personal finance

Relax: trust fund kids are not taking over the world


Middle-class families are haunted by a troublesome contradiction. We are happy to spend much more time, money and effort helping our children get ahead than our parents did. But we fret about society being distorted by inheritance.

There is little doubt that “patrimonial capitalism” of the sort predicted by Thomas Piketty would be a dystopia. Having to doff our caps to lazy kids born with silver spoons in their mouths is the stuff of nightmares. Many of the world’s richest people, from Bill Gates to Elton John, worry sufficiently about the bad incentives created by their own wealth that they have decided to slash the amount of money they plan to hand down to their children.

But for all our fears that inheritance is diminishing the value of hard work, the evidence does not suggest we are heading towards a future dominated by unearned wealth.

In a meticulous study of past, present and likely future bequests and incomes, the UK’s Institute for Fiscal Studies paints a relatively optimistic picture — although readers need to venture beyond the document’s summary to get this rounded, if thoroughly unfashionable, view.

The headline statistic immediately shows that the potential societal problems are limited. Those born in the 1960s are likely to receive on average 9 per cent of their lifetime incomes excluding inheritance as a bequest from relatives. This is set to rise to 16 per cent for those millennials born in the 1980s. The increase might be large, but the level is more important: few people can afford to give up 84 per cent of their lifetime incomes and live off these inheritances.

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More importantly, even though the authors searched quite hard to see if they could find a labour supply effect — proving that the expectation of receiving a large inheritance caused people to work less hard — they failed. It simply is not there in the data. Inheritances are not making us lazy.

In fact, the evidence which does exist points in the other direction. People who will earn a lot during their working lives also tend to have richer parents and expect larger inheritances. It would be wrong to draw a causal link here and say that the expectation of inheritance makes people work harder, but, equally, there is no evidence of a shift towards a world in which capital dominates labour.

Nor is there evidence that the rise in wealth will begin to cascade down the generations, leaving poorer families permanently excluded. Younger people increasingly expect their inheritances to fund their retirement.

Potentially the study’s most worrying finding is that wherever people are in the income distribution, those with richer parents will inherit more than those with poorer parents and the authors suggest this will damage social mobility.

But that is the equivalent of a mathematical tautology. Families with more money have more money. Middle-class and richer households often use these resources to buy time for their children, better education, books, museum trips, culture and quality news provision. This is almost entirely positive for society.

It is certainly more desirable than exploiting non-monetary forms of advantage such as connections, a knowledge of how to play the system or the colour of your skin.

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Granted, there is nothing special about people spending their money after death rather than when they were alive, so there should be no tax advantages in waiting before spending.

But we are at risk of losing our critical faculties when it comes to the dangers posed by intergenerational wealth transfers. The good news is that the chance of our nations being dominated by trust-fund kids is minimal. The evidence says we should relax about inheritance.

chris.giles@ft.com



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