Re:
"All this skewness just creates so many problems! If we only had a normal distribution all of this stuff would make so much more sense! What exactly is the meaning of "median income" in a country with a Gini coefficient of over .87 How should we describe in words what this is telling us about the Country's wealth distribution?"
The median wealth number is probably a good single number to use as it is the number at which 50% of the population has more and 50% less.
Assuming the wealth distribution is somewhat normal around the median and not a bi-modal distribution (people only at the extremes) the median does give a representative value for middle class people as one might expect the middle class to be distributed around the median value.
Re:Amy, March 27, 2013 3:00
"One question, and I don't know the answer, would defined benefit plans that used to be common be considered income and not wealth, since the employee didn't own the asset, but had a claim on the income? Then today's 401(k) type arrangements would be wealth because the employee actually owns the account. Is this right and how would it factor into this discussion?"
I believe these could be factored into the wealth number by calculating the Net Present Value. An income stream can be discounted to reflect what it would cost to buy an annuity to provide that stream, this is the Net Present Value.
For example, assume someone expects to have a monthly Social Security check of $1230 and they will live 20 years with this check arriving.
Future value = 0 (20 years from now the person dies)
Number of payments 12 * 20 = 240
Discount rate (interest rate during that 20 year period) = 5%
Payment = 1230/month
The Net Present Value of this income stream is $186,376 per my HP 12C calculator.
N=240
FV = 0
I = 5/12
PMT = 1230
Defined benefit plans could be handled the same way.
And Social Security is MORE valuable because it has traditionally been inflation adjusted.
Note, by decreasing the future SS benefits as politicians (of both stripes) have proposed, the calculated SS NPV drops. This is similar in effect to the Estate tax that some politicians rail against, except it is levied against the living, not the dead.
This calculation indicates the wealth of many Americans' is in their Social Security income stream.
I am an engineer, not an economist, and appreciate any corrections to my writings.
- John Wright
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