John Sabelhaus, a Visiting Scholar at the Washington Center for Equitable Growth and Adjunct Research Professor at the University of Michigan, previously served as Assistant Director, Research and Statistics, at the Federal Reserve Board of Governors.
Many people have argued that U.S. wealth inequality is high and rising, though less quickly than previously thought. Adding defined benefit (DB) pension wealth shifts the distribution of wealth within the top quartile of households but does not change the story below that point in the wealth distribution. My recent working paper with Alice Henriques Volz of the Federal Reserve Board investigates the extent to which adding Social Security “wealth” to the existing household wealth inequality measures affects those findings.
Measuring Social Security Wealth
Annual U.S. Social Security benefits are currently about as large total DB pension payments plus retirement account withdrawals. Social Security benefits are also growing relative to the size of the economy, rising from about four percent of personal income in the early 1970s to almost six percent today. The fact that the Social Security benefit formula is progressive also implies that the payments are far more important for retirees who had lower lifetime earnings, compared to others.
Our work asks whether Social Security benefits to the lower-earners meaningfully offset the wealth inequality inherent in household wealth measures that exclude Social Security wealth. To answer this question, we draw on the Survey of Consumer Finances (SCF) to construct estimates of the present discounted value (PDV) of Social Security taxes and benefits for every individual in the dataset for 1995 through 2016. We refer to the difference between the discounted present value of future benefits and the discounted present value of future taxes as Social Security Wealth, or SSW.
What We Find
We have four main findings. First, aggregate SSW is quantitatively important when compared to other components of household wealth. We estimate that SSW summed over all SCF respondents and their spouses/partners in 2016 was about $22 trillion, the difference between a PDV of benefits of $35 trillion and a PDV of taxes of $13 trillion. For perspective, the published measure of household net worth in the SCF was around $87 trillion in 2016 and the PDV of DB pension benefits was $18 trillion. Nevertheless, we estimate that only $18 trillion of the $22 trillion in SSW can be paid under current law.
We also find that SSW is quantitatively more important for otherwise low-wealth families at all ages. For example, the bottom 50 percent (by wealth) of persons age 35-44 in 2016 had average household wealth of less than $16,000, while that same group had average expected SSW of nearly $50,000, the difference between a PDV of benefits around $130,000 and a PDV of taxes around $80,000. By contrast, the top 10 percent of persons age 35-44 in the same year had an average about $1,600,000 of household wealth. Their expected SSW was $68,000, the difference between a PDV of benefits around $243,000 and a PDV of taxes around $175,000. Clearly, SSW relative to household wealth falls as household wealth rises.
A third major takeaway is that although incorporating SSW into household wealth has a substantial impact on wealth inequality levels, it does not change overall trends in top wealth shares over time. For example, our preferred measure for the top 10 percent share of household wealth increased over the period 1995-2016 from 53 to 63 percent, while the expanded wealth share that includes SSW increased from 45 to 54 percent. Thus, adding SSW amplifies trends in rising wealth inequality, because roughly the same percentage point change in wealth share is applied to a much lower base.
Our final takeaway connects our estimated SSW values across birth cohorts. The triennial structure of the SCF gives us up to eight pseudo-panel observations of average SSW per birth cohort over the 20-year span 1995-2016. Connecting the survey waves to trace the lifecycle patterns of SSW by age, we show that SSW starts out negative at young ages, increases steadily through retirement, and then gradually decreases with remaining expected years of life at older ages. The lifecycle shapes of SSW accumulation and decumulation are similar across wealth groups, but there are important differences in SSW relative to income that can be interpreted in terms of lifecycle “saving” rates. We estimate that annual Social Security “saving” rates (accruals of SSW relative to income) are, respectively, 15, 12, and 5 percent as we move from the bottom 50 percent of the wealth distribution, to the next 40 percent, and top 10 percent wealth groups.
These calculations can be extended to incorporate other benefits including disability and auxiliary benefits based on previous (and perhaps even prospective) marriages. These estimates of SSW can also be used to see if they help explain macroeconomic outcomes such as consumption, saving, and retirement behavior.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.