Aging in Rich Countries is Likely to Increase Inequality

Bernie Sanders supporters have been especially vocal about the increase in income and wealth inequality in the United States. Inequality was put squarely on the table by Thomas Piketty a couple of years ago, as I discussed at the time and since then as well. You can be sure that a lot of people are going to be unhappy when the top 10% of earners are raking in 50% of the income, as is happening in the U.S. right now.

It turns out, though, that demography is working in favor of inequality in the richer countries because an aging population tends to lead to more, rather than less, inequality. These are the very interesting findings of a paper by Joshua Goldstein and Ronald Lee of U.C. Berkeley that just came out in the latest volume of the Vienna Yearbook of Population Research. [Note that the latest issue has a date of 2014, but it just arrived in my mail and I know the mail isn't THAT slow!]

In this paper, we look at the role that population aging plays in increasing economic inequality. We provide estimates of the magnitudes of the effects on inequality of three different factors related to population aging: capital intensification, changing population age structure, and increasing longevity. Changing age structure is found to have a small effect on aggregate inequality, while capital deepening and longevity-based life cycle savings are shown to be more important. Taken together, our findings suggest that aging has a substantial effect on economic inequality.

The U.S. is largest economy in the world and is consistently more unequal than are European societies. However, since Europe is aging faster than the U.S., the Goldstein and Lee analysis suggests that inequality will also increase more rapidly in Europe than in the U.S. Here we find a clear-cut case of the intersection of demography and political economy--exactly the topic that Malthus was going on about more than 200 years ago.