“The Uncounted Trillions in the Inequality Debate” is an interesting WSJ article by Martin Feldstein, Ronald Reagan’s economic adviser and now a Harvard professor. The main theme of the article is kind of pointless:
So what is the grand total? Add the $50 trillion for Medicare and Medicaid wealth to the $25 trillion for net Social Security wealth and the $20 trillion in conventionally measured net worth, and the lower 90% of households have more than $95 trillion that should be reckoned as wealth. This is substantially more than the $60 trillion in conventional net worth of the top 10%. And this $95 trillion doesn’t count the value of unemployment benefits, veterans benefits, and other government programs that substitute for conventional financial wealth.
In other words, the bottom 90% of Americans are wealthier in the aggregate than the top 10%, something you might not have imagined after listening to our most successful political candidates (nothing works better than manufacturing envy!). But if the relevant question is political power, i.e., can the bottom 90% vote to take stuff away from the top 10% in hopes of having it transferred to themselves (minus whatever share the government bureaucracy takes), then the current distribution of wealth isn’t relevant.
What is interesting about this article to me is the calculation of entitlement program costs:
Most Americans count on Social Security to finance their consumption in retirement. The Social Security trustees estimate that Social Security “wealth”—the present actuarial value of the future benefits that current workers and retirees are projected to receive—is $59 trillion. Excluding the top 10% of households reduces the amount to about $50 trillion.
However, to qualify for those benefits, current workers must pay future payroll taxes with a present actuarial value of about $25 trillion. So you have to subtract these taxes from the $50 trillion, leaving a net Social Security “wealth” of $25 trillion for the bottom 90% of households. Adding this to the $20 trillion of their conventionally measured net worth, and these households have total wealth of $45 trillion.
The Congressional Budget Office estimates that over the next decade total Social Security retiree benefits will be $10.2 trillion, while the benefits for Medicare will be $9.0 trillion and those for Medicaid will be $4.6 trillion (about half of Medicaid benefits are for retirees in nursing homes). In short, the benefits for these two government health programs exceed the amount Social Security will pay out to retirees in cash.
But unlike Social Security, receiving government health benefits does not depend on current workers continuing to pay taxes. This suggests that the net “Medicare and Medicaid wealth” implied by current law is probably about as large as these households’ “gross Social Security wealth” of $50 trillion.
The apparent inequality of wealth in the U.S. in reality reflects the government’s out-of-date way of financing retirement. Politicians worried about inequality should start by fixing the inefficient programs they directly control.
Feldstein claims that somehow Americans would be better off if they financed their own retirements by putting their payroll tax funds into a 401(k). This doesn’t seem plausible. If we are paying in $25 trillion and getting out $50 trillion (both on a net-present value basis), how are we ever going to find an investment in the market that will beat that? Maybe our children or grandchildren could be better off, but not current voters.
Isn’t this some kind of phony math – you count the Social Security wealth of the bottom 90 but not of the top 10? Also Medicare and Medicaid “wealth” is a funny kind of wealth because you never receive that money – it goes only to doctors and hospitals and the sicker your are the more “wealth” you have. Even SS wealth is strange because it is only wealth for as long as you are alive – you can’t leave even 1 cent of it to your heirs, unlike the money in a 401(k). The rich complain about high inheritance tax rates but apparently there is a 100% inheritance tax on the poor’s “wealth”.
The reason Feldstein is talking about this at all is that most of the lower tiers (even people with considerable incomes) have ZERO net wealth -once you subtract out their mortgage, car loans, credit card balances, student loans, etc. their net worth ranges from minimal to zero to negative. The aggregate net worth of the bottom 50% of Americans (ignoring Feldstein’s phony math) is 1.1% of total net wealth.
You can easily see how this works. Say that the average US family (who would be at the top of, but still just within, the bottom 50% of wealth owners makes $50K per annum and spends $50K per annum – so after 20 years their net worth has not budged at all. But if someone makes just a little bit more and does not spend it all – say they make $60K and spend $55K, then after 20 years they (even before investment returns) have $100K. So over time even small differences in savings lead to big wealth gaps.
