Rising Inequality and Ever Increasing Cost of Living - Are You Prepared?

A 2011 study “Divided we Stand: Why Inequality Keeps Rising” by OECD showed that income inequality today is at its highest level for the past 50 years. Similar studies by Credit Suisse and Oxfam have shown that 85 wealthiest individuals in the world have a combined wealth equal to that of the bottom 50% of the world's population. This has prompted numerous economists to publish papers and write books detailing their rationale behind this rising inequality.

Thomas Piketty - In his book “Capital in the 21st Century”, Piketty makes three main claims:

  1. The Return on Capital (r) is Greater than Growth (g): "If the rate of return on capital [r] remains significantly above the growth rate [g] for an extended period of time, then the risk of divergence in the distribution of wealth is very high.” [p. 25]
  2. Inherited Wealth Grows Faster than Income: "People with inherited wealth need save only a portion of their income from capital to see that capital (investment) grow more quickly than the economy as a whole." [p. 26]
  3. Piketty concludes that if the above conditions hold, then capitalism will lead to a distribution of wealth that resembles an aristocracy which he calls “patrimonial capitalism.

Joseph Stiglitz - He argues that “Rent Seeking” is the reason behind economic inequality. It means that through the use of political power generated by wealth, certain groups shape government policies financially beneficial to them.

Some other causes of growing inequality are:

  1. Globalisation - Economist François Bourguignon argues that while globalisation has reduced global inequality (between nations), it has increased inequality within nations [Source]. This can be corroborated by the fact that the income Gini Coefficient for the world has been showing a downward trend from 0.8 in 1988 to 0.65 in 2013.

Year World Gini Coefficient
1993 0.76
1998 0.74
2003 0.72
2008 0.70
2013 0.65

But the inequality within nations is increasing tremendously as shown by the graph below:

  1. Gender Discrimination - When 50% of human population i.e. women are left bereft of equal opportunity and equal access to resources, poverty and thus, inequality remains high. Women are often not encouraged to make investments on behalf of the family. Research shows that women are actually far better at being systematic in their investments.
  2. Plutocracy or Inherited Wealth - Higher the Capital/Income ratio, higher the inequality.

Implications

  1. Failing society - Research has shown an inverse link between income inequality and social cohesion. People tend to become very polarised and inward looking. Crime rate has also been shown to be correlated with inequality in society.
  2. Impact on health - For the top 21 industrialised countries, counting each person equally, life expectancy is lower in more unequal countries (r = -.907) [Source].
  3. Political Instability - High levels of inequality gives rise to agitation among the working class of a country. This leads to protests like Occupy Wall Street and a distrust in the democratic institutions.
  4. Poverty - Oxfam Executive Director Jeremy Hobbs once remarked that "We can no longer pretend that the creation of wealth for a few will inevitably benefit the many – too often the reverse is true."

Though many organisations and economists propose a number of solutions like progressive wealth taxes, universal basic income, increased government spending on welfare schemes etc., all of these face the hurdle of political ideology. Creation of a welfare state is considered as government playing far too much of a role in people’s lives. In countries like the US, even topics like health-care are highly partisan issues and even a mention of “socialism” is highly frowned upon. The unshakable belief in cut-throat capitalism prevents honest discussion about reducing income and wealth inequality. Another great hindrance is discrimination based on gender and race. Most economists agree that this causes poverty, perpetuates inequality and vulnerability in society as a whole. Another factor is lack of education initiatives and programs for investing. If people are explained the benefits of SIP, SIP Plans, Systematic Investments etc. at an earlier stage in life, they are far more likely to become a disciplined investor who invests in the best SIP plans by identifying SIP Plans with good returns and evaluating every possible option in SIP or Systematic Investment Plans.

Systematic Investment Plan

SIP stands for Systematic Investment Plan. It is a Mutual Fund industry tool that encourages regular and disciplined investing without causing disruptions to your monthly budget. Here are a few plus points of doing an SIP:
  1. Convenience - SIP is a convenient method that can help create wealth. Using this tool, you can invest as little as Rs. 500 on a monthly or quarterly basis. It does not disrupt your household budget.
  2. Flexibility - You also have the flexibility of choosing your investment amount. The only rule - the investment amount should be in multiples of 500, i.e. when investing, you can invest Rs. 500, Rs. 1000, Rs. 1500, Rs. 2000 and so on. This style of investing turns dreamers into disciplined investors.
  3. The Power of Compounding - The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.
  4. Rupee Cost Averaging - SIP uses Rupee Cost Averaging. Here, the number of units acquired per month varies based on market fluctuations. So, if the market is down you get more units and if the market is up you get less. This minimises the effect of market volatility on your investments.

To summarise, let us all understand one thing — we will all get old, and though our lives will be longer and healthier than any previous generation, the really long retirement time period will pose great many challenges. Good thing is, just like with any other dilemma in life, a systematic and disciplined approach (SIP) is available in the investment landscape that can help you sail smoothly through your retirement years.

Once you have a list of your goals and a date by when you want to achieve them, you have to ask yourself - are you on track to achieve each of them?

Yes! Maybe? No!

If your answer was ‘Yes’. Congratulations!

If your answer was ‘Maybe’ or ‘No’, do not worry, you can get back on track using our SIP calculators here