futility. If all you are going to end up with is a few thousand dollars or a thousand dollars at the time of retirement, you might say, "The hell with it; I might as well live it up today. I am going to be in the poorhouse anyway."

Now if you get much more affluent than the kind of levels I have been currently speaking of, of course, you are in a much better position to adjust to what you observe is going on in financial markets. You certainly, to the extent that people have any wisdom about these things, can take advantage of expertise. You can ask lawyers to help you. You can ask financial consultants to help you.

The cost of making transactions has become a relatively small share of the amount of money you are going to be dealing with, so everything tends to get a bit easier as you get richer, and you clearly are in a better position to protect yourself. Once you get beyond personal wealth, like houses and automobiles, which is the bulk of wealth for most people, you can put it here or put it there to your advantage.

People don't shift houses because of a change in assets price last week or last month. They don't try to capture those gains. It is too hard. The transaction costs are too high.

On the other hand, if you are investing a portfolio of several million dollars, the transaction costs are trivial.

Mr. MORGAN. Funny quirks take place, however. In the recent inflation, those in the stock market haven't done as well as those who had their money in a house, so in some intermediate levels there has been a rather widespread spreading of the benefit among a lot of homeowners and not so much among stockholders, if you really believe that stock market prices rather than the earnings are what you want to look at and that is a question of how you want to measure wealth.

Mr. SMITH. Yes; and if you have the appropriate interval of time. Mr. MORGAN. That is right.

MS. PROJECTOR. This comes back to the general question, that you probably would have to specify when you ask that question how you are going to take into account the composition of wealth. If you are looking at people starting at some particular time who have the same amount of wealth but in quite different forms, they may end up at the end of 5 years of rapid inflation in quite different positions because one had real estate and one had savings accounts; so I think it is not just wealth as such but also it is composition.

Mr. FRASER. Is there any discernible pattern for people with less money as to whether they are likely to be in inflation-proof investments? Money in the savings account these days generally appears to me as being a loser.

The problem is, it is not easy to find a winner because stocks don't go up either. I don't know how this phenomenon developed. Real estate clearly has moved ahead. Whether it is because nothing else is moving ahead so people are putting money into that and thus bidding up prices or some other reason I am not sure.

Mr. MORGAN. There is a problem that you cannot pay your medical bills with that gain on the price of your house either, so one of the major policy issues that may very well arise is that you may have a rather widespread benefit from inflation to homeowners but they can

not capitalize on it very well. It is a known fact that when people retire they insist on living in houses that are too big for them, but they have difficulty paying the property taxes and food bills, and medical bills, so at least in one level of society you have to be careful assuming that the benefit of inflation is widely spread.

MS. PROJECTOR. If you abstract from homeownership, which is a large share of wealth of what you would call the lower and middle income groups, and concentrate on, say, the financial assets, then they would certainly be much more likely to be in fixed value things, such as savings accounts, not in stocks or in speculative real estate, which is consistent with the idea that Professor Smith has, that stock is highly concentrated.

Mr. MORGAN. And I think you will find a lot of affluent people not investing in the regular stock market but in business ventures where, rather than take the beating the stock market goes through, they take the real capital gains from running a whole business.

Mr. FRASER. Except that, as I understand it, in this last year or so business investment has been significantly lower in contrast to other postrecession recoveries. That, in fact, is one of the reasons the recovery has been so poor, it is said.

Mr. MORGAN. Which, of course, raises the question, Where has that money gone?

Mr. SMITH. I think for some purpose it is important to focus on what you might describe as shortrun phenomenon, what the market has been doing over the past couple of years or something like that, but for most of the kinds of issues we have been talking about with respect to the generation of, and the transmission of wealth, those intervals are too short.

Whatever we conclude about what happened last year in the market is not likely to hold with respect to what is going to happen next year or the following year. If you think that isn't so, you can look at how badly the people fare who are supposed to be experts in what the market is going to do when they measure their predicted results against what actually happened.

Mr. FRASER. Mr. Simon, do you have any questions?

Mr. SIMON. Just a couple, and one aside that has absolutely nothing to do with all of this.

