A Head‐to‐Head Comparison of Augmented Wealth in Germany and the United States*

• Author: Edward N. Wolff,Markus M. Grabka,Timm Bönke,Carsten Schröder
• Published date: 01 July 2020
• Date: 01 July 2020
• DOI: http://doi.org/10.1111/sjoe.12364

Scand. J. of Economics 122(3), 1140–1180, 2020

DOI: 10.1111/sjoe.12364

A Head-to-Head Comparison of Augmented

Wealth in Germany and the United States*

Timm B ¨onke

Free University Berlin, DE-14195 Berlin, Germany

timm.boenke@fu-berlin.de

Markus M. Grabka

DIW Berlin, DE-10117 Berlin, Germany

mgrabka@diw.de

Carsten Schr¨oder

DIW Berlin, DE-10117 Berlin, Germany

cschroeder@diw.de

Edward N. Wolff

NewYork University, New York, NY 10003,USA

edward.wolff@nyu.edu

Abstract

We examine the composition of augmented household wealth (i.e., the sum of net worth and

pension wealth) in the United States and Germany. Pension wealth makes up a considerable

portion of household wealth, of about 48 percent in the United States and 61 percent in Germany.

When pension wealth is included in household wealth, the Gini coefficient falls from 0.889 to

0.700 in the United States, and from 0.755 to 0.508 in Germany.If the wealth shares in Germany

were the same as in the United States, this would lead to a 12.6 percent increase in the Gini

coefficient in the augmented wealth distribution in Germany.

Keywords: Augmented wealth; net worth; pension wealth; Socio-Economic Panel; Survey of

Consumer Finances

JEL classification:D31; H55; J32

I. Introduction

The rising inequality observed in many advanced economies is widely

considered one of the most serious problems facing the world today (see

Stiglitz, 2012). Much of the current literature on the subject focuses on

*M. M. Grabka, C. Schr¨oder, and E. N. Wolff thank the Deutsche Forschungsgemeinschaft under

contract GR 3239/4-1 for financial support. We would also like to thank Tobias Schmidt and

participants at the 2016 IARIW conference in Dresden for valuable comments, and Deborah

Anne Bowen for editing the paper.

C

The editors of The Scandinavian Journal of Economics 2019.

T. B¨onke et al. 1141

income inequalities, while wealth inequalities have received less attention,

and rigorous cross-country studies remain scarce; exceptions include Wolff

and Zacharias (2009) and Alm˚as and Mogstad (2012). This is not for lack

of interest – what is lacking are comparable data.1

The literature to date has focused primarily on four wealth aggregates:

real assets; financial assets; debts; and the difference between assets and

debts, or net worth (e.g., Caroll et al., 2014; Brinca et al., 2016). Pension

wealth is often ignored in studies on wealth inequalities.2It is not even

a standard item in household (wealth) surveys in continental Europe and

Japan, despite the substantial interest in pension institutions in economic

research. Studies within this body of literature have looked at the role

of pension institutions in portfolio choices and in savings (crowding-

in/out effects) and retirement decisions.3This literature has also shown

the responsiveness of private savings to the design of pension institutions –

in terms of coverage, generosity, (expected future), and financial stability –

and several studies have demonstrated that (public) pension wealth functions

as a substitute for net worth.4

If pensions differ in generosity across countries, cross-country

comparisons of net worth might yield biased estimates of average material

well-being and the distribution of well-being across the population (see

also Cowell et al., 2018, p. 352). A comprehensive measure that considers

pension wealth in addition to net worth is augmented wealth (Wolff, 2015a,

b; B¨onke et al., 2018). The empirical literature on wealth inequalities

that explicitly addresses social security wealth in a broad concept of

(augmented) wealth is very limited, and cross-country comparisons based

on harmonized data are scarce. A pioneering study on the subject is that

of Wolff and Marley (1989).5Perhaps the closest paper to ours is B ¨onke

et al. (2018), who derive a distribution of augmented wealth for Germany.

