Generational wealth accounts: Did public and private inter-generational transfers offset each other over the financial crisis?

Finance, Wealth and Assets

Posted

January 2024

David McCarthy

James Sefton

Ronald Lee

Joze Sambt

Research Paper

What is this research about and why did you do it?

Media coverage of generational wealth often pits Boomers against Millennials, claiming older generations have benefited at the expense of younger ones. Undoubtedly, economic conditions are not as rosy for young people today: wage stagnation, a shortage of housing and global crises have certainly made things harder.

But are older generations leaving them with an unfair share of the pain from these circumstances? Or is there more intergenerational solidarity at play than the conventional narrative would suggest? To explore this, we conducted a comprehensive study – potentially the first of its kind –measuring all transfers between generations in the UK, whether privately, within families, including bequests and other capital transfers, or mediated through the public sector and assessing their implications for each generation and the long-run sustainability of consumption, public and private.

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How did you answer this question?

We first measured all inter-generational transfers at each age in the UK each year between 2005 and 2015 using a combination of survey and administrative data. We then combined this with estimates of wealth in each year, split by age, from survey data. Capitalising the transfer income, as well as labour and capital income flows, allowed us to prepare the first comprehensive set of balance sheets by age to include all human, physical and financial capital as well as the present value of future transfers of all types, called Generational Wealth Accounts.. We calculated these annually between 2005 and 2015, allowing us to measure how these accounts changed over the period spanned by the financial crisis as well as the long-run sustainability of private and public consumption.

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What did you find?

We found that while the distribution of labour income has remained relatively stable across the generations over time once the fact that younger generations are entering the labour force later and the timing of recessions is accounted for, the same is not true of wealth. There has been a global wealth boom since the1990’s, including dramatic rises in property values. At the same time, public debt has increased dramatically. Because most wealth is held by the old, but most human capital by the young, and the young face a larger burden from public debt, on the face of it these changes seem to have led to increased inter-generational unfairness. We find, however, rather than increasing their consumption, the elderly are more likely to pass the value from their appreciated assets down to the next generation than to liquidate them for their own benefit. All generations thus share in the appreciation of asset values.

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Over the financial crisis, the sustainability of public consumption worsened due to the higher public debt, but overall consumption sustainability actually improved due to the increase in private wealth.

(In the figure, the savings gap measures the sustainability of private consumption (it equals the present value of private consumption not covered by existing resources, relative to the present value of total consumption, so a positive value indicates unsustainable consumption paths),the fiscal gap measures the sustainability of public consumption (again, the present value of public consumption not covered by existing resources) and the consumption gap measures the sustainability of overall consumption. Although the fiscal gap worsened over the financial crisis, the savings gap improved, and overall consumption was more sustainable after the crisis than it was before.)

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What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?

We show that the different generations appear to support each other in bearing risks that affect the whole economy, even if these risks may affect different generations differently, so the conflict between the generations may not be as attritional as it is sometimes portrayed. But our work shows that because younger generations will increasingly rely on inherited wealth to sustain their consumption, a key issue is the intra-generational distribution of wealth and how this is expected to change as the patterns we have identified in private transfers assert themselves. We also show, in common with other work, that the public sector is increasingly indebted, and that this issue will need to be resolved going forward.

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What are the next steps in your agenda?

We are now focusing on how intra-generational inequality interacts with inter-generational risk-sharing, and the implications that this will have for our society as time goes on.

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