Lifetime Wealth Research Articles

The Concentration of Personal Wealth in Italy 1995–2016

Abstract We estimate the distribution of wealth in Italy between 1995 and 2016 using a novel source of inheritance tax files, combined with surveys and national accounts. We find that the level of wealth concentration is in line with other European countries; however, its time trend appears more in line with the US, showing a significant increase over the period studied. The country exhibits one of the greatest declines in the wealth share of the bottom 50%. The paper also shows that age plays a marginal role in explaining wealth concentration. Changes in savings, instead, are the predominant force behind the increase in wealth inequality, even at the top. Equity prices also account for a large share of wealth growth above the 99th percentile, whereas changes in house prices play only a minor role. Finally, we document the growing concentration of life-time wealth transfers, and their increasingly favorable tax treatment.

Procedure to determine the optimal Roth IRA versus deductible IRA allocation

We offer a procedure to guide the Roth IRA versus deductible IRA (RVD) allocation decision. We require users to input 10 values to generate outputs that include contribution and withdrawal tax rates; maximum gain; and, optimal amount to allocate between the two major IRA types. By being at their optimal RVD allocation, we find that a modest earning couple can achieve a lifetime wealth gain amounting to about $180,000 in today’s dollars. We provide figures and tables illustrating RVD outcomes when there are changes in key variables such as salary match, adjusted gross income, portfolio returns, and withdrawal years.

Student debt incidence: recent data and conceptual issues

Abstract: In recent years, the rising level of student debt has led to calls for increased government assistance in the form of partial or full student debt cancellation. In this Commentary, we use the 2019 Survey of Consumer Finances (SCF) to study the incidence of student debt and cancellation benefits along quantiles of household income, net worth, and our estimate of lifetime wealth. We show that student debt is highly concentrated among households with low net worth, but much more evenly distributed across income and lifetime wealth. We then highlight several challenges in using such statistics to draw conclusions about whether cancellation will ultimately increase or decrease inequality in lifetime wealth, and we outline open questions for future research. Replication materials for this Commentary may be found at https://github.com/tphelanECON/student_debt_SCF

5 THE WEALTH SHIELD: A MICROSIMULATION OF INEQUALITIES, INHERITANCE AND THE IRISH FAIR DEAL

Abstract Background The article analyses the inequalities resulting from the long-term funding scheme in Ireland with a unique focus on intergenerational obligations. With the Fair Deal scheme of 2009, officially the Nursing Homes Support Scheme (NHSS), Ireland introduced a unique inheritance clawback clause. The state covers long term care costs for those in need up-front and claims the costs back from the estate after the older person deceases. The article focusses on the emerging income and wealth inequalities and intergenerational redistributive effects. Methods We estimate micro simulations to show the distributional effects based on income and housing wealth. The simulations are based on aggregate data from the Central Statistics Office, Nursing Homes Ireland, Eurostat and the European Central Bank. Each simulation estimates the individual contributions based on 50, 100, 150 and 200 percent of average income and wealth, while keeping either income or wealth constant at the average. Based on average nursing home fees, the simulations show the relative contributions from the state, income and wealth. These simulations are contrasted to the funding gaps of the old subvention scheme in place until 2009. Results The Fair Deal has expanded eligibility to the middle class and shields property wealth after three years. Nursing home residents with above average pension income and housing wealth benefit disproportionately from the reform and can pass on more relative wealth to their kin. Overall, the wealth distribution of the Fair Deal scheme is regressive, despite the inclusion of the middle class. Conclusion The increased eligibility of the fair deal has the benefit of increased legitimacy for the welfare state. However, considerable inequalities of risks exposure remain as less than 50 percent of older people will need nursing home care. Estimations for a long-term care insurance scheme at 3 percent social contributions would reduce the lifetime wealth contribution of nursing home residents by about 35 percent.

Permanent‐income inequality

Through certainty equivalent consumption (CE) measures, we show that dispersion of current earnings, expenditures, and net worth overstate welfare inequality. This is largely due to the unaccounted value of future earnings, which we call human wealth. The latter mitigates permanent‐income inequality, though its influence is diminished by the growing importance of assets in lifetime wealth. Average expenditures and CE inequality roughly doubled between 1983 and 2016 and, to weigh these offsetting forces, we decompose aggregate welfare changes into contributions from the level and dispersion of consumption, as well as uncertainty and demographic composition. Rising inequality has offset about 1/4 of the welfare gains from higher consumption, with most of the losses accruing after 2000.

Current developments in German pension schemes: What are the benefits of the new target pension?