1A recent data initiative by the European Central Bank aims at closing the data gap with its

Household Finance and Consumption Survey (HFCS); see European Central Bank (2009, 2013)

for an introduction. This has opened up newoppor tunities for empirical research (see Kaas et al.,

2015).

2Pension wealth is the discounted expected present value of future entitlements from public,

occupational, and private pension schemes (especially tax-sheltered retirement savingplans).

3Case studies on the role of social security institutions are: Moffitt (1984), Gustman et al. (1997),

and Wolff (2014) for wealth portfolios; and Boyle and Murray (1979), Dicks-Mireaux and King

(1984), Leimer and Lesnoy (1982), Gullason et al. (1993), Kennickellet al. (1997), and B ¨orsch-

Supan et al. (2008) for private savings.

4See, for example,Attanasio and Brugiavini (2003), Bosworth and Burtless (2004), and Samwick

(2000). Of course, pension wealth is only an imperfect substitute for other assets; it is not under

the direct control of the policy holder and cannot be marketed directly or used as collateral (see

Wolff,2015b).

5Further studies are: Jianakoplos and Menchnik (1997) and Wolff (2005, 2014) for the United

States; Shamsuddin (2001) for Canada; Mazzaferro and Toso (2005) for Italy; Roine and

C

The editors of The Scandinavian Journal of Economics 2019.

1142 A head-to-head comparison of augmented wealth

In contrast to previous studies, which focused on particular subpopulations

(e.g., retirees or married couples), they provide the distribution for the

overall population.

Following B¨onke et al. (2018), our estimates rely on the accrual method

to derive pension wealth. The accrual value of pension wealth shows the

value of each pension plan based on the individual’s work history to date.6

Our main reason for choosing the accrual method is consistency: like all

other components of augmented wealth, pension wealth is measured in

terms of today’s and not (expected) future possessions. However, compared

with B¨onke et al. (2018), we make several innovations. First, this paper

is comparative in nature, comparing augmented wealth distributions for

the United States and Germany, based on (ex post) harmonized survey

data.7Second, our paper provides the distribution of household, rather

than individual augmented wealth as in B¨onke et al. (2018). Further,

the wealth aggregate in the present paper is broader, as it additionally

incorporates survivor pension entitlements in the household context. To

our knowledge, this is a unique feature of the present work. Third, the

inequality analyses are enriched through the use of (i) factor decomposition

to assess the contributions of different portfolio compositions for differences

in inequalities across countries, and (ii) the DiNardo–Fortin–Lemieux (DFL)

decomposition (DiNardo et al., 1996) to assess how wealth differences

between Germany and the United States can be explained by differences in

the country-specific household type and age distributions.

The results of this first systematic “head-to-head” comparison of wealth

distributions for the United States and Germany provides the following

insights. The inclusion of pension wealth adds about 48 percent to average

net worth in the United States and 61 percent in Germany. This reduces

the wealth gap between the two countries. While the US–German ratio

of average net worth is about 1.9 in favor of the United States – the

US average is 338,000 US dollars (USD), and the German average is

USD 182,000 – it is just 1.4 for augmented wealth (US average, USD

653,000; German average, USD 472,000). The addition of pension wealth

Wal de ns tr ¨om (2009) for Sweden;Maunu (2010) for Finland; and Frick and Grabka (2010, 2013)

for Germany.

6An alternative to the accrual is the ongoing concern method. The latter method assumes that

employees continue to workat their place of employment until their expected date of retirement.

Hence, the accrual method and the ongoing concern treatment represent two extremes in the

valuation of social security wealth.The ongoing concern method, however,relies on the stringent

assumptions that the firm or organization continues to remain in existence overtime, and that the

employee continues workingat the enter prise (in the same position, etc.).

7To our knowledge,only two papers to date have provided a comparative analysis of augmented

wealth: Wolff (1996) for the United States and Canada, and Frick and Headey (2009) for retirees

in Australia and Germany.

C

The editors of The Scandinavian Journal of Economics 2019.