I’m starting an organization whereby I will unburden the top 10%’ers from their excess wealth so that they too may reap the tremendous wealth and simplicity the lowest 90%’ers are enjoying. Think of the benefits: no more high priced financial advisers, lawyers and accountants to manage, never again worry about what the stock market is doing, doing your own taxes(ala 1040ez!), no messy estate planning to contemplate. Simply send the excess income my way, and I’ll swallow the onerous marginal income taxes! I’m such a swell guy, I’ll even reimburse your SSDI deductions with the remaining funds.
I’m even contemplating a “tier 2” service for those who want to double down and get on the welfare gravy-train. Services include: quickly divesting and transferring assets to minimize income to maximum welfare, burning bridges(how to quit your job with flair and impact to ensure not getting re-hired), food stamps and you, anchor baby family planning, successful subsidized housing, and finally, no maim no gain permanent disability. The first 500 clients will get a free ER waiting room entertainment pack, to ease those multi-hour hospital visits.
I think you two missed the point of the WSJ article. Feldstein picked the top 10% because that matches his cited data source: the Federal Reserve’s Survey of Consumer Finances (http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf). He was not arguing that it would be better to be in the 50th percentile than in the top 10%. He was pointing out that if you want to add up and compare wealth you’ll get misleading results if you don’t count the assets of a claim of Social Security payments and a right to government-paid health care.
Actually both SS and Medicaid have no guarantees. The courts have held that SS and Medicaid can be changed,modified, reduced, at any time; and you have no recourse to sue.
Therefore, any reasonable evaluation of value would include the same calculation of risk as unsecured credit. That is, you hand over the money and get an unenforceable promissory note which depends only on the honor of the creditor.
Even the SSA admits this (the Supreme Court case is Flemming v. Nestor): https://www.ssa.gov/history/nestor.html
To my mind, I am reminded of the promises of the USSR to its citizens, which it has technically honored – you paid in and got a certain number of rubles each month when you retired. Unfortunately, while the number of rubles you got was delivered, the implied purchasing power of those rubles was not delivered.
Given that, how much of a discount should be applied to its future value?
So instead of the current set of misleading results you get by not putting any value on SS and Medicare, he proposes a different set of misleading results that you get by overvaluing them.
I don’t know what valuation methodology he used, but generally speaking the value of an asset is what a willing buyer would pay a willing seller. Or alternatively as the present value of the future income stream of the asset. If the government allowed you to sell your SS income stream (the way you can sell your income stream from a legal settlement or lottery) it would have some value, though you would have to discount for life expectancy. I suspect that would be less than Feldstein’s valuation. However, if you were trying to sell your Medicare entitlement (the bulk of his phony “wealth”) no one would pay you anything for it because it’s not an income stream to the owner at all.
Expanding a bit on Izzie’s points, for people who aren’t of retirement age, the present value of the future income stream isn’t exactly comparable to the equivalent liquid asset. A 50 year old who “owns” $200,000 worth of future SS payments and loses their job is not in same financial situation as a 50 year old who owns $200,000 of GOOG and loses their job.
“the present actuarial value”
Comparing future income/payments of the lower 90% to current accumulated assets (ignoring future income) of the top 10%. Hmm.
It’s a lot of money but it’s a stretch to call it “wealth”.
There’s also an implied assumption that the “wealth” is distributed evenly over the lower 90%.
philg: “I think you two missed the point of the WSJ article. Feldstein picked the top 10% because that matches his cited data source”
No, the point of the article is to suggest that the lower 90% are fairly “well off” or “wealthy”.
Is being “wealthier in the aggregate” really a thing now? Does that mean I can get the BMW M5 I’ve always wanted?
Neal: “Expanding a bit on Izzie’s points…”
The article is subtly dishonest.
Even at retirement age and getting payments, it’s not the same.
The maximum SS benefit payment at normal retirement age (67) is $2,663 per month (that’s for people earning the most when working).
That’s not an insignificant amount of money but it hardly is enough to make somebody wealthy.
Article: “Most Americans count on Social Security to finance their consumption in retirement.”
“Consumption” in this case includes basic stuff like rent and food but the word connotes “luxuries”.
Izzie L.: “…though you would have to discount for life expectancy.”
That’s what “present actuarial value” does.
What about the young lady that said to me, in reference to her application for social security disability: ” I have worked my 10 quarters and it’s there, so why shouldn’t I have it.?”