Intergenerational transfers and wealth inequalities
Juan C. Palomino, Gustavo A. Marrero, Brian Nolan, Juan Gabriel Rodríguez February 09, 2022
Wealth (in the form of money, other financial assets, real estate, business assets) helps individuals cope with unexpected economic shocks, finance – directly or as collateral – enrollment in education , acquiring new properties or starting new businesses. For a given level of income, greater wealth is also associated with greater subjective well-being (Hochman and Skopek 2013). Thus, regardless of the talent, ideas or efforts of citizens, inequalities in wealth can limit their ability to accumulate human capital, carry out business projects or be resilient during major economic crises.
Intergenerational transfers, i.e. inheritances and inter-vivos donations, are one of the usual suspects underlying wealth inequality. Alvaredo et al. (2017) and Piketty and Zucman (2015) estimated that the weight of intergenerational transfers in the total wealth of developed countries has increased in recent decades in parallel with the increase in wealth inequality, which could also reflect a relationship between both processes. However, there is no consensus in the literature analyzing this relationship. To enrich the debate and deepen this question, we present here some results of our research on wealth inequalities and intergenerational transfers (Palomino et al. 2021).
How do intergenerational transfers influence wealth inequality?
Broadly speaking, three types of analytical approaches to this question are employed. First, we have studies that measure the change in wealth after the receipt of inheritances (Boserup et al. 2016, Elinder et al. 2018) or those that compare the current distribution to a distribution in which the current value of inheritances and gifts received in the past is subtracted from current wealth (Crawford and Hood 2016, Karaggiannaki 2017). These papers mainly conclude that intergenerational transfers increase absolute inequality (monetary distance between individuals) but decrease relative inequality (the relative Gini index), although the effect may not last in the long run (Nekoei et al. Week 2018). The result in relative terms is equalizing because, among those who receive inheritances, the transfers received by individuals at the top of the wealth distribution are lower (relative to previous wealth) than those received by those at the bottom of this distribution.
However, a significant part of the population does not receive any significant inheritance or gift, the magnitude of intergenerational transfers received in the lower part of the wealth distribution is much lower than in the upper part (Nolan et al. 2021). Thus, Feiveson and Sabelhaus (2018) compare the distribution of wealth observed in the United States in 2016 with a hypothetical distribution in which all the wealth attributable to intergenerational transfers received is fairly evenly distributed within the population. They find that the richest 10% of the population then drop from 73% of the total wealth to only 57%. This clearly illustrates how the counterfactual distribution taken as a reference point significantly affects the conclusions reached.
The third approach analyzes the importance of inheritances in the degree of correlation between the wealth of the parents and that of the children. Thus, Adermon et al. (2018) find that at least half of the correlation between parents and children is explained by inheritances. Along the same lines, Fessler and Schürz (2018) conclude that having received an inheritance at some time in the past increases the position of the average household in the wealth distribution by 14 percentile points.
A new proposal to measure the contribution of inheritances and donations to wealth inequalities
In our analysis, after controlling for age, sex and household size, we condition the distribution of wealth on the level of transfers received by distinguishing between six groups: (1) non-beneficiaries not expecting to receive inheritance or gift in the future, (2) non-recipients who expect some future transfers, (3) recipients of small amounts only, (4) medium-low recipients, (5) recipients middle-high and (6) recipients of large intergenerational transfers. Additionally, because of its potential relationship with remittances and to measure the net relevance of each factor, we also categorize by socioeconomic status of family background (represented by parents’ education or occupation). The intuition of our method is that if intergenerational transfers (and family origin) were unimportant, the distribution of wealth by these sets would be very similar.
We assess this hypothesis for Spain (using the Household Finance and Consumption Survey, HFCS 2014), France (HFCS 2014), the United States (Survey of Consumer Finances, SCF 2016) and the Kingdom United Kingdom (Wealth and Assets Survey, WAS 2010-12). ). Although all are wealthy OECD countries, the distribution of wealth and the taxation of wealth and wealth transfers vary from country to country, so the robustness of our results is of particular interest.
Shown in Figure 1 for France (with a similar pattern in the UK, Spain and the US), we rank individuals from lowest to highest wealth within their receiving “group” of transfer, then we plot the ordered distribution of the wealth of each group. Note that we often refer to all legacies and gifts here as simply “legacies” for convenience. We see that, for each percentile, the wealth of the two groups that received the largest inheritances (in the third and even more so the fourth quartile of the distribution of inheritances) is greater than that of the other groups. Since these differences are important, there is a relevant association between inheritances received and wealth inequality. Similarly, there are also marked differences between wealth distributions by groups when considering inheritances and socio-economic status simultaneously.
Figure 1 Breakdown of wealth in France by intergenerational transmission groups
In short, our analysis attempts to elucidate how inequality would change if we eliminated the association between wealth and different levels of inheritance received, finding a smoothed distribution in which wealth at each percentile is the same regardless of the household inheritance group. By comparing this counterfactual to the observed distribution, we measure the contribution of inheritance and socio-economic status to wealth inequality in the four countries analyzed. Table 1 shows that the combined contribution of these two factors amounts to almost half of the wealth inequality measured in the United States, Spain and France (49%, 47%, 45%, respectively) and more than a third in the UK (36%). %).
It is also revealing to compare the marginal effects of each factor. After deducting the interaction with the family environment, inheritances and gifts still represent a significant share of wealth inequality: 31% for France, 27% for the United States, 26% for Spain and 22% for the United Kingdom. These contributions clearly exceed the marginal contributions of family origin (excluding interaction with inheritances), which are between 4% and 12%. The rest of the joint contribution would be explained by the interaction between inheritance and socio-economic status. When we apply alternative decomposition procedures, such as the Shapley value decomposition, the percentage contributions are similar.
Table 1 Contribution of inheritance and status to wealth inequality
Our results suggest that intergenerational transfers play an important role in sustaining wealth inequality. When inheritances and gifts exceed a certain threshold, the possibilities for accumulating more wealth are greatly expanded (see wealth distribution for beneficiaries of higher inheritances, Q4, in Figure 1). Although it remains difficult to accurately estimate the threshold above which inheritances contribute most to wealth inequality, our results suggest that not all inheritances are the same in this regard. The possible subsequent positive effects that an improvement in individual opportunities may have on economic growth are also worth investigating (Marrero and Rodríguez 2013).
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