Wealth Inequality and the Importance of Public

In recent years, the social policy discussion in Germany—but elsewhere as well—has been heavily dominated by the issue of income inequality and rising poverty risk rates. Yet very little research has been done on the personal wealth distribution to date, not least of all due to the severe lack of appropriate data. Using representative micro-data from the Socio-Economic Panel Study (SOEP), the German contribution to the Luxembourg Wealth Study (LWS), this paper analyzes a standard measure of net worth (including property, financial assets, business assets) for 2007. Detailed analyses by SES reveal significant differences in wealth holdings by occupational status as well as across age groups, but are based on a “standard” net worth concept and thus ignore any entitlements to public pension schemes. In the present paper, we use statistical matching to link the SOEP survey data to data from the German Social Security Administration. Using retrospective life history data as well as concurrently collected data from up to 24 annual interviews in the SOEP, our matching is based on education, employment, and income history as well as fertility data, all of which are relevant correlates of pension entitlements. This approach allows us to calculate the present value of an individual’s public pension entitlements as of 2007. Our results for the extended wealth measure indicate a very strong impact of pension entitlements on wealth levels and wealth aggregates (plus 95 percent of non-pension wealth), on the portfolio structure, as well as on wealth inequality (the Gini coefficient is reduced by roughly one quarter), all of which reflect the dominant role of the public pension system in Germany. The effect on “middle-class” households is particularly strong when using either income or net worth measures as the basis for defining the middle class. This augmented wealth measure may be useful to reduce the respective inequality bias within a given country (here Germany) resulting from different incentives to invest in old-age provision depending on employment status (self-employed, public servant, dependent employee), but it may be most important for comparative research on wealth inequality across countries and welfare regimes. JEL-codes: C49, D31, D63, I39