Wealth inequality in the United States is often discussed in terms of savings, property, and financial assets. But many economists argue that one major component is usually missing from these calculations — Social Security. A recent research paper suggests that ignoring Social Security can give an incomplete picture of how wealth is actually distributed across American households.
Professor Sylvain Catherine, along with co-authors Max Miller and Natasha Sarin, studied how including Social Security changes the way we measure wealth inequality. Their paper, Social Security and Trends in Wealth Inequality, has received major recognition in the field of financial economics. Their findings suggest that once Social Security benefits are counted as part of household wealth, inequality appears much lower than many earlier studies suggested.
Why Social Security Should Be Included in Wealth Measurements
Professor Catherine explains that Social Security is one of the largest retirement programs in the United States and serves as the primary retirement savings source for millions of Americans.
Because of its scale, he believes it should be counted when measuring wealth.
For many people, especially middle- and lower-income households, Social Security represents a major future financial asset. Ignoring it when calculating wealth can lead to misleading conclusions about how wealth is distributed across society.
Historically, many wealth inequality studies focused only on private assets such as:
- Savings accounts
- Stocks and bonds
- Real estate
- Retirement plans like 401(k)s
But Social Security benefits — which are earned through years of work — also represent future income. When this value is included in calculations, the picture of wealth distribution changes significantly.
How Social Security Reduces Measured Wealth Inequality
According to Catherine’s research, two key features of the Social Security system help reduce measured inequality.
First, Social Security contributions are capped. This means that individuals earning above a certain income level stop paying additional Social Security taxes on higher earnings.
Second, the benefit formula is progressive. Lower-income workers receive a higher percentage of their previous earnings in retirement compared to high-income workers.
These two characteristics make Social Security far more important for people with lower incomes.
As a result:
- Lower-income households rely heavily on Social Security benefits
- Higher-income households rely more on private investments and savings
When Social Security is excluded from wealth calculations, it makes lower-income households appear to have far fewer resources than they will actually receive in retirement.
This can artificially increase the measured level of wealth inequality.
Why Previous Studies Often Ignored Social Security
Many earlier studies left Social Security out of wealth calculations because the program operates on a pay-as-you-go system.
In this system, current workers pay taxes that fund benefits for current retirees. Because the benefits are not stored in individual accounts like private retirement plans, some researchers avoided counting them as wealth.
However, Catherine argues that this decision creates an inconsistency.
For example, private retirement assets like 401(k) plans and pension funds are included in wealth measurements. Yet these assets also represent future retirement income.
Leaving out Social Security while including other retirement assets can therefore produce an incomplete picture of household financial resources.
Risks of Ignoring Social Security in Policy Discussions
Not including Social Security in wealth data can also affect policy debates.
Many policymakers and economists rely on wealth inequality statistics when deciding whether to expand government programs.
But if Social Security is ignored, the data may exaggerate the level of inequality.
Catherine explains that as government programs expand, people may save less privately because they expect more support in retirement.
In such cases:
- Private wealth may appear lower
- Inequality may seem higher
But in reality, the government program itself may be reducing inequality.
This makes it important to measure wealth in a way that includes both private assets and public retirement benefits.
What Policymakers Should Consider Going Forward
The future of Social Security is already a major policy issue.
Current projections suggest that the Social Security Trust Fund could face funding shortages within the next decade. Because of this, policymakers may need to make changes to the system.
Possible reforms include:
- Increasing the retirement age
- Reducing benefits
- Raising payroll taxes
Each option would affect different income groups in different ways.
By including Social Security in wealth calculations, policymakers can better understand how these reforms would impact inequality across households.
The Next Step in Wealth Inequality Research
Catherine’s research focuses mainly on the retirement system, but he believes future studies should go even further.
Other government programs also provide significant financial support to households. For example, Medicare and Medicaid together represent a huge portion of government spending and benefits.
Like Social Security, these programs represent future resources that households will receive.
Including them in wealth calculations could help researchers develop a more accurate picture of the true distribution of resources in the United States.
The debate around wealth inequality in the United States may look very different when Social Security is included in the calculation. According to Professor Sylvain Catherine’s research, Social Security plays a crucial role in supporting lower- and middle-income households, making the distribution of resources more balanced than traditional wealth statistics suggest.
Ignoring this major retirement program can lead to misleading conclusions about inequality and may affect policy decisions. As policymakers consider reforms to Social Security and other government programs, measuring wealth more accurately — including both private savings and public benefits — will be essential for understanding the true economic situation of American households.
FAQs
What is wealth inequality?
Wealth inequality refers to the uneven distribution of assets such as savings, property, and investments among individuals or households in an economy.
Why is Social Security important when measuring wealth?
Social Security provides retirement income to millions of Americans. Including it in wealth calculations gives a more accurate picture of the financial resources households will have in retirement.
How does Social Security reduce wealth inequality?
Social Security benefits are designed to be progressive, meaning lower-income workers receive a higher percentage of their earnings in retirement compared to higher-income workers.
Why did earlier research exclude Social Security from wealth measurements?
Some studies excluded Social Security because it operates on a pay-as-you-go system rather than individual savings accounts. However, this approach may underestimate the true resources households will receive.
What policy changes could affect Social Security in the future?
Possible reforms include raising the retirement age, reducing benefits, or increasing payroll taxes to address potential funding shortages in the coming years.