We analyze the newly introduced German occupational pension scheme called target pension (“Zielrente”), which links the beneficiaries’ benefits during the retirement phase to the mortality experienced among the pension beneficiaries and the performance of the financial market, from a pension beneficiary’s perspective. We model the contract payoffs related to the target pension according to the new enhancement law on German occupational law. Specifically, we include two parameters in the plan design, one to control the surplus participation and one to control the loss participation. These parameters are chosen in such a way that the initial wealth of the retiree equals the initial value of the target pension. With the help of expected lifetime utility and wealth equivalent, we find that the target pension provides a meaningful supplement to the first and third pillar. Further, we find some comparative advantages of the target pension over the traditional pure defined benefit and some defined contribution plans from a policyholder’s point of view. Our analysis with reasonable parameter choices shows that target pension plans can be outperformed by defined contribution plans with variable annuities, while the latter are accompanied by a considerably higher ruin probability.

Framing Interest: Misperceptions of Consumption and Savings

Exponential-growth bias (EGB) is the tendency to neglect the power of compounding inter- est. A person with EGB will misperceive the intertemporal budget constraint, overestimating lifetime wealth and underestimating the differences in the cost of consumption across periods . We test four comparative static predictions implied by EGB: (1) compound interest will increase consumption, (2) budget-neutral delays in income will increase consumption, (3) the person will exhibit a form of dynamic inconsistency that depends solely on the current account balance and is independent of time preferences, and (4) framing the frequency of interest in shorter units increases consumption. We test these predictions using an induced-value consumption-savings experiment in the lab, and find evidence in support of all predictions against the rational bench- mark. People may use rules of thumb when making consumption-savings decisions. We consider three rules of thumb as alternative hypotheses and find that they cannot explain the results.

A systematic review of causes of recent increases in ages of labor market exit in OECD countries

Ages of labor market exit have increased steadily since the late 1990s in OECD countries, but with continuing population aging, there are calls for further stimulation of labor force participation at older ages. Social scientists have extensively studied causes of variation in retirement timing between individuals and across countries, but have paid less attention to causes of variation over time. This study systematically reviews evidence of causes of increases in ages of labor market exit over the past 30 years in OECD countries. Two goals are pursued: first, to provide an overview of the retirement domains that have been subject to investigation; second to compare studies with respect to the magnitude of change in retirement behavior that they attributed to different causes, in different contexts. Nineteen studies were reviewed. Available evidence articulates itself around four domains: inter-cohort changes in labor force participation of women (3 studies), educational attainment (3 studies) and lifetime wealth (1 study), and changes to social security systems (16 studies). Determinants in all domains explain a significant amount of past increases in ages of labor market exit, though figures attributable to similar determinants vary between studies and across countries. Evidence suggests that further postponement of labor market exit may depend on further increases to normal retirement ages and more limited access to early retirement programs, but also on further increases in educational attainment and the continued integration of women in the labor market. However, a large share of the past increases in ages of labor market exit remains unexplained; therefore, other factors such as those related to work and organizational characteristics deserve further research.

Capital taxes and redistribution: The role of management time and tax deductible investment

Should capital income be taxed for redistributional purposes? Judd (1985) suggests that it should not. He finds that the optimal capital tax is zero at steady state from the point of view of any agent. This paper re-examines this question in an infinitely-lived worker-capitalist model, in which capitalists devote management time to build capital. Two forms of capital taxation are considered: one for which investment is not tax deductible (corporate tax) and a second one for which investment is fully and immediately tax deductible (dividend tax). Our main results are as follows. The optimal corporate tax is zero. In contrast, the optimal dividend tax is in general not zero at steady state and depends on preference parameters, life-time wealth and the point of view (Pareto weights) of the benevolent policymaker. For the case of a fiscal authority with utilitarian preferences, we find that labor tax rates should be cut down to 4 per cent while dividend tax rates should be increased to 42 per cent.

Simple explicit formula for near-optimal stochastic lifestyling

In life-cycle economics, the Samuelson paradigm (Samuelson, 1969) states that the optimal investment is in constant proportions out of lifetime wealth composed of current savings and the present value of future income. It is well known that in the presence of credit constraints this paradigm no longer applies. Instead, optimal life-cycle investment gives rise to so-called stochastic lifestyling (Cairns, Blake, and Dowd, 2006), whereby for low levels of accumulated capital it is optimal to invest fully in stocks and then gradually switch to safer assets as the level of savings increases. In stochastic lifestyling not only does the ratio between risky and safe assets change but also the mix of risky assets varies over time. While the existing literature relies on complex numerical algorithms to quantify optimal lifestyling, the present paper provides a simple formula that captures the main essence of the lifestyling effect with remarkable accuracy.

