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October 20, 2015

A Quick and Easy Way to Reduce Income Inequality

 

Apparently THE issue for Democratic presidential candidates heading into the 2016 election is income inequality. They have two solutions: raise the minimum wage and redistribute wealth. 

The far better solution, both for individuals and the economy, would be to let lower-income workers create wealth.  

The creation of wealth—i.e., capital—and its ability to earn higher returns than economic growth is the thesis of economist Thomas Piketty and his much-discussed book Capital in the Twenty-First Century. 

Piketty argues that the wealth disparity is increasing because the wealthy—i.e., people with capital—are able to earn more over time than the increase in wages, which normally grows closer to the rate of the economy. 

One doesn’t have to fully embrace Piketty’s thesis, which has been widely challenged, to conclude there would be huge economic benefits if lower-income populations, who don’t have much discretionary income to put into savings, had a process to create wealth for themselves. 

Arguably, their greatest source of wealth is something they don’t even have a property right to: Social Security. Workers pay into the system for 40 or 45 years, and if Congress wants to rob them of their Social Security benefits, it can. 

Urban Institute economists Gene Steuerle and Caleb Quakenbush estimate that a male worker earning the average wage and retiring in 2015 will hand over to Social Security about $337,000 over their working life. 

That’s some serious capital. 

But get this: Steuerle and Quakenbush estimate that worker will only receive about $287,000—a loss of $50,000. 

Now suppose that instead of giving that money to the government, workers were allowed to put it into a private retirement account that was invested broadly in the stock market. 

Instead of discussing how capital benefits the few, we’d be talking about how capital benefits the many—indeed, almost everyone.  

Instead of those who die early leaving their beneficiaries a $255 Social Security death benefit, they would be leaving their private retirement savings.  

Instead of the “have nots” demanding more from the “haves”—and politicians promising to do just that if elected—the “have nots” would join the “haves.”  

In short, we shouldn’t redistribute wealth to dramatically reduce income inequality, we just need to let lower-income workers have a private property right in the wealth they create.


 

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