Wednesday, September 23, 2015

Age and the Distribution of Wealth

One important feature of the distribution of wealth is its relationship with age.  There are many determinants of wealth inequality but one of the most important is age.  If we divide the population by age quintiles then we see that the youngest households have ten times less wealth than the oldest households.

These tables are taken from a recent CSO release.

Wealth Shares

Households where the reference person is under 35 make up 20.1 per cent of the sample.  These households have a 3.5 per cent share of net wealth.

Households where the reference person is 65 and over make up 20.1 per cent of the sample.  These household have a 32.5 per cent share of net wealth.

If we look at median net wealth we see that the gap is even more alarming.  The median wealth of the under 35 households is €4,000.  The median wealth for the over 65 households is €202,400.  The middle household in the under 35 age bracket has 50 times less wealth than the middle household in the over 65 households.  Do we want to make this gap smaller? If we want to do that how do we achieve it? Take wealth from the nearly retired and give it to the newly qualified? Would it not be better if this gap was even greater?

Of course, the substantially higher mean net wealth compared to the median for each age category show that within the age cohorts wealth is not evenly distributed.  The point is that a key driver of overall wealth inequality is age.  People’s wealth levels are different because they are at different points of the life cycle.

This is wealth inequality we should probably have more of not less.  Most young households will start off with close to zero net wealth and over their working lives we would like them to repay a mortgage if they have one, build up some savings or grow an investment fund for their retirement.  More of this age-related wealth inequality would be good.

This chart from research by the Central Bank on this data shows the evolution of assets and liabilities by age.

Wealth by Age

We can see that households tend to buy houses in their 30s and 40s (the positive black bars that increase in size) and then repay the mortgage debt over the next 20 years (the negative grey bars that decrease). 

Investment in other property assets (the skin coloured section in the middle of the bars) increases when people are in their 40s and 50s with financial assets (the light blue at the top of the bars) making a small contribution to the increase in wealth by age.  By the time households reach their 70s debt levels are very low and they begin to sell assets (mainly other property assets).

Again though these are average values so do not tell us much about the distribution within each age category.  If we do have problems with wealth inequality it would be helpful to look at the distribution within age categories rather than across the entire population.  We should have more wealth inequality by age not less.


  1. The problem with this analysis is that it assumes that wealth WILL increase with age, i.e. there's an aging effect. There may well be a cohort effect, that the generation of 55-75 year olds are well off because they bought homes cheaply, had secure, well-paid jobs, and now they have gold-plated pensions. Those pensions aren't available to new workers, and houses are out of reach of many (in part because existing householders block building in areas near them). If it is a cohort effect the youth may be in penury even when they are older, because of a lifetime in poorly-paid insecure jobs, with limited pension rights and no significant asset increasing in value over time.

    1. Eoin,

      That is precisely what we should be avoiding. We should be ensuring that when people get to 60+ they are in strong financial position - either through entitlements or assets.

      I agree that there will be some cohort effect in a once-off snapshot of the distribution of wealth by age. The key is what will it look like in 20 or 30 years time. If it is decided that the current distribution of wealth is a problem introducing measures to "improve" it could harm the current 35 to 50 year olds some of whom, as you say, may not be in a very good position to begin with.

      I don't think there is any doubt that, on average, wealth increases with age whether this is through saving, compounding or inheriting. It is possible that a good portion of the wealth of the current 60-75 years olds will at some stage end up with the current 35-50 year olds.

      All I'm saying is that we shouldn't be hugely concerned that there are massive differences in wealth between different age cohorts as, on average, wealth will increase with age. We should be hoping that wealth increases even more with age. I would guess this happens as most generations tend to be better off than the next one. It would be great if we could ensure that but as you rightly point out that is not necessarily the case at the moment given changes that have happened over recent periods.

      When it comes to the distribution of wealth we definitely should be concerned with inequality within age cohorts. We don't know a whole lot about that but just because the those 65+ have a high average net wealth tells us nothing about the distribution of wealth in that age group. If such intra-group inequality is high (and I would guess that it is) we should be looking to reduce that but a general objective of reducing overall wealth inequality would not be appropriate in my view.

  2. The Irish Longitudinal Study on Ageing (TILDA) had data on the distribution of income and wealth among those aged 50 and over.