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Among the nations of Europe, do those with greater levels of welfare spending have lower levels of wealth inequality?

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A study published by the European Central Bank in 2016 found that European nations with greater levels of "welfare state spending" had higher levels of "wealth inequality." This is because "social services provided by the state are substitutes for private wealth accumulation," and when governments provide more welfare benefits, "there is less need for relatively poor households to hold precautionary savings, and more income might be used for consumption purposes." Social programs like Social Security have similar effects because the taxes used to fund these programs hinder people's ability to save, and the expectation of benefits reduces their incentive to save. For example, a study published by the University of Chicago Press found that Social Security raises wealth inequality by about 20% and leaves lower-income households with "less to save, less reason to save, and a larger share of their old-age resources" in a form they cannot pass along to their heirs.

DocumentationEuropean Central Bank StudyWealth & Social Programs



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