Consider these facts from a recent Federal Reserve report:
- Between 2010 and 2013, “only families at the very top of the income distribution saw widespread income gains.” That’s the Fed’s way of saying that the top 3 percent of families receive roughly a third of all income generated in the U.S. annually.
- The top 10 percent of families received just about half of total income in 2013. Thus, total income is split evenly between the 10 percent and the remaining 90 percent.
- Between 2010 and 2013, “families at the bottom of the income distribution saw continued substantial declines in real net worth.”
As incredible as it sounds, 90 percent of Americans own just 25 percent of the country’s wealth while the remaining 10 percent own 75 percent of it. The dismal science does not get much drearier than that. Of course, the 1 percent has always wanted to whitewash this inconvenient truth that the market distributes income and wealth in such a morally indefensible manner.
I am nonetheless bewildered by an essay last week by Marty Feldstein, an AAA-rated Ivy-League economist, advisor to presidents and presidential hopefuls, mentor to a dozen crème-de-la-crème economists and member of the board of directors of the American Insurance Group for 22 years. Feldstein claims that the wealth distribution is not as bad as it looks. After all, the have-nots still have Medicaid, Medicare and Social Security! All we have to do is to count those benefits as part of our private wealth as though they were in our safe-deposit boxes, and the obscene distribution becomes quite tolerable.
So alright then, I’ll ask my banker if she’ll take my rights to Medicare as down payment for a house, and after that I’ll cash in my future Social Security payments to pay for a trip to the Caribbean. No? What do you mean I can’t do that?
Feldstein defines wealth as “the ability to spend more than one’s income.” But he forgets the time dimension. A diamond ring could be converted immediately into cash at the local pawn shop, and then I could spend more than my income. However, my Medicare entitlements do not enable me to do so. I have to wait until I get sick in order to receive any benefits, and the benefits won’t enable me to spend more than my income; instead, they’ll just help me get over my ill fate of having become sick, and then I still have my co-payments to worry about.
And as far as Social Security is concerned, for more than 10 million people it does not enable them to spend more than their income either; in fact, it is their only income.
Ask a 20-something-year-old if they think they feel wealthier because of the existence of Social Security. I bet they’d look at you askance. After all, half of millennials do not believe that they will receive any benefits by the time they retire. They are paying taxes now and are poorer for it, not wealthier. Will future generations be honor-bound to continue Social Security payments by the time they retire? There is no generational contract, no pledge, no promise that they’ll have retirement benefits waiting for them. With such an uncertain economic future, we can hardly blame them for being incredulous. I doubt that they consider their future benefits as part of their portfolio while burdened by taxes for their grandparents’ generation’s retirement.
Moreover, just 6 percent of millennials (and 9 percent of members of Generation X) believe that Social Security benefits will remain at their current levels. And the benefits are pretty low to begin with. The average monthly Social Security payment is but $1,300, which is about the hourly wage of a typical 1 percenter. In other words, Social Security income is just $135 above the official poverty threshold for a family of two over the age of 65. That’s nowhere near wealth.
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Social Security might meet your basic needs if you limit your needs to the bare minimum. Note that U.S. Social Security benefits are well below Organisation Economic Co-Operation and Development average relative to income.
Thomas Pikkety, the celebrated author of the best-selling “Capital in the 21st Century,” defines wealth as “the total market value of everything owned… provided that it can be traded on some market. It consists of the sum total of nonfinancial assets… and financial assets… less the total amount of financial liabilities (debt).” In other words, wealth can be transferred. Entitlements cannot be.
In fact, the state of our finances is even worse than the Fed’s data show. The Census also collects wealth data and shows what the have-nots owe. The Census reveals that the bottom 20 percent of U.S. households is underwater with an average net worth of -$32,000, that is, the debts of about 60 million people are greater than all their assets combined. No automobiles, no equity in a house, no checking account balances, no diamonds. Nothing owned outright. If you combine the first and second quintiles of the wealth distribution, it’s apparent that 120 million people’s average net wealth is still below zero at minus $11,000.
And let us not forget that the picture is even more dismal among minorities. Among African American households, average wealth is still negative in the bottom 60 percent of the wealth distribution. And the average wealth among 80 percent of African American households is a meager $10,000. I wish I could whitewash these facts somehow, but using Social Security to offset this picture just won’t do.
The inconvenient truth is that these government programs are not wealth at all. Rather, they are simply transfer payments from currently 166 million workers to 59 million retirees and people with disabilities. In contrast, Feldstein writes: “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.” No such thing. The Social Security Administration actually calls these estimates “future costs” and not “wealth.” So the Social Security Administration does not consider these taxes wealth, the Fed does not consider them wealth, the Census does not consider them wealth and the participants do not consider them wealth. It looks like they’re wealth only in Professor Feldstein’s imagination.