Owning, renting, or living with parents? Changing housing situations among Canadian young adults, 2001 to 2011

Homeownership is a central component of wealth, but many young adults today struggle to enter the housing market, opting to rent or live at home with their parents instead. Despite these trends, few recent Canadian studies have addressed the housing arrangements of young adults. We use pooled cross-sectional General Social Survey data from 2001 to 2011 to analyze three types of housing arrangements among 18- to 35-year-olds. Findings show that although the proportion of young adults living at home increased dramatically since 2001 and the proportion renting declined, rates of homeownership among young adults remained fairly constant over the three waves. Changes over time were most dramatic among the youngest age group of 18- to 24-year-olds, first-generation immigrants, and young adults with higher levels of education. Findings further demonstrate persistent socioeconomic and demographic disparities between young adults who can move out of their parents’ homes and into homeownership and those who either remain at home or become renters, with important repercussions on lifetime wealth inequality.

Exponential‐growth Bias in Experimental Consumption Decisions

Exponential‐growth bias (EGB) is the tendency to neglect the power of compounding interest, which has been found to be widespread in the population. A person with EGB will misperceive the intertemporal budget constraint, overestimating lifetime wealth and underestimating the differences in the cost of consumption across periods. We test five comparative static predictions implied by EGB: (1) compound interest will increase consumption when the elasticity of intertemporal substitution is greater than 1; (2) higher interest rates lead to more compounding and hence increase consumption; (3) budget‐neutral delays in income will increase consumption; (4) the person will exhibit a form of dynamic inconsistency that depends solely on the current account balance and is independent of time preferences; and (5) framing the frequency of interest in shorter units increases consumption. We test these predictions using an induced‐value consumption–savings experiment in the laboratory, and find evidence in support of all predictions against the rational benchmark. We consider rules of thumb as alternative hypotheses and find that they cannot explain the results, although they contribute to some findings.

Association of a Simulated Institutional Gender Equity Initiative With Gender-Based Disparities in Medical School Faculty Salaries and Promotions

Despite progress in narrowing gender-based salary gaps, notable disparities persist in the scientific community. The significance of pay difference may be underestimated, with little data evaluating its effect on lifetime wealth after accounting for factors like time to promotion and savings. To characterize gender disparities in salary and assess the outcomes associated with a gender equity initiative (GEI). Quality improvement study with simulations of salary and additional accumulated wealth (AAW) using retrospectively reviewed Johns Hopkins University School of Medicine annual salary and promotion data. All academic faculty were included in the faculty salary analysis from 2005 (n = 1481) and 2016 (n = 1885). Salary and longitudinal promotion data from 2005 to 2016 were used to estimate gender-based differences in salary and time to promotion. The effect of these differences on total salary and AAW, including retirement and salary-based investments, was simulated for a representative male and female faculty member over a 30-year career in 3 scenarios: (1) pre-GEI, (2) post-GEI, and (3) in real time for GEI, beginning with and progressing through these initiatives. Analyses of salaries of 1481 faculty (432 women) in 2005 and 1885 faculty (742 women) in 2016 revealed that a decade after GEI implementation, the overall mean (SE) salary gap by gender decreased from -2.6% (1.2%) (95% CI, -5.6% to -0.3%) to -1.9% (1.1%) (95% CI, -4.1% to 0.3%). Simulation of pre-GEI disparities correlated with male faculty collecting an average lifetime AAW of $501 416 more than the equivalent woman, with disparities persisting past retirement. The AAW gap decreased to $210 829 in the real-time GEI simulation and to $66 104 using post-GEI conditions, reflecting success of GEI efforts. Even small gender-based salary gaps are associated with substantial differences in lifetime wealth, but an institutional commitment to achieving equitable promotion and compensation for women can appreciably reduce these disparities. The findings of this study support broad implementation of similar initiatives without delay, as results may take more than a decade to emerge. A modifiable version of the simulation is provided so that external users may assess the potential disparities present within their own institutions.

