We Really Don’t Measure Wealth Properly

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It’s the Americans who are really going overboard about wealth inequality, here in the UK the polemicists are still warming up. We’re rather more shouting about income inequality still.

There is though a problem with the basic underlying figures that everyone uses. Something built into the very definitions which are being used.

Just as an example, let’s measure pension inequality. Some of us have really great savings in our pension IRAs. Others of us don’t. We were ill, didn’t earn enough to save, had bad luck, got wiped out in a stock market crash. That’s wealth inequality. Nearly all of us have some income to arrive in our retirement from Social Security. That’s obviously just as much wealth as any other pension income we’re going to get and should be valued at the same capital value as any other income stream of the same amount. Except that it isn’t. In our calculations of wealth, Social Security is treated as being worth nothing. It comes from government, you see?

Equally, if our lovely defined benefit pension of 50% of salary comes from a funded pension scheme then that’s counted as wealth. If it comes from an unfunded scheme, like must public sector pensions, then it is counted as constituting zero wealth. You could be on $50,000 a year for life with adjustments for inflation, and our standard wealth calculations say that’s worth nothing. This is, quite obviously, a ridiculous way to measure wealth.

Sure that’s about the US. But the same thing applies to UK measures of wealth. The Old Age Pension is not counted as being wealth. Yet it is, quite obviously, wealth. So too – as far as I know – the distinction made between funded and unfunded defined benefit pensions.

Consider for a moment. Somewhere out there in the government universe there’s a fully funded pension scheme. No, I don’t know which one. But something that owns lots of assets which then pay those pensions. There is also a number of unfunded such schemes. Where it’s the current pension contributions of the current workers paying the pensions of those retired.

The effect on the wealth of those receiving the pensions is of course entirely equal. And yet in our calculations of wealth the funded schemes count as the net present value of the future pension income stream, the unfunded as nothing.

This is not the way to measure wealth, is it? And yet that is the way it’s done and that is the way Grandpa Death’s schemes to steal all the money are justified.

This is before we even go on to discuss the wealth effects of the rest of the welfare state. Why do we have unemployment insurance? Because we generally agree that such a safety net makes us all richer. By the value of what might be got, times the possibility of getting it, plus some premium for the peace of mind from knowing we’re insured. Education free at the point of use is wealth – what would be the capital value of the cost of having to educate out of pocket? So too health care and so on.

All of these things are entirely ignored in our calculations of wealth. That is, they’re all lying to us. Absolutely all of them.

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