Measuring Remaining Lifetime Spending Across Age Cohorts Shows a Different Picture of Inequality

October 28, 2019

As the debate continues over the distribution of wealth and taxes, and what to do about rising inequality, it is important to consider how different researchers are measuring inequality and the implications these different methods have for the results.

A recently revised study, “U.S. Inequality and Fiscal Progressivity—An Intragenerational Accounting,” highlights this importance. The study measures remaining lifetime spending, rather than looking only at wealth or current-year income, within age cohorts. The findings show that although inequality is still present, the distribution of spending is more equal than the distribution of wealth or income and that the United States maintains a progressive fiscal system.

The study, by economists Alan J. Auerbach, Laurence J. Kotlikoff, and Darryl Koehler, is unique in the following ways:

  1. The study focuses on the net result of all government taxes and transfer programs, rather than just tax burdens.
  2. The study measures remaining lifetime spending, which is the present value of the sum of the household’s current wealth plus future labor earnings minus net taxes. This differs from approaches which use current income and instead focuses on “a household’s trajectory of remaining resources and net taxes, rather than only those for [the] current year.”
  3. The study adjusts for age. Comparing the tax burden of a 30-year-old in the beginning of her career to that of a retiree living off previously taxed labor income can result in misleading conclusions. For example, those who saved out of previously highly taxed labor income and are now living off the savings could appear to have a relatively low tax burden compared to those currently working and paying taxes on their income. Instead, the study compares remaining lifetime spending of individuals within age cohorts.

This excerpt from the study discusses the results:

Our findings are striking. Under current law (including the provisions of the Tax Cuts and Jobs Act of 2017, and assuming those provisions are permanent), the distribution of remaining lifetime spending, while highly unequal, is considerably more equal than either net wealth or current income. For example, the top 1 percent of 40-49-year-olds ranked by resources account for 34.1 percent of total cohort net wealth, but only 14.5 percent of total cohort remaining lifetime spending. As for the lowest-resource quintile, it has just 0.6 percent of the cohort’s net wealth, but 7.3 percent of its total spending power.  

Two factors drive the more equal distribution of remaining lifetime spending, which is observed in similar patterns across age cohorts. First, they find that human wealth, or the present value of future labor earnings, is more equally distributed than net wealth. Second, they find that the fiscal system is progressive overall.

According to this research, those with the lowest resources face significantly negative average remaining lifetime net tax rates while those with the highest resources face significantly positive average remaining lifetime net tax rates. For example, in the 40 to 49 age cohort, the top 1 percent have an average remaining lifetime net tax rate of 34.5 percent, while for those in the bottom quintile, the rate is -46.6 percent. The difference for those aged 60 to 69 is particularly striking: the remaining lifetime net tax rate of the top 1 percent is 20.6 percent, while those in the negative quintile face a -438.7 percent rate, which reflects Social Security, Medicare, and Medicaid benefits.

Measures of wealth and income inequality, according to the authors, dramatically overstate inequality in remaining lifetime spending.

Assessing inequality and fiscal progressivity based on current income and gross, let alone net tax rates is likely to misstate both and very significantly. The distribution of current income differs from that of remaining lifetime spending and current-year net tax rates generally understate the degree of progressivity of the tax and transfer system. This is true even if one considers net tax rates within generations.

But whatever one makes of these findings, [one] thing is clear—assessing economically relevant inequality—inequality in spending power—requires understanding all the elements determining spending. Focusing exclusively or even primarily on inequality in wealth or current-year income, or, for that matter, on inequality in some other component of spending power, such as claims to Medicaid, can present a very incomplete and, hence, distorted picture of true overall inequality…. This study’s bottom line, however, will remain. Inequality and fiscal progressivity shouldn’t be studied in isolation or in a piecemeal fashion, nor can they be accurately assessed by combining very different age cohorts in analysis.

Ultimately, the study finds that 1) considering age as well as remaining lifetime labor earnings, remaining lifetime gross taxes, and remaining lifetime gross transfer payments in addition to measuring wealth results is a more balanced measure of inequality, and 2) the U.S. has a progressive fiscal system. This is useful context for the current debate about the distribution of wealth, income, and taxes in the United States.

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