For the past 70 years or so, each generation in Britain could reasonably expect to be wealthier, at each stage in their lives than their parents. They became less and less reliant on inherited cash; they became more educated, were more likely to own their own home and could expect to retire in a relatively comfortable state.
However it’s gradually becoming clear that this is no longer the case. We’ve known for some time that those born since 1980 have faced worse outcomes (in terms of wealth, pensions and home ownership) than their parents. However, the IFS has now added to the sense of doom by reporting that the same also goes for those born in the 1960s and 70s.
The full IFS report can be found here. The main point is one illustrated by the chart below.
As you can see, those hitting the age of 40 are less wealthy at the same point in their lives as those born a decade earlier. The same goes for those hitting 50 and those hitting 60.
The upshot of this, according to the IFS, is that for many of these generations, inherited cash will become more important than it was for their parents’ generations. And that’s already borne out by survey evidence: under a third of those born in the 1940s have or expect to receive an inheritance. The equivalent figure for those born in the 1970s is a whopping 70%.
This is a significant economic and social shift. For the explanation of why, one has to look towards the research of the world’s great expert in research on wealth, Thomas Piketty of the Paris School of Economics. He’s found that the flow of cash from one generation to another dropped sharply for much of the 20th century – as you can see looking at this chart of inheritance flows (the amount of cash passed down from one generation to another) as a percentage of GDP. Here’s the relevant chart for France:
And here’s the equivalent for the UK:
At the turn of the 20th century about a fifth of national income was passed down from one generation to another. That dropped very sharply to around 6% by the 1980s. It now looks almost certain that the share will rise back up in the coming decades. Indeed, Piketty’s simulations bear out that prospect.
Tempting as it is to assume that this might be an aberration, and that we might return to a world of greater intergenerational equality in the future, that seems unlikely. For, based on a few of Piketty’s other charts (he has a major book on wealth arriving next year which will, in economics circles at least, be a must-read) the aberration seems to have been the mid-20th century. Indeed, just consider the chart below of national wealth in the UK.
The 20th century, its depressions and wars, contributed to a very sharp fall in wealth across the UK. Put simply, there was less wealth left to inherit. However, this level of wealth has been built back up again over the decades that followed. Britain is currently getting back to the level of national wealth it had in the late Victorian period (though bear in mind that in absolute terms levels will be far higher – after all, national income was substantially lower all those years ago). But this may well imply that inheritance levels will also rise back to those previous levels. As a result, society is quite likely to become less equal. Here’s a chart of how Britain’s equality compares over time:
There is a proviso to all of this – which is to say that none of these trends are inevitable. At least part of the explanation behind the fall in inequality, the fall in inheritance levels and the improvement in cross-generational equality during the 20th century was government intervention: the introduction of welfare states across the Western world, the establishment of redistributive taxation systems: these are likely at least partly to have contributed to the phenomenon.
However, some would argue that, given the continued rise in the value of high-end assets, thanks at least partly to quantitative easing on both sides of the Atlantic, this inequality has only worsened in the wake of the financial crisis.
The world is becoming wealthier, which is good news. However, the assets are being concentrated amongst a smaller group of people.