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Retirement News
Rich Retirees Big Losers, Young Homeowners Big
Winners in Inflation
Inflation is also a
boon for the government and a tax on foreigners.
 December 19, 2006 – During periods of unexpected
inflation it is the wealthiest of retirees that are the primary losers
and the young, middle-class that are the big winners, reports a new
study.
This study in the December issue of the Journal of
Political Economy says that even mild inflation can lead to substantial
redistribution of nominal assets from lenders to borrowers,
specifically, the transfer of wealth from older, wealthier households to
younger, middle-class households.
"Inflation affects all nominal asset positions, not
just cash positions," write Matthias Doepke (University of California,
Los Angeles and National Bureau of Economic Research) and Martin
Schneider (Federal Reserve Bank of Minneapolis and New York University).
"As a result we find that even moderate inflation
leads to substantial wealth redistribution."
The main winners are young, middle-class households
with fixed-rate mortgage debt. They also have the largest ratios of net
debt to net worth. Doepke and Schneider find that borrowing in the form
of mortgage loans is what positions young, middle-class households to be
the greatest beneficiaries in the event of inflation.
In contrast, old households in the top 10 percent
of net worth keep a large part of their savings in long-term bonds.
In a scenario where inflation increased at five
percentage points more than expected over the next decade, rich retirees
would be hurt more – relative to net worth – than either the poor or the
middle class, accounting for nearly 60 percent of total household-sector
losses.
Besides transferring resources from the old to the
young, Besides transferring resources from the old to the young,
inflation is a boon for the government and a tax on foreigners.
Across sectors, inflation is also a tax on
foreigners, the researchers find. Foreign holdings of U.S. nominal
assets – that is, assets without any intrinsic value – surpassed that of
domestic households in the early 2000s.
"Our results suggest that fiscal policy can play a
central role in the shaping of the effects of an inflation episode,"
write the authors.
"Indeed, in all of our experiments the government
is a major winner, which implies that fiscal policy has to adjust in
some dimension to satisfy the government budget constraint."
Editor's Notes:
Financial support for this study was provided by
the National Science Foundation and the Alfred P. Sloan Foundation.
JPE has been presenting significant research and
scholarship in economic theory and practice since its inception in 1892.
Publishing analytical, interpretive, and empirical studies, the Journal
presents work in traditional areas--monetary theory, fiscal policy,
labor economics, development, micro- and macroeconomic theory,
international trade and finance, industrial organization, and social
economics. For more information, visit:
www.journals.uchicago.edu/JPE.
Doepke, Matthias and Martin Schneider. "Inflation
and Redistribution of Nominal Wealth." Journal of Political Economy
114:6.
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