In the first-ever official study of wealth transfers in Australia, the Productivity Commission has projected a fourfold increase in the value of inheritances over the next 30 years.
The $224 billion estimate is based on the finding that $1.5 trillion was transferred between Australian generations between 2002 and 2018, 90 per cent of which was made up of inheritance payments and the remainder of gifts to mostly younger adult children.
It is also based on assumptions by the Productivity Commission about housing and sharemarket returns, along with expectations that older people will hold a growing share of total wealth and have fewer children to bequeath to because of lower fertility rates.
But contrary to the conventional wisdom about inheritances being drivers of financial inequality, popularised by critics such as French economist Thomas Piketty, the report found inheritance was a major contributor to a reduction in wealth inequality from a relative perspective. That’s because even moderate gifts and inheritances can make a big difference for poorer people.
“It means that inheritances are a lot more significant, in terms of their life-changing potential, for those in the bottom quintile because it’s 50 times larger for them compared to their existing wealth.”
‘Relative wealth inequality’
The poorest Australians on average hold just $7500 in assets, but are receiving an average inheritance worth $30,000 or more, usually made up of superannuation savings and “other assets”, often a car or truck, Productivity Commission (PC) data shows.
Therefore, while inheritance tends to increase inequality on an “absolute” basis, Dr De Fontenay said consideration of “relative wealth inequality” had merit as it considered the “significant impact” that an inheritance can have for the financial lives of the less wealthy.
The report added that the rate of return from the housing market was likely to have a more substantial effect on wealth inequality than inheritance.
Across the wealth spectrum, $3.5 trillion is expected to be transferred between generations over the next two decades, with baby boomers and the World War II generation to leave record levels of wealth to Generation X and older Millennial beneficiaries.
The total value of wealth transfers, including inheritances and gifts, to younger generations is projected to be $237 billion in 2050, in 2018 dollars discounted by income growth, according to additional information supplied to the Financial Review.
The estimate is based on tax return and Household, Income and Labour Dynamics in Australia (HILDA) survey data, which may under-report the size of gifts received.
The report also found that inheritance accounted for about one third (36 per cent was given as a “best estimate”) of “intergenerational wealth persistence” – that is, the correlation between an individual’s household wealth (home-ownership, employment and income status) and that of their parents.
The estimate is based on the 2018 levels for an Australian aged 64 to 74 whose parents have both died and ranks Australia on par with Scandinavian countries Sweden and Denmark and below the OECD average.
Other family and environmental factors were found to be larger contributors to wealth, including education, values, genetics and gifts.
“Wealthier parents might have invested more in their children’s education by sending them to a private school or a better public school,” the report said. “They might have instilled their attitudes and values that promote wealth accumulation. And to the extent that there is a genetic predisposition to wealth accumulation, their children may have inherited it.”
Dr De Fontenay said the PC did not take a position on the latter point but said some academic research suggested parental encouragement of financial knowledge and literacy was a contributing factor to wealth.
Bank of Mum and Dad overstated
Though gifts accounted for just 10 per cent of total wealth transfers – with an average gift of $8000 in 2018, compared with the average inheritance of $125,000 – they disproportionately affected the wealth status of younger people.
The average age of an inheritance beneficiary was about 50, compared with the average age of a gift beneficiary at 20. “While inheritances weigh on
economic mobility — by increasing the likelihood that wealthy parents have wealthy children — the effect is moderated by the lateness in life at which they are received.
While house prices were found to be a driver of wealth, the report did not find evidence of “large transfers” from the so-called Bank of Mum and Dad (parental contributions to first-home buyers).
Dr De Fontenay said PC data suggested just 2 per cent of home loans had a parental guarantor attached, while gifts self-disclosed as part of the HILDA survey fell well short of claims that parental contributions to home loans are collectively worth as much as $35 billion – equivalent to the nation’s ninth-biggest lender.
“We do think there is some under-reporting in the HILDA data,” Dr De Fontenay said.
“But it would have to be spectacular under-reporting for the Bank of Mum and Dad to be as big a phenomenon as people think it is.”