Simple Explicit Formula for Near-Optimal Stochastic Lifestyling

In life-cycle economics the Samuelson paradigm (Samuelson, 1969) states that the optimal investment is in constant proportions out of lifetime wealth composed of current savings and the present value of future income. It is well known that in the presence of credit constraints this paradigm no longer applies. Instead, optimal lifecycle investment gives rise to so-called stochastic lifestyling (Cairns et al., 2006), whereby for low levels of accumulated capital it is optimal to invest fully in stocks and then gradually switch to safer assets as the level of savings increases. In stochastic lifestyling not only does the ratio between risky and safe assets change but also the mix of risky assets varies over time. While the existing literature relies on complex numerical algorithms to quantify optimal lifestyling the present paper provides a simple formula that captures the main essence of the lifestyling effect with remarkable accuracy.

Portfolio Tax Trading with Carryover Losses

We study portfolio choice with multiple stocks and capital gains taxation, assuming that capital losses can only offset current or future realized capital gains. We show, through backtesting using empirical distributions, that optimal equity holdings over an extended period are significantly lower on average than benchmark holdings suggested in the literature. Using value and growth or small and large portfolios, the backtests show that allocations remain persistently underdiversified. Carryover losses have large economic significance since they can dramatically shrink the no-trade region. Finally, the backtested economic cost of incorrectly modeling capital losses is at least 8% of lifetime wealth. The Internet appendix is available at https://doi.org/10.1287/mnsc.2017.2733 . This paper was accepted by Neng Wang, finance.

Impact of pension system structure on international financial capital allocation

Recent findings indicate that pension system structure affects private savings and through them the aggregate foreign asset position of a country. We present a two-country overlapping-generations model that explores the relationship between the magnitude of pension guarantees and the resulting portfolio choices of workers. The existence of a pay-as-you-go pension system lowers the wealth of the young workers, who consequently borrow from abroad to supplement their current consumption, and lowers the overall riskiness of their lifetime wealth, prompting them to invest in risky equity financed by the selling of safe bonds. In particular, we are able to replicate and explain the ”venture capitalist” (positive net equity accompanied by negative net debt) portfolio profile of the United States. More broadly, we find empirical support for our results in a cross-country analysis using data from 110 economies: greater amounts of pension spending are associated with international indebtedness, long equity positions, and short debt positions.

Do the Rich Save More in Japan? Evidence Based on two Micro Data Sets for the 2000s

Using two household surveys, this paper investigates whether the saving rates of richer households are higher than those of poorer households in Japan. We construct a number of proxies for lifetime wealth, including those original to this study, and find marginally positive correlations between saving rates and lifetime wealth for working age households. We further find that the relationship between saving rates and lifetime wealth differs depending on the life stage of individual households. Older households with higher lifetime wealth appear to be dissaving to some extent, which is more or less consistent with the lifecycle model of consumption.

Does Your Home Make You Wealthy?

Estimating the lifetime wealth consequences of homeownership is complicated by ongoing events, such as divorce or inheritance, that may shape both homeownership decisions and later-life wealth. We argue that prior research that has not accounted for these dynamic selection processes has overstated the causal effect of homeownership on wealth. Using NLSY79 data and marginal structural models, we find that each additional year of homeownership increases midlife wealth in 2008 by about $6,800, more than 25 percent less than estimates from models that do not account for dynamic selection. Hispanic and African American wealth benefits from each homeownership year are 62 percent and 48 percent as large as those of whites, respectively. Homeownership remains wealth-enhancing in 2012, but shows smaller returns. Our results confirm homeownership’s role in wealth accumulation and that variation in both homeownership rates and the wealth benefits of homeownership contribute to racial and ethnic disparities in midlife wealth holdings.

Mortgage Debt and Social Externalities

I analyse the implications of social status concerns on debt holdings at individual and aggregate level, in a partial equilibrium life-cycle framework with heterogeneous agents. The focal point of the analysis is the explicit consideration of durable goods, in their triple role as a part of utility, a collateralizable portion of life-time wealth and a social positioning device. In an economy featuring social status concerns, the debt-to-income ratio is higher, a shift of resources towards the beginning of life arises and the effects of changes in financial conditions are more pronounced.

The Impact of Compulsory Retirement Savings Contributions on Lifetime Welfare

In private pre-funded retirement savings systems, workers can be compelled by regulation to make minimum contributions to retirement accounts. We examine the impact of compulsory contributions into retirement savings (superannuation) accounts on individuals' lifetime consumption and wealth using a continuous-time life-cycle model calibrated to the Household, Income and Labour Dynamic in Australia (HILDA) survey data. Simulations of optimal paths from the calibrated model show that the consumption of lower wealth individuals is severely constrained by compulsory savings, resulting in a sizeable welfare loss. In response, we propose a time varying contribution rate that mitigates the welfare loss while enhancing retirement wealth.