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Wealth inequality – reader mailbag

Summary:
An informed reader reminds me of a couple points on wealth inequality in response to this morning's post: Just saw your piece on wealth. To add to the points you make:Strongly agree with your point about the use of cross sectional data. This is particularly true in a country where a large number of people in the first ten to 15 years of adulthood go abroad. We would expect the distribution to be highly skewed if the most effective means of building capital is to go abroad. There is likely to be a depressing effect on saving associated with the generosity of the state superannuation scheme. Or to be more precise: people have an implicit overlapping generations model in the minds that sees long run intergenerational transfers by government as credible. This means they see the tax and

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An informed reader reminds me of a couple points on wealth inequality in response to this morning's post:
Just saw your piece on wealth. To add to the points you make:
  • Strongly agree with your point about the use of cross sectional data. This is particularly true in a country where a large number of people in the first ten to 15 years of adulthood go abroad. We would expect the distribution to be highly skewed if the most effective means of building capital is to go abroad.
  • There is likely to be a depressing effect on saving associated with the generosity of the state superannuation scheme. Or to be more precise: people have an implicit overlapping generations model in the minds that sees long run intergenerational transfers by government as credible. This means they see the tax and transfer system as an implicit saving scheme. When combined with home ownership and universal health care, it is a reasonable question to ask what purpose would it serve people in the lower half of the income distribution to build up assets? (there is a paper by Andrew Coleman somewhere on this)
Both points are good. The latter one especially should be better recognised. NZ Super guarantees you a decent basic retirement income. NZ Super currently pays $926 per fortnight if you're single, or $701 per fortnight per person in a couple. After tax, it's $617 per person in a couple. 

So a retired couple gets $1234 per fortnight after tax in NZ Super, so $32,000 per year. That's in the middle of the second decile of equivalised household income for a couple, before housing costs. So anyone earning less than that could easily be forgiven for not building any retirement savings: they would be reducing their current consumption in order to gift themselves higher consumption in retirement than they were ever able to afford when working. What does that mean? It is completely rational for the lowest income twenty percent of the population to not be building wealth. 

Or, to put it another and perhaps better way, we should view NZ Super eligibility as being equivalent to lump sum wealth holdings for each person, rich or poor, equivalent to the present discounted value of the stream of entitlement payments once you turn 65. But that's not all! Government provides other services as well. There's a retirement care subsidy (which draws against your Super entitlement, but also involves additional subsidy from the government). Government provided health care too. Entitlements to all of these should be viewed as part of the lump-sum entitlement that's fairly evenly distributed. 

And what happens to any inequality measure if you ignore a giant lump sum that's provided across-the-board? The inequality measure will overstate real inequality. 

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