Blame Demographics for Income Inequality

Many experts agree that natural demographic changes and lifetime income cycles distort common income inequality measurements in the United States. In short, there are a lot more middle-aged and old people now than there used to be, and older people by-in-large have more money than their younger counterparts because they have been earning money longer. And therein lies the main reason why income inequality appears to be exploding. Old people are certainly to blame, while they are paradoxically not at fault. Economists Ingvild Almas and Magne Mogstad have established a method to adjust mainstream income inequality measurements for age differences and associated variables like education. They found that after these adjustments are made, the Gini-coefficient—a measure which underlies most contemporary academic work on income inequality—is grossly exaggerated.

Many young people are also choosing to take on debt to invest in a car, a home, and a college degree. In theory, these investments pay off in the long-term as the young become the old and advance in their careers having obtained an education and a stable living situation. This is why, for example, young people have less retirement savings than old folks. It is also why older people have far higher homeownership rates. As the baby-boomer generation becomes eligible for retirement benefits and reaps the rewards of their accumulated savings, income inequality will appear worse over time. While obviously not all senior citizens are well-off, it is clear that demographics coupled with an awkwardly structured Social Security system are primarily to blame for the nation’s perceived income disparity.

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