Strange truths in The Guardian

Chris Dillow tells us something true in The Guardian:

No, no, no. In fact, it’s young people who will lose out most from this superficially “fair” move. If the triple lock stays, an 80-something will get only a few years of real-terms pension increases. But younger people can look forward to decades of such rises. Because our wealth is the present value of future incomes, scrapping the triple lock will effectively impoverish younger generations today more than old people. Far from promoting intergenerational fairness, scrapping the triple lock will deal yet another blow to young people who have already been comparatively disadvantaged.

This is, of course, all about the state pension. The specific truth we would highlight being this:

our wealth is the present value of future incomes

Entirely so. Except, when we go out to measure wealth that’s not what we do. This is from the canonical Saez and Zucman paper but it’s a general concept used in all valuations and calculations of the wealth distribution:

Our definition of wealth includes all pension wealth—whether held on individual retirement accounts, or through pension funds and life insurance companies—with the exception of Social Security and unfunded defined benefit pensions. Although Social Security matters for saving decisions, the same is true for all promises of future government transfers. Including Social Security in wealth would thus call for including the present value of future Medicare benefits, future government education spending for one’s children, etc., net of future taxes. It is not clear where to stop, and such computations are inherently fragile because of the lack of observable market prices for this type of assets. Unfunded defined benefit pensions are promises of future payments which are not backed by actual wealth. The vast majority (94% in 2013) of unfunded pension entitlements are for Federal, State and local government employees, thus are conceptually similar to promises of future government transfers, and just like those are better excluded from wealth.

Dillow is right, our wealth is the net present value of all future income streams. Things like the state pension - and of course unfunded civil service ones - plus the value of free at the point of use education, health care, the insurance provided by housing benefit, dole, tax credits and all the rest, are wealth. And yet when counting the wealth distribution we don’t include any of these things.

This poses one specific problem, when it is suggested that we should reduce the wealth gap by taxing the richer to funnel money to the poorer we end up not including the effect of the funnelling. Because we deliberately don’t include the effect of receiving tax transfers upon wealth.

But more importantly, given that we already do rather a lot of such redistribution all and every current estimation or calculation of the wealth distribution is wrong. Something that we should probably fix before we discuss whether we should be doing more levelling - or perhaps, mirabile dictu, less. After all, in determining whether we wish to change the current reality we should start with the actual current reality, no?

Or, as we’ve remarked before, it matters what you count and how.