Can we rely on inheritance to reverse intergenerational unfairness?

David Kingman responds to a new piece of research from the Institute for Fiscal Studies which argues that the children of the Baby Boomers will only be able to match their parents’ wealth through inheritanceGift of house

Britons who were born in the 1960s and 70s are likely to be significantly poorer than their parents’ generation were over their lifetimes, on average, according to a new piece of research released by the Institute for Fiscal Studies (IFS).

The IFS report, entitled The economic circumstances of cohorts born between the 1940s and the 1970s found that people who are middle-aged today typically have take-home pay which is no higher than it was for their parents’ generation at the same stage in life, while at the same time they are less likely than those born during the 1940s to own their own home or to have amassed private pension savings.

The report argues that these trends will give rise to two dramatic knock-on effects: they will reverse the long-standing pattern of each generation enjoying higher living standards than the one which came before it, and they will also make individuals in the younger generation more reliant upon inherited wealth. Neither trend will have a positive impact upon British society, as this blog will argue.

Breaking the “British Promise”

Back in 2011, Ed Miliband publicly criticised the Coalition Government in a speech for pursuing policies which he claimed threatened to break the “British Promise” that each successive generation would have greater opportunities than those who came before them.

While the trends which the IFS report draws attention to have developed over many years and are too long-standing to have been caused by the actions of any single government, the think tank has shown that he offered a correct diagnosis of the problem, if not its causes. As Andrew Hood, the report’s author, said to The Guardian:

“Since the second world war, successive cohorts have enjoyed higher incomes and living standards than their parents. Yet the incomes and wealth of those born in the 1960s and 70s look no higher than the cohorts who came before them. As a result, younger cohorts are likely to have to rely on inheritances to be better off in retirement than their predecessors.”

The report identified two key problems that are blocking the traditional route towards acquiring wealth and prosperity for members of this generation who were born during the 60s and 70s. The first is that wages have been falling steadily in real terms since the turn of the century, meaning the returns for working have diminished. Clearly, this has made it much harder for workers to pay their bills – especially in the face of rising costs for basic necessities such as housing and food – and it has meant they have a smaller amount left over to save or invest once everything else has been paid for.

This has fed into the second problem, which is that today’s middle-aged workers have many fewer profitable avenues open to them which will enable them to convert their earnings into wealth. Traditionally, the two most common ways of doing this were by acquiring assets which would increase in value over time – especially housing and pensions. However, access to both of these types of asset has shrunk for most ordinary workers, leaving them much worse off over their lifetimes.

What’s wrong with inheritance?

The IFS report argues that the only way in which many ordinary workers will be able to acquire large amounts of wealth in the future will be through inheriting it from their parents. In effect, they will have to rely on coming into the housing and pension wealth which currently belongs to the older generation because purchasing these assets from their own resources has been put out of their reach.

However, this will have a number of negative consequences. For one thing, inheritance is highly unequal: the IFS report shows that most inherited wealth goes to people who come from wealthy backgrounds (as you might expect), and that people who expect large inheritances tend to marry each other (because better-off people tend to engage in “assortative mating”). This means that the increasing importance of inheritances will raise inequality.

Inheritances are also inherently uncertain, and may turn out to be worth much less than people initially expect. If the baby boomers enjoy very long life expectancy, they may well use up most of their resources through increased living costs and medical expenses, leaving little left over for their heirs. Even if younger cohorts do inherit significant amounts of wealth, rising life expectancy among their parents’ generation is likely to mean that they don’t acquire possession of it until they are at a relatively advanced age themselves, potentially shifting patterns of consumption over the life course.

Most importantly, relying on private inheritance to spread the nation’s wealth unquestionably represents a step backwards, away from the idea that anyone can make it in life if they work hard enough. The spread of asset ownership among the masses was one of the major social and economic advances of the twentieth century, but the fact that the trends in property ownership and pension saving are moving decisively away from enabling younger workers to share in them is a terrible legacy for the Baby Boomers to pass on.

The IFS said that they haven’t yet undertaken the necessary modelling to investigate what the prospects are for workers who were born after 1980, but there is little reason to suspect they will be any better. Unfortunately, inequality between the baby boomers and their children appears set to increase the inequality within the generations who have come after them, which is a worrying prospect for British society.