Professor Smith referred to death as the Grim Reaper.

We have a Presbyterian seminary in Illinois, founded by the family of Cyrus McCormick, called the McCormick Seminary, and there is a story-I am sure apocryphal-that death is referred to there not as the Grim Reaper but as the International Harvester.

In Professor Morgan's statement-and I am sorry I was not here to hear it-you have this sentence: "If there is a large and growing group in their fifties and sixties who have accumulated little or nothing * * *”—and I will address this to you also, Director-don't we have that kind of data?

Mr. MORGAN. No. From the 1972-73 Bureau of Labor Statistics we have some limited wealth data but most people have little aside from their house, their pension equities and their social security, and the pension equity

Mr. SIMON. Is the unmeasured

Mr. MORGAN. Right, and until recently people said you can't get that from people who don't know it. But we now have a law that requires.

that people be told a little bit about their private pension equities, and that indeed they be vested; so that one of the advantages of improving the pension law, I think, is that it is going to improve our ability to get information from people about their total possible retirement benefits. Among the bulk of the households we are concerned about what kind of private pension coverage they have in addition to their social security and what kind of house equity they have are the crucial issues because many people have very little else.

Mr. SIMON. You in your remarks and the director in hers talk about the costs, that it would be expensive to gather that kind of data. Yet it seems to me it is fairly fundamental that we know something like that. What kind of costs are we talking about to pull together that kind of data?

Mr. MORGAN. There are two kinds of costs: One is the cost of developing an efficient sample of households to get this information from, and that cost depends on how much we want to concentrate on the top 1 percent or 5 percent, because if that is a major concern, that we want really to know what about the inequality at the very top, we have to rely on things other than area samples. We probably have to have the Internal Revenue Service draw a sample which heavily oversamples those upper levels, at least which has been done before, and in order to improve the precision of those estimates we really need to know the rate at which the various people were drawn, which means that we have to know their adjusted gross income, at least in brackets, and indeed once you have gone that far to be able to relate the tax return information about taxable portfolios to the household information about other assets and what people are planning to do with them, it vastly increases the information; so there is an incremental set of costs depending on whether you simply want to oversample upper income areas in a regular sample, select a mass sample from files, unmask the sample sufficiently to get a sufficient sample weight, or even use it in conjunction with household information.

There is a question of how far you want to go there. On the household interviews, again, if you have to screen a sample to throw out some two-thirds of the lower income people because you don't need them all, there is an expense and it is more expensive to interview upper income people because they are harder to find and it takes more trouble.

But one advantage of this kind of research is that you can do something for a middle range amount of money. You don't have to spend the kind of money that was spent on the BLS expenditure survey to reduce our ignorance from infinity to a reasonably sized number. Mr. SIMON. What kind of money are you talking about? Mr. MORGAN. $1 million, plus or minus.

MS. PROJECTOR. I think it is much more than that. My recollection is that in the early sixties with a rather small sample size, the Federal Reserve Board survey was at that time $1 million and with inflationand I think one would want a large sample size-I would think one was talking certainly of more than $1 million, maybe less than $10 million; but it is not an easy job.

Incidentally, I ought to say one thing on this particular question: People in their fifties, I think that there are some data available from the retirement history survey by Social Security. I am not particularly acquainted with that, but I can check on that for you.

Mr. MORGAN. There is one cohort that is already retired.

MS. PROJECTOR. The survey follows people in their fifties as they move into retirement, and it doesn't cover the rest of the population, which is also of interest in terms of general analysis of accumulation of wealth.

Mr. SIMON. Then one kind of general question: How do we stand in comparison with other countries with Great Britain, Germany, Japan, Sweden-in income distribution or wealth distribution? MS. PROJECTOR. You mean in terms of data availability?

Mr. MORGAN. In terms of the actual distribution, I think he meant. Mr. SIMON. Yes.

MS. PROJECTOR. Are we talking about in terms of what kind of data they have, or the substantive questions?

Mr. SIMON. The substantive, and I realize our data are limited, but we still have some fairly good measures. Incomewise we do, if not wealthwise.

