New research incorporating pension and Social Security benefits finds Americans “richer and less unequal” than they’ve been told.

Important research by a team of economists will better inform discussions of wealth inequality in America. And the new insights turn out to be good news. The Wall Street Journal editorial board sums it up well:

Americans may be richer than they think and less unequal than they’ve been led to believe. That’s the takeaway from a recent working paper by five economists from the University of Wisconsin and the Federal Reserve, which adds to standard wealth measures by including Social Security and pension guarantees.

Social Security benefits and defined-benefit pensions—employer pensions promising a fixed income in retirement—don’t show up in workers’ bank accounts, but their promised future payouts are worth trillions of dollars. Include the full present value of retirement assets, the paper shows, and the median American household headed by someone in his or her 40s had a net worth in 2019 of $402,000. At the 75th percentile, the figure was $1.15 million.

That makes a big difference for wealth inequality. As the authors write: “Our estimates show that the value of DB pensions and Social Security are significant relative to other forms of wealth—throughout the wealth distribution but especially at the lower half of the wealth distribution.”

In their paper, the economists provide a lot of detail on their methods, data sources, and the implications for public policy. They write,

The employment-based retirement system in the United States has evolved from one primarily based on DB pensions to one built around DC plans. DC plans, unlike DB plans, are a form of market wealth and are included in the SCF and other household wealth surveys. The steady increase in DC retirement accounts and account balances starting the 1980s, therefore, represents in large part a transition between systems and not necessarily the accumulation of additional household wealth and increased wealth inequality. We find that by capturing both types of retirement accounts, the growth in wealth concentration over the past 30 years is moderated, but still present.

As documented in Poterba et al. (2011) and Gustman and Steinmeier (1999), these additional forms of wealth are empirically important resources to retirees in the United States—but they also impact decisions leading up to retirement. Social Security may crowd out private savings, but its near universally required participation is the primary mechanism for financing retirement in most lower income households, as Social Security benefits alone represent the single-largest source of retirement income for more than 60% of retired households (Social Security Administration, 2016). Similarly, employer-provided DB pensions also substitute for other private retirement savings. Both Social Security and DB pensions disproportionately benefit households below the top portion of the wealth distribution, and estimates of wealth concentration that do not include their value are potentially misleading, especially in the context of economic policy discussions. Despite this, nearly all research on wealth concentration relies on data which exclude the majority of assets that are linked to the most important income streams for retirees: Social Security and DB pensions.


in- corporating the asset-value of expected retirement benefits, particularly Social Security, increases estimated wealth levels throughout the distribution and has a dramatic equaliz- ing effect on the distribution of wealth. For example, among households with heads ages 40-49, in 2019 the top five-percent share of wealth excluding DB pension plans and Social Security is 58%. Once estimated DB and Social Security are included, the top five-percent wealth share falls to 41%. Examining trends in the distribution of wealth in our expanded wealth measure, we find that there is also a slight moderation of the trend toward greater inequality once we incorporate all forms of retirement wealth.

They identify the benefits of their analysis.

We believe that this expanded wealth measure offers a valuable perspective on wealth concentration and its evolution for two broad reasons. The first concerns the substitutabil- ity across different forms of wealth from the perspective of a household. Retirement is a major reason for saving among many households, and DB pensions and Social Security are significant resources for most households. Because they are to some degree a substitute for (i.e., “crowd out”) other forms of savings, their inclusion is appropriate for a more complete understanding of wealth and resources at older ages. Because Social Security especially is broadly held across the wealth distribution, its exclusion leads to higher measures of wealth concentration than what we found through our expanded wealth concept.

This expanded wealth measure also helps us understand the implications of policy for wealth inequality and economic well-being, as seen through our exercise on the effects of a hypothetical reduction in Social Security benefits. Our distributional simulations indicate that addressing projected shortfalls in the Social Security Trust exclusively by reducing benefit payouts can be expected to lead to significant increases in wealth concentration among the youngest cohort.

The second benefit of this expanded wealth measure is that by including DB pensions along with DC plans, we have an improved understanding of trends in wealth concentration over time. The transition away from private DB pensions—which are not included in surveys or typical measures of net worth—to DC plans—which are included—presents a measurement issue where growth in net worth that includes only DC plans is mechanically overstated. Estimating DB pension wealth helps to correct this issue, and its inclusion is one contributor to the lower rate of growth in wealth concentration over time that we find with the expanded wealth measure.

The WSJ editorial points out,

This study follows a 2020 paper from three University of Pennsylvania researchers that found an even greater impact of Social Security on inequality trends, using a different methodology and sample. They write that “Social Security promises rose in value by over 200 percent in real terms between 1989–2016.” Include Social Security in wealth calculations, and there has been “either only a minimal increase in the top 1% share,” the paper found, “or even a decrease.”

A useful contribution to our understanding of inequality and a corrective to previous overstatements of the wealth gap.