Agree with everything you said, but I always have felt the major missing component here is the value of a year-of-life.
This is where the young are infinitely more wealthy than the old. You can do the math around a set of discounted QALYs to actually calculate this or you could just intuitively think about it - how much of their "net worth" would a 70 year old offer to be 20 again? This becomes particularly salient if you think about the longevity advances we are about to see. Any rational 70 year old deca-millionaire would give up almost every dollar to be a 20 year old again in 2026.
Re retirees not losing wealth - it’s investment growth and income combined with pension/SSA retirement income and frugal lifestyle. As a CPA of my acquaintance said years ago, his customers who retire with two millions of savings die with four.
I kinda worry about the future decades having a lost decade concluding with some 2008 event. $2 mil can disappear pretty quickly if the retiree isn’t careful to consider SORR and not assume another 15 yearish bull run.
But overall that is what I hear. Retirees spend a bit at the onset, break a hip or knee, spend less, then spend more to stay alive and be given care until they’re dead. If the withdrawals aren’t greater than the returns they absolutely die very wealthy.
Scott Sumner over the years has written a lot of posts on wealth vs income vs consumption inequality and by age. A lot of the animosity towards high wealth people is really young spendthrifts being mad at old savers
Some people work hard, live frugally, save and invest, and by old age have become rich. They may make only token efforts to share their “good fortune” with others, but what one really wishes is that they could share their *virtue*.
One correction. In #3 you write, "Trade deficits represent borrowing." This is true empirically in the United States but it's not a necessity. Trade deficits can exist even with zero borrowing. Don Boudreaux, your co-author on your forthcoming book, can explain quickly.
I could be wrong, but I believe that "borrowing" is being used in a broad sense by Bryan. Since every transaction involves two sides (even gifts are exports/imports of "good will"), then if a country runs a trade deficit (imports > exports, of course) then we must be "trading" something else assuming the other countries are not giving the goods/services away for free. In this case, "capital account" items--basically, foreigners are acquiring more US assets, than are US residents acquiring foreign assets (that is, on net, a capital account surplus and current account deficit).
100% agree, but I guess what they all have in common is a claim on future income streams, so foreign purchase of bonds, stocks, land, firms.... all have in common a claim on the future income stream generated from that asset (interest, dividends, rent--explicit or implicit, profits...). My interpretation is only based on how macro textbooks write balance-of-payments accounts. But, yes, somewhat confusing for those not familiar with this practice.
Wealth grows exponentially, while the value of money to a person grows logarithmically. If you are the type of person who can save and grow a million dollars, you probably aren't the type of person who can spend that money in a 20 year retirement. But those who could never imagine having 6 figures in their bank account, will spend any money quickly to reap whatever value they get from it immediately.
This is the most mind blowing chart I have seen this year. Definitely a keeper.
If I may quote my AI summary of the article though…
“American household wealth is vastly greater, and much more widely distributed through the upper-middle part of the population, than the standard “most Americans are financially desperate” narrative would lead you to believe. Wealth accumulation over the lifecycle is also enormous.
That is real and worth emphasizing. Where Caplan loses me is when he jumps from that excellent observation to “therefore liquidity problems are imaginary, almost everyone could become rich through frugality, and most elderly Americans don't need Social Security.” The SCF data establish the first story remarkably well. They do not establish the second one.”
You are not wealthy if you can't afford to own your housing in a place you want to live - several hundred thousand in the bank doesn't necessarily solve this. You are not wealthy if a healthcare problem will bankrupt you. You are not wealthy if losing your job and being unemployed for a few months will bankrupt you.
The chart shows people are much wealthier than we thought. Whether this is quote unquote “wealthy” in a particular case according to your definition is a bit beside the point.
I can’t remotely afford to live where I would like in Rancho Santa Fe. Doesn’t mean I am not wealthy according to my definition.
Anyone without health insurance is playing a risky game. Seems you are describing irresponsibility rather than lack of wealth.
The chart is based on actual distribution. Those with temporary job losses are cooked in already.
Not sure what CPI has to do with the argument.
Guess I don’t really get your point. After reading this article, are you not surprised by how wealthy American families are?
Just curious, is IRA/401K $ discounted in the wealth calculation, and by how much? Anyone smart enough to read this substack knows that if you have a million dollars in an IRA/401K you can't cash it all in at once and get a million dollars (taxes).
People earn just enough to get by' is a phrase often used to explain the low personal saving rate in the United States. The implicit presumption is that households simply do not earn enough to pay for current needs' and to save. We show in this paper that at all levels of lifetime earnings there is an enormous dispersion in the accumulated wealth of families approaching retirement. It is not only households with low incomes that save little; a significant proportion of high income households also saves little. And, a substantial proportion of low income households save a great deal. We then consider the extent to which differences in household lifetime financial resources explain the wide dispersion in wealth, given lifetime earnings. We find that very little of this dispersion can be explained by chance differences in individual circumstances largely outside the control of individuals' that might limit the resources from which saving might plausibly be made. We also consider how much of the dispersion in wealth might be accounted for by different investment choices of savers some more risky, some less risky given lifetime earnings. We find that investment choice is not a major determinant of the dispersion in asset accumulation. It matters about as much as chance events that limit the available resources of households with the same lifetime earnings. We conclude that the bulk of the dispersion must be attributed to differences to in the amount that households choose to save. The differences in saving choices among households with similar lifetime earnings lead to vastly different levels of asset accumulation by the time retirement age approaches.
Agree with everything you said, but I always have felt the major missing component here is the value of a year-of-life.