Mr. SMITH. We have some of both. Probably wealth is less concentrated in the United Kingdom and Sweden, but compared to most other parts of the world we look egalitarian. There are some problems, however, with these kinds of data and that is, that it is not just ownership of wealth but its use with which one needs to be concerned. In societies where there is a great deal of public sector wealth available to individuals, such as Sweden, the difference is even greater than the numbers would suggest.

Let me take a rather concrete case where I think one might not draw the connection between the distribution of wealth and the particular social consequences that exist, and that is in secondary education, primary education, in the United States. There is a growing awareness of just how badly we are doing, particularly in large cities, educating our youth.

Many high schools have turned into combat zones. What is going on, of course, is that those people with some affluence are finding substitutes for the public school system. The rest of the population, particularly the black and Puerto Rican population, is being set up for a terrible, terrible shock 10 or 12 years down the road. That comes back to this distribution of economic well-being in the broadest sense where one takes into account not only what one owns in his own name but also his access to public sector wealth as well.

Mr. SIMON. I realize that precise measurements in the education example you cite as a good one become difficult, but I would be interested in any data you could send me. I would be happy to share it with the chairman of this task force.

It is kind of a basic question and I guess I should know, and I don't know that much about it.

Thank you, Mr. Chairman.

Mr. FRASER. I don't know how meaningful this is. Do we know how income is divided between earned and unearned?

Mr. MORGAN. For those who file tax returns, if you wanted to include only taxable income. The difficulty comes when one realizes capital gains and contributions to pension equities are not included in taxable income. They are a substantial amount and a growing amount, particularly now that you have independent retirement account plans plus employer pensions.

Mr. FRASER. But aside from that problem and just taking the taxable income, do we know roughly what the proportions are between earned and unearned?

Mr. MORGAN. And they go up very dramatically with income level. When you get up above $15,000, $20,000

Mr. FRASER. How about the aggregate nationally? I don't know what personal income is running today, but say it is $1.2 trillion or something, whatever it is, how much of that would be earned and how much unearned?

Mr. SMITH. Earned income, somewhere around 65, 70 percent.

Mr. FRASER. Sixty-five or 70?

Mr. SMITH. For the total personal income.

Mr. FRASER. Would be earned income?

Mr. SMITH. That is correct.

Mr. FRASER. And about a third of it unearned?

Mr. SMITH. Yes.

Mr. FRASER. Then in addition to that, there are these other accretions or accumulations which are not recorded?

Mr. SMITH. That is right.

But may I comment on the significance of what we have been talking about?

Mr. FRASER. Yes.

Mr. SMITH. It is not very significant because it is not very important how that big pie is divided up that way, to wit, the existence of your committee. You are interested in what the distributional impact is and it doesn't matter. If only a third of the total pie, is unearned income; it happens to go to a very small proportion of the population. When that third goes to say, 5 percent of the population it is an awfully big chunk per head.

Mr. FRASER. That was my next question. What was the pattern of the unearned income distribution as against earned?

Mr. SMITH. I cannot cite you numbers off the top of my head very well, but as Mr. Morgan suggested, it becomes increasingly more important as one moves up the ladder of total income, that is, the share of unearned income that one gets when he makes $1 million is fairly large, on average.

There is hardly anything you can do to make $1 million by labor, a few lawyers and a few physicians do. But such people very quickly put that and part of their savings into investments and they generate property income and that process of accumulation goes on so that soon their unearned income is a large part of their total income.

Also, we treat property income for tax purposes, as I have indicated, so there is an incentive to put assets where the tax will take a smaller bite.

Mr. FRASER. Everybody on the panel agrees we need to know more about who holds wealth today. We need better measuring tools, and we really need a study.

Professor Morgan, you think it might cost $1 million but Ms. Projector thinks it would cost considerably more than that.

Mr. MORGAN. That reflects a difference in the kinds of things we focus on. I am less concerned with precise dollar information than I am in finding out what people are planning to do with wealth and how it is accumulated. It seems to me the Government sometimes