Wealth - why do we care and what do we know? Rowena Crawford Fiscal Studies Special Issue Launch Event, 19 April 2016
Why do we care about wealth? Fundamentally Wealth enables individuals to smooth their living standards in response to Expected needs changes Unexpected needs changes Unexpected income changes Expected income changes Key role in determining well-being and living standards Too often the focus is only on incomes
Why do we care about wealth? Some specific questions of policy and societal interest Are people saving enough to fund their retirements? How do/might people respond to financial shocks and fiscal or monetary policy? What drives wealth inequality and how has this changed over time?
What do we know? Some interesting facts about: The distribution of wealth The effect of inheritances on wealth inequality Changes in household wealth over time Note of caution: These findings are drawn from household survey data and so don t necessarily reflect those at the very top of the wealth distribution
The distribution of wealth
Cumulative percentage of total wealth Wealth is distributed very unequally 100% 80% Lorenz curve of distribution of total household wealth per adult (2010/12) Gini coefficient: 0.64 [Income Gini: 0.34] 60% 40% 20% 0% Bottom 50% hold just 7% of total wealth Top 20% hold 65% of total wealth -20% 0% 20% 40% 60% 80% 100% Cumulative percentage of households Notes: Total wealth = net property wealth + net financial wealth + pension wealth Source: Crawford, Innes and O Dea (Figure 3) using Wealth and Assets Survey 2010/12
Median total household wealth per adult (,000s) even once account for lifecycle effects 250 200 150 100 Gini: 0.63 Gini: 0.59 Gini: 0.56 Gini: 0.55 Gini: 0.55 Gini: 0.55 Gini: 0.64 50 Gini: 0.74 0 25 34 35 44 45 54 55 64 65 74 75 84 85+ All Age of household respondent Notes: Total wealth = net property wealth + net financial wealth + pension wealth Source: Crawford, Innes and O Dea (Figure 2, Table 1) using Wealth and Assets Survey 2010/12
The effect of inheritances on wealth inequality
Inheritances and wealth inequality Popular concern that inheritances widen intergenerational inequality and reduce mobility in the wealth distribution One third of individuals aged 65+ have received an inheritance 6% of individuals aged 65+ have received a large gift Source: Crawford and Hood (Table 2) using English Longitudinal Study of Ageing (2012/13) What is the impact of these on the distribution of wealth?
Percentage of individuals with an inheritance Inheritances themselves are very unequal 16 14 12 10 8 6 4 2 0 Median: 35,733 Mean: 84,960 Inheritances are more likely to be received by, and be larger for, those with higher education / higher income Total value of inheritance(s) received Note: Reported sizes of inheritances are converted into 2012 prices using the Retail Prices Index Source: Crawford and Hood (Table 2) using English Longitudinal Study of Ageing (2012/13)
Percentage of marketable wealth Impact of inheritances on marketable wealth 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Lorenz curve of distribution of household wealth per adult with and without transfers (inheritances + gifts) Gini: Observed wealth: 0.52 Wealth excl. transfers: 0.57 Bottom 25% hold: 2.5% of wealth 0.3% of wealth excl. transfers Top 25% hold: 61.1% of wealth 63.5% of wealth excl. transfers -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative percentage of individuals Note: Marketable wealth = net financial wealth + net property wealth + physical wealth Assumes inheritances don t affect other saving or returns, and that inherited wealth grows by 3% real per year Source: Crawford and Hood (Figure 3, Table 4) using English Longitudinal Study of Ageing (2012/13)
Inheritances actually equalise marketable wealth Inheritances have actually had an equalising impact on the distribution of wealth (among these older individuals) Inheritances are smaller amounts for those lower down the wealth distribution Second least wealthy 10%: mean addition to wealth pp 8,603 Most wealthy 10%: mean addition to wealth pp 93,054 but are relatively more important compared to other wealth Second least wealthy 10%: mean addition to wealth pp 18% Most wealthy 10%: mean addition to wealth pp 12%
But is this the effect we really care about? Impact of inheritances on the distribution of lifetime incomes that is of most interest Some evidence that the rich save more A broader wealth measure including future pension income may be a better proxy for lifetime income than marketable wealth Marketable wealth Bottom 25% hold: 2.5% of wealth 0.3% of wealth excl. transfers Top 25% hold: 61.1% of wealth 63.5% of wealth excl. transfers Total wealth incl. pensions Bottom 25% hold: 8.3% of wealth 7.9% of wealth excl. transfers Top 25% hold: 51.0% of wealth 51.3% of wealth excl. transfers Equalising effect of inheritances on the distribution of wealth virtually disappears when consider broader measure of wealth
Changes in household wealth over time
Median household total wealth per adult (,000s, 2014 prices) Change in wealth 2006/08 to 2010/12 300 250 200 150 100 Despite the financial crisis, wealth among working-age households increased on average Older individuals do not appear to spend down their wealth very rapidly Age in 2006/08: 25-34 35-44 45-54 55-64 65-74 75-84 85+ 50 0 Unless the rate of wealth accumulation picks up, younger cohorts will have less wealth than those that preceded them 20 30 40 50 60 70 80 90 100 Median age Notes: Total wealth = net property wealth + net financial wealth + pension wealth Weighted sample of stable, single-benefit unit households, grouped by age in 2006/08 Source: Crawford, Innes and O Dea (Figure 4) using WAS 2006/08, 2008/10 and 2010/12
Median net total wealth ($,000s 2014 prices) Wealth decumulation at older ages 1929-1933 1924-1928 1919-1923 1914-1918 450 400 350 300 250 200 150 100 50 0 70 75 80 85 90 95 Average age of cohort Source: Blundell, Crawford, French and Tetlow (Figure 4) using ELSA (2002/03 to 2010/11)
Summary We know far more than we did about wealth a decade ago Still many fascinating questions to be answered What are the drivers of wealth inequality? Are there (permanent) cohort differences in wealth accumulation (and if so, why?) Why don t older households draw more on their wealth in retirement? The benefits of repeated wealth data collection are only just starting to be realised