Inheritances will widen intergenerational inequalities, author Max Rashbrooke writes in his new book Too Much Money: How Wealth Disparities are Unbalancing Aotearoa.
One of the simplest ways to ensure intergenerational advantage is through the transfer of cold hard cash. The last time these transfers were systematically surveyed, in 2001, the wealth of New Zealanders who had inherited over $10,000 was, unsurprisingly, much greater than that of those who had not. A recipient of inheritances in their late forties, for instance, had twice the wealth of a non-recipient.
These inequalities will only have widened since, given the compounding effects of economic inequality and, of course, the housing market. As endless news stories have noted, young people’s chances of buying a house are increasingly dependent on their parents’ ability to help them with a deposit – the fabled ‘Bank of Mum and Dad’. And most of these bankers will, of course, be themselves homeowners. Advantage is transmitted from generation to generation. Some will inherit houses; others will never afford one.
While we lack domestic data, in Britain – a country with comparable inequality and a seriously overheated housing market – parental influence is clearly strengthening. Thirty-year-olds whose parents have property are three times more likely to be homeowners than those whose parents do not, up from twice as likely in the 1990s.
* Good week in opposition upset by ‘trivial error’ in economic plan
* Inheritances getting larger and arriving later, but many will leave little for their children
* Unprecedented increase in beneficiaries – MSD report
A similar pattern here seems likely. ‘There is a new kind of wedge between the haves and the have-nots,’ the economist Shamubeel Eaqub says. ‘Home ownership will soon become the purview of those with property lineage – the landed gentry … Now, even if you have a good education, it is unlikely that you will have sufficient income to buy a house, unless you have access to the bank of mummy and daddy.’
Beyond housing, a ‘bequest bulge’ is looming, as wealthier baby-boomers die off or make lavish gifts. ‘The world is about to witness the greatest intergenerational transfer of wealth in history,’ writes business journalist Nicola Shepheard, citing estimates that globally US$30 trillion (NZ$41.4 trillion) will change hands in the next fifteen years. Given that the wealthiest fifth of New Zealand thirtysomethings already hold 70 per cent of the assets of their age cohort, and are much more likely to inherit, this will further widen intergenerational inequalities.
Statistics New Zealand plans to collect more data on inheritances in a few years’ time. But already trustee firms such as Perpetual Guardian have recorded ‘a big uptick’ in the assets being distributed from estates, according to the company’s chief executive, Patrick Gamble. These bequests will also widen disparities. Some people who have already helped their children buy property are making the rest of their wealth ‘skip a generation’, passing it straight to their grandchildren to ensure that they, too, can be homeowners. No wonder Eaqub talks about the return of the landed gentry. While this is wonderful news for that select few, such bequests are self-evidently unfair because unearned, and the contrast with those who will inherit nothing is stark.
Overseas research, meanwhile, confirms that inheritances widen inequality. Estimating the average Australian inheritance at AU$773,000 (NZ$828,000), the Grattan Institute think-tank notes that inheritances ‘tend to transmit wealth to people who are already well-off. A generation more reliant on inheritances for building wealth is therefore one in which wealth is less equally shared.’ In Britain, inheritances are likewise disproportionately received by the most fortunate.
Dynastic forces can be observed even further up the wealth ladder. Working with Auckland University’s Tim Hazledine, I recently showed that in the Rich List (minimum wealth for inclusion: $50 million), eighty of 184 fortunes had a significant dynastic component. These firms had either been inherited from the previous generation, begun to actively involve the next generation, or both. And that was only looking at direct involvement in the running of the firm. A wider measure of inheritance, including the full suite of loans, gifts and other wealth transfers between the generations, would have captured far more – possibly all – of the listed fortunes.
The popular view holds that such wealth is soon dissipated: it takes one generation to build a fortune, a second to maintain it and a third to waste it. But even if this were true in the past, most of today’s fortunes are unlikely to be so rapidly dispersed. Rich Listers’ increasingly sophisticated wealth management, and strategies such as holding assets in trust, will discipline would-be spendthrifts.
The ‘work hard, play hard’ ethos of today’s rich militates against the dissolution of wealth. And the factors that led many past fortunes to be broken up no longer exist. In the 1890s, when the wealthiest 1 per cent owned nearly two-thirds of all assets, those concentrations were shrunk by the bursting-up of the big estates, wealth taxes of various kinds, a growing share of company income going to workers, and finally the Great Depression. Such trends and policies are either not much in evidence today or, in the case of a deep recession, not something to be deliberately engineered. The other force undermining those old fortunes was the fact that they had to be split among so many children – and today’s families are far smaller.
So although much ink is spilled over the ‘clash of the generations’, other stark divides should not be ignored. It is true that millennials have legitimate grievances: though the world they inherited from the baby-boomers is a materially wealthy one, with previously unheard-of consumer goods and global connectivity, it is also marked by widespread economic inequality, growing debt, low-paid precarious work, and the looming catastrophe of climate change.
The above data, though, remind us that large inequalities between generations go hand in hand with large inequalities between families. There are poor boomers as well as rich ones, rich millennials as well as poor ones. And like increasingly goes with like: richer boomers will generally (though not always) have richer millennial children, poorer boomers poorer children. We face a future in which one of the sharpest divisions is that between well-off families, where wealth is passed from generation to generation, and poorer families, whose only financial inheritance is disadvantage.
Max Rashbrooke is a senior associate at the Institute for Governance and Policy Studies and was the 2020 JD Stout Fellow, at Victoria University of Wellington. Too Much Money (Bridget Williams Books) is on sale now ($39.99).