On wealth inequality

Discussion in 'Markets & Economies' started by bordsilver, Apr 23, 2015.

  1. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    This is a simple example to show how the oft bleated 'wealth inequality' headline ignores some basic facts of life.

    First: Age. Age has a large effect on wealth inequality. This can be shown by constructing a very simple stylised example. (Unfortunately this requires some primary school maths, but please try to keep up. :p )

    Age distribution: To start with let's assume that we have a population of workers who are evenly distributed between ages 20-69. This conveniently means that a fifth of the working population is aged 20-29, a fifth is aged 30-39, and so on.

    Incomes: Let's assume that the average 20-year old earns $20,000 per year and that as people age they acquire extra skills and rise gradually through entry level position to senior management such that their average salaries rise by $1,000 per year of age. Hence, 21-year olds earn an average of $21,000, 22-year olds earn $22,000 and so on until the average 69-year old earns an income of $69,000 a year. This is a very flat income distribution (but is presumably the goal of those who whine about wealth inequality).

    Savings: For simplicity let's assume that every age group saves 5% of their annual salary. Which is invested in an accumulating portfolio.

    Interest/dividends: Let's assume that the average rate of return on the portfolio is 5% per year (and assume it is credited the year after it is saved). For simplicity, I'll just call the investment returns 'interest'.

    Based on these parameters, after one-year our 20-year old worker who has just entered the workforce has saved $1,000 (ie 5% of $20K). The next year they save a further $1,050 (ie 5% of $21K) and earn $50 interest on their previously invested $1,000. At the end of the year they now have accumulated wealth of $2,100.

    The year after that our average 22-year old saves a further $1,100 (ie 5% of $22K) earns $105 on their investment portfolio of $2,100 and therefore by the end of the year has a wealth balance of $3,305.

    Continue this year after year and by the age of 60, the average person is saving $3,000 (ie 5% of $60K), but has an accumulated wealth portfolio in excess of $200K that is earning $10,079.98 in interest. As a result of age the average 60-year old person has 200 times the wealth of our average 20-year old. Essentially through the power of compounding, the rate of wealth accumulation is exponentiating as people age and by the time they are 69 they'll have accumulated an average of $368,696 of wealth.
     
  2. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Graphing this example, the first figure shows the annual income, savings, accumulated wealth and interest returns.
    WI_1.PNG

    The next figure shows the wealth distribution by quintile (which is simply each decadal age group).

    WI_2.PNG

    What we can see is that, despite our fairly egalitarian wage assumptions, there is a large amount of wealth inequality. At the 5% annual rate of return, the bottom quintile (ie people aged 20-29) has just 1% of the total wealth while the top quintile (people aged 60-69) has 52% of the wealth.

    And, as can be seen in the figure and the table below, changing the assumptions doesn't have a very large effect on the distribution. For example, even if there was zero net average return on people's investment portfolios then the bottom quintile would still only have 3% of the wealth while top quintile has 42%. This is simply because the top quintile has had 40-50 years of accumulation. Similarly, even if we had some "semi-socialist utopia" where everyone's income was identical, the top quintile would still have 49% of the total wealth purely because of age effects. Hence, anytime someone mentions wealth inequality they should always correct for age.

    WI_3.PNG
     
    Last edited: Feb 5, 2018
  3. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Obviously the real world is far more complicated, with different people saving different proportions of their annual income (or some being net debtors) or some obtaining a consistently higher average annual rate of return than their peers, or some people having a substantially higher lifetime salary than their peers, all of which will generally give rise to the top quintile having a much higher share than those estimated in this quite simplistic example (but which nonetheless shows that large disparity between the wealth of different individuals does not necessarily mean anything).
     
  4. col0016

    col0016 Active Member

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    So what do you suggest we do to help fix wealth inequality? It sounds like a savings tax would help make your example fairer. So instead of everybody keeping their own savings at the end of every year all of the money is pooled and divided evenly.

    Do you think that would help make the system fairer?
     
  5. Big A.D.

    Big A.D. Well-Known Member Silver Stacker

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    It isn't a case of just taking money from people, it's about ensuring that the same opportunities exist over the given time frame.

    Looking at the end result is obviously important, but if the assumption (in this case) that everyone's pay always goes up by $1000 per year over the course of their working life doesn't hold true, then trying to fix things at the end isn't necessarily fair or efficient.

    The inherent nature of the compounding formula is that the more you put in earlier, the higher the amount will be at the end. For example, if income growth drops to 5% and stays there for 20 years, a 20 your old who starts working and saving at the lower rate will be significantly worse off over their lifetime than someone who only gets the lower rate in the last 20 years of their working life.
     
