Older or wealthier? The impact of age adjustments on the wealth inequality ranking of countries

Differences in individual wealth holdings are widely viewed as a driving force of economic inequality. However, as this finding relies on cross-section data, the authors of this paper argue that we may be confusing older with wealthier.

The authors propose a new method to adjust for age effects, which unlike existing methods, captures that individuals differ both with respect to age and with respect to other wealth generating factors.  They suggest this new method is superior to existing methods, like the much used Paglin-Gini, which is shown to have several problems.

The proposed method for age adjustment of inequality is described as a three-step procedure:

• a new age adjusted Gini coefficient (AG) is derived
• a multivariate regression model is employed, allowing the isolation of the net age effects while holding other determinants of wealth constant
• the wealth distribution that characterises perfect equality in age adjusted wealth is determined
  

This new method is applied to cross-section data from Canada, Germany, Italy, Sweden, the United Kingdom, and the United States, collected from the cross-country comparable Luxembourg Wealth Study (LWS) database. This new database reveals that the choice of method is empirically important - existing methods, which attempt to adjust for age, yield erroneous wealth inequality rankings of countries.