This is where the young are infinitely more wealthy than the old. You can do the math around a set of discounted QALYs to actually calculate this or you could just intuitively think about it - how much of their "net worth" would a 70 year old offer to be 20 again? This becomes particularly salient if you think about the longevity advances we are about to see. Any rational 70 year old deca-millionaire would give up almost every dollar to be a 20 year old again in 2026.
Great point!
Re retirees not losing wealth - it’s investment growth and income combined with pension/SSA retirement income and frugal lifestyle. As a CPA of my acquaintance said years ago, his customers who retire with two millions of savings die with four.
I kinda worry about the future decades having a lost decade concluding with some 2008 event. $2 mil can disappear pretty quickly if the retiree isn’t careful to consider SORR and not assume another 15 yearish bull run.
But overall that is what I hear. Retirees spend a bit at the onset, break a hip or knee, spend less, then spend more to stay alive and be given care until they’re dead. If the withdrawals aren’t greater than the returns they absolutely die very wealthy.
Scott Sumner over the years has written a lot of posts on wealth vs income vs consumption inequality and by age. A lot of the animosity towards high wealth people is really young spendthrifts being mad at old savers
Some people work hard, live frugally, save and invest, and by old age have become rich. They may make only token efforts to share their “good fortune” with others, but what one really wishes is that they could share their *virtue*.
Excellent, excellent post!
One correction. In #3 you write, "Trade deficits represent borrowing." This is true empirically in the United States but it's not a necessity. Trade deficits can exist even with zero borrowing. Don Boudreaux, your co-author on your forthcoming book, can explain quickly.
I could be wrong, but I believe that "borrowing" is being used in a broad sense by Bryan. Since every transaction involves two sides (even gifts are exports/imports of "good will"), then if a country runs a trade deficit (imports > exports, of course) then we must be "trading" something else assuming the other countries are not giving the goods/services away for free. In this case, "capital account" items--basically, foreigners are acquiring more US assets, than are US residents acquiring foreign assets (that is, on net, a capital account surplus and current account deficit).
Could be.
But it's strange to use the word "borrowing" that way. When I buy a house from someone, we don't say that he borrowed it.
100% agree, but I guess what they all have in common is a claim on future income streams, so foreign purchase of bonds, stocks, land, firms.... all have in common a claim on the future income stream generated from that asset (interest, dividends, rent--explicit or implicit, profits...). My interpretation is only based on how macro textbooks write balance-of-payments accounts. But, yes, somewhat confusing for those not familiar with this practice.
Wealth grows exponentially, while the value of money to a person grows logarithmically. If you are the type of person who can save and grow a million dollars, you probably aren't the type of person who can spend that money in a 20 year retirement. But those who could never imagine having 6 figures in their bank account, will spend any money quickly to reap whatever value they get from it immediately.
Any data for households outside the US?
This is the most mind blowing chart I have seen this year. Definitely a keeper.
If I may quote my AI summary of the article though…
“American household wealth is vastly greater, and much more widely distributed through the upper-middle part of the population, than the standard “most Americans are financially desperate” narrative would lead you to believe. Wealth accumulation over the lifecycle is also enormous.
That is real and worth emphasizing. Where Caplan loses me is when he jumps from that excellent observation to “therefore liquidity problems are imaginary, almost everyone could become rich through frugality, and most elderly Americans don't need Social Security.” The SCF data establish the first story remarkably well. They do not establish the second one.”
You are not wealthy if you can't afford to own your housing in a place you want to live - several hundred thousand in the bank doesn't necessarily solve this. You are not wealthy if a healthcare problem will bankrupt you. You are not wealthy if losing your job and being unemployed for a few months will bankrupt you.
CPI doesn't really capture all these nuances.
The chart shows people are much wealthier than we thought. Whether this is quote unquote “wealthy” in a particular case according to your definition is a bit beside the point.
I can’t remotely afford to live where I would like in Rancho Santa Fe. Doesn’t mean I am not wealthy according to my definition.
Anyone without health insurance is playing a risky game. Seems you are describing irresponsibility rather than lack of wealth.
The chart is based on actual distribution. Those with temporary job losses are cooked in already.
Not sure what CPI has to do with the argument.
Guess I don’t really get your point. After reading this article, are you not surprised by how wealthy American families are?
Just curious, is IRA/401K $ discounted in the wealth calculation, and by how much? Anyone smart enough to read this substack knows that if you have a million dollars in an IRA/401K you can't cash it all in at once and get a million dollars (taxes).
I keep coming back to this paper, which is quite consistent with what you've stated above.
https://www.nber.org/papers/w7521
summary:
People earn just enough to get by' is a phrase often used to explain the low personal saving rate in the United States. The implicit presumption is that households simply do not earn enough to pay for current needs' and to save. We show in this paper that at all levels of lifetime earnings there is an enormous dispersion in the accumulated wealth of families approaching retirement. It is not only households with low incomes that save little; a significant proportion of high income households also saves little. And, a substantial proportion of low income households save a great deal. We then consider the extent to which differences in household lifetime financial resources explain the wide dispersion in wealth, given lifetime earnings. We find that very little of this dispersion can be explained by chance differences in individual circumstances largely outside the control of individuals' that might limit the resources from which saving might plausibly be made. We also consider how much of the dispersion in wealth might be accounted for by different investment choices of savers some more risky, some less risky given lifetime earnings. We find that investment choice is not a major determinant of the dispersion in asset accumulation. It matters about as much as chance events that limit the available resources of households with the same lifetime earnings. We conclude that the bulk of the dispersion must be attributed to differences to in the amount that households choose to save. The differences in saving choices among households with similar lifetime earnings lead to vastly different levels of asset accumulation by the time retirement age approaches.