  6. col0016

    col0016 Active Member

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    Isn't that another reason it's fairer just to pool whatever people have left at the end of the year and distribute it evenly? So just say Bob spends his $30k on a car and Bill saves it, we can even it out so they both have a fairer amount of savings (in this case $15k).
     
  7. Shaddam IV

    Shaddam IV Well-Known Member Silver Stacker

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    Taking from / donating by the productive to give to the sick and elderly is a moral obligation. Taking from the productive to give to the lazy seems to be the norm now and this is not fair on those that have their wealth "re-distributed" or on the sick/poor who have to compete for funds with bludgers. People are not equal. Every person makes themselves equal or no by their choices.
     
  8. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    He's not suggesting that wealth inequality needs fixing. It is a natural outcome of engaging in economic activity.
     
  9. col0016

    col0016 Active Member

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    I'm playing the part of the usual ______s who can't get their heads around the fact that life isn't fair and not everybody has the same amount of money.
     
  10. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    :lol: thought it was a bit unusual coming from you. ;)
     
  11. sammysilver

    sammysilver Well-Known Member Silver Stacker

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    Why is it that "we" or "they" have to help "them". Everybody is out trying to fix the world and accomplishing little - can't see the trees for the forest.

    Maybe as individuals, we concentrate on one or two near us, and help them. Don't worry about "them", the "hims" and "hers" is enough - just one or two trees.

    The price we pay for the good life is public servitude.
     
  12. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Yeah. The example highlights that it is actually quite a meaningless concept.
     
  13. Big A.D.

    Big A.D. Well-Known Member Silver Stacker

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    Surely it's still useful in that you can use it to track the results back to opportunities.

    For example, you could look at the data that says old people have a lot of money (fine) but determine that in order for younger people to catch up, their income would need to increase by a ridiculously unachievable amount.
     
  14. bordsilver

    bordsilver Well-Known Member Silver Stacker

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    Don't think so. The "ridiculously unachievable" would be an assumption methinks.
     
  15. smk762

    smk762 Active Member Silver Stacker

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    Though it is a valid premise that the length of time spent producing income is proportional with potential accumulated savings, LOL at the assumption of static conditions over decades being used as an argument. Income is not earned in a vacuum, and the economy doesn't operate in one.

    Some years it is easier to get a job, some years it is cheaper to get an education. The tax system is perpetually being modified, as is monetary policy. Wars are waged, bubbles burst and drought strikes.

    It makes sense that someone fresh out of uni is not as rich as someone about to retire. But does it make sense that the graduate carries significant debt for their education when the retiree was given it for free?
    Does it make sense that the graduate is burdened with the weight of taxation required to contribute to the retiree's pension, while at the same time being forced to pay their own pension in advance via compulsory superannuation?
    Does it make sense that the graduate is likely to spend money more years of relative annual income towards paying off a mortgage, while the retiree's net worth has been boosted by the highly inflationary real estate market?

    I have no suggestions of how to address this disparity of circumstance and opportunity, but failing to acknowledge it is misleading.

    On the upside, the next generation has unprecedented access to self education, if only they are willing and able to take advantage of it and avoid the commercially motivated obfuscation of knowledge leading them to Idiocracy.
    There is also a good chance that that during their working lives of the next 50 odd years, the unsustainable relative growth of housing vs income will come full circle.

    If not, and shit's as fucked up as some people say, to the point enough people get pissed off enough to do something about it, maybe necessary change comes about. Hopefully it's not too bloody an affair, but seems like existing powers have been preparing for the worst for a while now, and rarely are attempts at social change not met with resistance by those who profit from the status quo.
     
  16. sterling-nz

    sterling-nz Well-Known Member

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    This is some of the biggest BS i have ever read here.
    We are dealt a hand and have to play it the best we can.
    I had a lot and then through divorce LOST EVERYTHING.
    Well i worked my arse off and again have a very nice lifestyle.
    If i was not overly taxed to help these poor people then i would be considerably better off.
    I DETEST this being forced to help others.
    If i want to help chosen people then i shall.
    But i am completely against being forced to help.
    DISGUSTING
     
  17. Shaddam IV

    Shaddam IV Well-Known Member Silver Stacker

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    I can see why someone would divorce you.
     
  18. sterling-nz

    sterling-nz Well-Known Member

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    Because i do not believe in handouts for people?
    It is weak and deluded socialists like yourself that are to blame for many of our countries problems.
    How about i send you my bank details and you can start paying me a weekly donation if you are so keen to give your money away?
    I am betting you will not send me money though, because people like you are all TALK until it comes to parting with your OWN dollars.
     
  19. havo

    havo New Member Silver Stacker

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    I concur. There is plenty of information freely available on the internet from which one can make a living...
     
  20. JulieW

    JulieW Well-Known Member Silver Stacker

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    OMG RNT you got called a socialist!!


    :lol: :lol: :lol:
     

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