The Effect of Aging on Wealth Inequality
People generally accumulate wealth as they age, and then begin spending down their assets once hitting retirement. While age isn’t the only determinant of wealth, the connection between age and wealth has implications for an aging population and wealth inequality. A recent Economic Synopses essay explored this connection.
Research Officer and Economist Guillaume Vandenbroucke and Research Associate Heting Zhu focused on a measure of wealth inequality called the Gini index (or Gini coefficient):
- A coefficient of 0 means everyone holds the same wealth.
- A positive coefficient means there’s some wealth inequality.
- A coefficient of 1 means maximum inequality, or one person holding all the wealth.
The authors examined the share of wealth and the share of population by age group in 2010. They noted, for example, that those under 35 years old represented over 25 percent of the population, but only about 5 percent of the wealth. Conversely, those aged 55 to 64 represented only about 16 percent of the population, but almost 31 percent of the wealth. The Gini coefficient implied by this wealth distribution is 0.385. (For a figure showing the population and wealth distribution, see the Economic Synopses essay Aging and Wealth Inequality.)
Vandenbroucke and Zhu cautioned: “Because this Gini coefficient measures only the dispersion of wealth by age group, it omits additional sources of wealth inequality and therefore understates the true Gini coefficient for the United States.”
How Wealth Inequality by Age Affects Overall Inequality
The authors provided an example of how wealth inequality by age contributes to overall wealth inequality. They assumed a population of 100 people where each young person had $1 of wealth and each old person had $10 of wealth.
In the first scenario, 80 percent of the population was young and 20 percent was old. Thus, the total wealth of the population was $280 (80 percent with $1 and 20 percent with $10). The young held 29 percent of the total wealth ($80/$280), while the old held 71 percent ($200/$280). The Gini coefficient for this population was 0.51.
In the second scenario, each population had the same amount of wealth per person as in the first scenario, but the population shifted to 50 percent young and 50 percent old. The total wealth of the population rose to $550 (50 percent with $1 and 50 percent with $10), and the old now held 91 percent of total wealth ($500/$550). With a larger percentage of the population having greater wealth, the Gini coefficient fell from 0.51 to 0.41.
Vandenbroucke and Zhu noted that an aging population may reduce wealth inequality, but this is far from certain. They added that their example should be interpreted with caution. “It does not imply that the forecasted aging of the U.S. population will be accompanied by a reduction in wealth inequality,” they wrote. “The calculation presented here abstracts from other forms of inequality not related to age. It is conceivable that these other forms of inequality may increase as the population becomes older and offset the effects described here.”