But while income is important in the equation, inherited wealth is also a major factor behind rising inequality. What’s more people are increasingly inheriting at a later age as life expectancy goes up, which is reflected in the widening generational wealth gap across ageing developed countries.
The problem is compounded by the fact that the fabulously wealthy baby-boomer generation is set to retire and pass on, sparking perhaps the largest transfer of wealth in history. If nothing is done, this will without a doubt exacerbate soaring inequality and risk making privilege and not merit the main driver of economic growth.
France, the UK and Germany
France is no exception to this rise in inherited wealth among the older generations. A recent study by the French public policy unit France Stratégie explores this issue in depth, looking at what measures might be taken to ensure the younger generations benefit from this inherited wealth. It also examines how within generations inequality can be minimized through wealth redistribution.
“What we’ve seen over the past thirty years or so is both a massive increase in bequests and a clear trend of the wealthy getting older,” said Clément Dherbécourt, an economist at France Stratégie and the study’s author.
Indeed, Dherbécourt found bequests rose from €60 billion in 1980 to €250 billion in 2015 (both figures are in 2015 euros). And this wealth has indeed by and large been going to older individuals. According to the French national statistics office Insee, in 2010 half of households over 50 reported receiving an inheritance or living bequest, whereas only 23% of households under 30 did.
Similar trends are present in other Western European economies. A 2017 study by economists Andrew Hood and Robert Joyce at the UK’s Institute for Fiscal Studies found elderly households today have much more wealth than households of the same age as recently as a decade ago. This has been driven by rising housing prices.
“Home ownership at the age of 30 for those born in the 80s is around 40%, whereas for those born in the 70s it was almost 60% at the same age,” Hood said. “For those born in the 50s and 60s, at age 30 it was well north of 60%. It’s basically house prices to earnings ratios that have gone up enormously.”
Hood and Joyce found that average real non-pension wealth increased to £230 000 (around €260 000) in 2012-13 for households with individuals over 80, up from £160 000 (roughly €180 000) in 2002-03.
Europe’s largest economy, Germany, is also seeing increasing concentration of wealth in the older generations. In a 2016 paper, economists Stefan Bach and Andreas Thiemann from the German Institute for Economic Research (aka DIW Berlin) point out that about one-third of Germany’s total wealth of €8.6 trillion is owned by households with the reference person aged 65 or over.
Moreover, they note that like in France there has been surge in inheritances: an estimated €200 to €300 billion is gifted or inherited annually in Germany, with an average tax rate of only about 2.2 to 2.8%, compared to 5.0% for a similar sum in France. They note that those born in the 1930s have been transferring wealth accumulated in the post-war period for several years now.
Levelling the playing field
One solution Dherbécourt puts forth for taxing fairly the increasing amount of assets bequeathed is instituting a system where the tax rate is based on all assets inherited in a lifetime and not simply in one instance. In practice, this would mean each time an individual were to inherit, the inheritance tax would be determined by what the individual has already inherited. Advocated by Nobel Prize-winning economist James Meade and more recently by the late economist Anthony Atkinson, this would ensure an individual with a lot of inherited wealth pays more than someone with less. In addition, it would provide an incentive for individuals to bequeath their wealth to those who have inherited little in their life.
This system would be coupled with exemptions based on the heir’s age to encourage the redistribution of wealth to people under 40. For example, an individual receiving €200 000 would be taxed at a rate of 10% if the entire sum is inherited after 40 and 7.5% if half is received before 40.
Bach, for his part, is in favour of instituting a wealth tax rather than an inheritance tax to reduce inequality in Germany. “An inheritance tax is rather unpopular among Germans, perhaps because it relates to the sensitive subjects of old age and death,” he said.
Of course, people born to families with few or no assets would not benefit from any reform to inheritance taxes. To redress this, Atkinson in his 2015 book, Inequality, What Can Be Done?, proposes the state using the revenue from increased taxation on inherited wealth to pay out a sum of money to all citizens on their 18th birthday. Those who then inherit more than a certain amount would be taxed so as to pay back, in effect, the sum received from the state.
Regardless of the specifics, it is clear today that the combination of ageing societies and increasing amounts of inherited wealth has the potential to lead to spiraling inequality in countries like France the UK and Germany if policy action isn’t taken to devise fairer systems of taxation.