Virtual Wealth Levels the Playing Field… Some

Google has some surprises when it comes to what’s most on our minds. Here, for instance, are the number of Google searches I recently found for some top-of-mind words:

• Covid-19   6, 770 million
• Trump       1,230 million
• Biden            678 million
• Taylor Swift  591 million
• Elvis Presley  82.7 million

What surprised me was the same figures for two other words:

• Wealth concentration 1,750 million
• Virtual wealth    227 million

As you can see, our concern with Covid-19 tops the list. That’s no surprise.

The surprise in wealth concentration

The surprise is that “wealth concentration” comes in second, well over Trump, Biden, Taylor Swift or Elvis Presley. Who knew?

As a news subject, wealth concentration is everywhere, and it is universally presented as bad news and a source of angst.  Searches for “Virtual wealth,” on the other hand, were only one-tenth as high as those for “wealth concentration” — even if it tops Elvis — and it is good news to the vast majority of Americans.

So, how is “virtual wealth” different from conventional wealth?  And what’s good about it?

Virtual vs. Conventional Wealth

The answers come from Andrew J. Rettenmaier. He’s the executive associate director of the Private Enterprise Research Center at Texas A&M in College Station. Rettenmaier is one of a handful of researchers who has gone beyond conventional measures of wealth to measure our virtual wealth. Trust me —  it’s not a casual undertaking.

You can learn more about the distribution of both conventional and virtual wealth by checking the work done by economist James Poterba and others. You can find a column, with a link to the original paper about it, at this link:   https://scottburns.com/the-thinness-of-wealth/

What’s the difference?

Conventional wealth is defined by legal ownership: homes, cars, stocks, bonds, fund shares, private businesses, etc.  Virtual wealth is a right to income from Social Security or a pension. You get income. But you don’t own or control an asset because there isn’t one, only an income right. That income, however, can be evaluated as an asset.

The income from Social Security keeps millions of retirees out of poverty. It helps sustain the standard of living for many millions more. As I have pointed out in many columns, you have to be high on the hog before Social Security benefits are a non-factor in your retirement planning.

Calculating virtual wealth

The vast majority of all stories, columns and articles about wealth concentration are based on readily available figures on conventional wealth from the Federal Reserve. Rettenmaier starts with those figures. Then he uses government data to calculate the effective value of our participation in Social Security.

It’s enormous. In 2018, the most recent available data at the time he wrote his paper, the value of estimated accrued lifetime Social Security benefits was a stunning $39 trillion. That’s about double the equity homeowners collectively have in their homes.

At the same time, the Federal Reserves’ conventional measure of household net worth was $99 trillion. If you add our Social Security wealth to our conventional wealth, we’re talking about a collective net worth of nearly $140 trillion.

Quite an addition.

That’s nice. But where’s the good news?

Social Security benefits and the virtual wealth they represent, are much more widely distributed than conventional wealth. Rettenmaier found, for instance, that while the top 10 percent of all households own 75 percent of conventional assets, they hold only 18 percent of Social Security wealth.

Big difference.

The impact of Social Security wealth on the distribution of retiree wealth is even larger. While the top 10 percent of all retired households hold 70 percent of conventional net worth, they hold only 14 percent of Social Security wealth.

When the two sources — conventional assets and Social Security wealth —  are combined, the concentration of wealth drops from 75 percent for the top 10% to 64%. And among retirees it drops from 70 percent to 58 percent. Either way, that’s a shift of 11 or 12 percent.

Small beer, you say?

Well, yes and no.

In the real world, virtual wealth is a big deal

If you’re looking for a revolutionary change in effective wealth distribution, adding the benefit of Social Security to net worth is small beer. We’re a long way from having a cadre of nobles in castles surrounded by serfs in hovels.

But if your concern is the practical, day-to-day economic condition of all Americans, the shift is a very big deal.

Shifts in wealth are glacial, happening over a generation or longer. According to Federal Reserve data, for instance, the gain in share of wealth by the top 1 percent since late 1990 has been 7.5 percent.  The gain for the top 10 percent has been 8.8 percent. That change has been enough to cause the subject of “wealth concentration,” however it is measured, to land somewhere between “Covid-19” and “Trump.”

Related columns:

Scott Burns, “The Amazing Value of Social Security Benefits,” 5/23/2020 https://scottburns.com/the-amazing-value-of-social-security-benefits/

Scott Burns, “The Thinness of Wealth,” 5/24/2015   https://scottburns.com/the-thinness-of-wealth/

Scott Burns, “The Incredible Importance of Social Security,” 9/8/2013 https://scottburns.com/the-incredible-importance-of-social-security/

Scott Burns, “The Financial Condition of Pre-Retirees: Precarious,” 5/17/2013 https://assetbuilder.com/knowledge-center/articles/the-financial-condition-of-pre-retirees-precarious

Sources and References:

Andrew J. Rettenmaier, “Social Security Wealth and Federal Liabilities,” 10/2020 http://perc.tamu.edu/publication?id=218

http://perc.tamu.edu/PERC-Blog/PERC-Blog/Federal-Liabilities-and-Individual-Assets-The-Case

Federal Reserve website, “distribution of Household Wealth in the U.S. since 1989. https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#quarter:124;series:Net%20worth;demographic:networth;population:1,3,5,7;units:shares

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo:  Scott Burns.  Snow in Hill Country

(c) Scott Burns, 2021