Retirement Savings Drive Shift in Capital Distribution

A new analysis by several well-known economists warns of severe economic consequences related to income inequality; but there are also positive findings about capital distribution and retirement savings. 

Researchers from the Paris School of Economics and the University of California, Berkeley, have published an in-depth analysis of income distribution in the United States—utilizing a data set that seeks to cover all nationally significant forms of income.  

The paper, “Distributional National Accounts: Methods and Estimates for The United States,” was penned by Thomas Piketty (Paris School), Emmanuel Saez (Berkeley), and Gabriel Zucman, (also Berkeley). It draws wide-reaching conclusions about the present American economy, supported by extensive data.

At the highest level, the research finds the pre-tax income of the middle class—adults between the median and the 90th percentile—has grown 40% since 1980. This is “faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits.” For the lowest 50% of income earners, income has stalled since the 1980s.

It will be news to few that income has absolutely boomed, relatively speaking, at the top of the distribution scale: “In 1980, top 1% adults earned on average 27 times more than bottom 50% adults, while they earn 81 times more today. The upsurge of top incomes was first a labor income phenomenon but has mostly been a capital income phenomenon since 2000.”

Of particular interest to readers in the retirement plan industry will be the findings showing strong growth in equity and bond assets over the decades—and how the distribution of these capital assets across income groups has shifted over time. Notably, for the bottom 90% of income earners, capital share has significantly increased over time, from around 10% during the 1970s to close to 20% today. Researchers pin this largely to the rise of pension funds and defined contribution plan investing. In fact, such pension funds account for a growing share of household wealth (36% in 2014).

Other relevant findings suggest that, since income has collapsed for the bottom 50% of all working-age groups—including experienced workers above 45 years old—it is unlikely that the bottom 50% of lifetime income has grown much since the 1980s. Further, “the stagnation of the bottom 50% is not due to population aging—quite the contrary: It is only the income of the elderly which is rising at the bottom.” 

For the bottom half of the working-age population, average income before government intervention has fallen since 1980—this is true whether one looks at pre-tax income, including Social Security benefit, or factor income, excluding Social Security.

The full paper has been made available for download on Zucman’s website: