Professor Sylvain Catherine and his co-authors Max Miller and Natasha Sarin were named winners of the Dimensional Fund Advisors First Prize from the American Finance Association for their paper, “Social Security and Trends in Wealth Inequality,” published in the Journal of Finance. The award places Professor Catherine among a select group of scholars recognized for the most impactful finance research of the year in one of the field’s most prestigious publications.
The paper was previously awarded the Marshall Blume Prize in Financial Research by Wharton’s Rodney L. White Center for Financial Research, highlighting its early potential and setting the stage for broader recognition. The Marshall Blume Prizes are awarded annually to the best Wharton faculty working papers in financial economics.
In this Q&A, Professor Catherine discusses why Social Security’s inclusion fundamentally changes how we measure wealth inequality.
What motivated you to investigate U.S. wealth inequality through the lens of Social Security?
Sylvain Catherine: Social Security is very large—it’s the main way most Americans save for retirement. It’s therefore strange not to include it when measuring wealth, especially when comparing today’s level of wealth inequality to historical periods when the welfare state did not exist, like the 1920s.
You find that wealth inequality hasn’t increased nearly as much as previously thought when Social Security is accounted for. Can you explain what causes this difference in wealth inequality once Social Security is included?
Sylvain Catherine: First, there’s a level difference for two reasons. Contributions to Social Security are capped, so above a certain income level Social Security becomes less and less important. Second, the benefit formula is progressive: the higher your income, the lower your replacement rate. These two features mean Social Security is proportionally much more important lower in the income and wealth distributions, so ignoring it mechanically inflates measured wealth inequality.
Second, if the U.S. had a fully funded retirement system, people would contribute to personal accounts that would be counted as wealth, and measured inequality would be lower. But because Social Security is pay-as-you-go, previous research has often chosen not to include the accrued value of entitlements—even though it does include private retirement wealth like 401(k)s or defined benefit plans. That choice is somewhat arbitrary and gives an incomplete picture of the future resources households will have at their disposal based on past work.
What are the risks of not including Social Security in our measures of wealth inequality?
Sylvain Catherine: One risk is ending up with a measure of wealth inequality that is not useful for policy evaluation. Many economists and policymakers argue for expansions of the welfare state based on wealth measures that ignore existing programs. But the larger Social Security is, the less households should optimally save on their own for retirement. So as you expand these programs, private wealth inequality can look worse and worse—even though the programs themselves make outcomes more equal. Having a metric that properly captures the effects of these programs is therefore essential.
How should policymakers think about Social Security’s role in inequality trends? What kinds of questions do you think policymakers should be asking now that would help us better understand Social Security’s role?
Sylvain Catherine: As the Social Security Trust Fund is projected to run short of funds within the next ten years, policymakers will need to reform the system. This could be done by increasing the retirement age, lowering benefits, or increasing taxes. These choices have different implications for who bears the cost of reform. By including Social Security in the measurement of wealth, policymakers can better assess how different reforms would affect inequality trends.
How can future research build upon your findings to give us a better understanding of wealth concentration in the U.S.?
Sylvain Catherine: Our research focuses only on the retirement system, which is just one part of the promises the government makes to taxpayers. Combined, Medicare and Medicaid are about as large as Social Security, and they will also face funding pressures over the next decade. Expanding the analysis to incorporate these off-balance-sheet components of household wealth is therefore very important.
Read “Social Security and Trends in Wealth Inequality” on Journal of Finance.
Learn more about Professor Sylvain Catherine.
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