Intergenerational Transfer of Wealth

- “Great Expectations”

Career Enhancement Series: Elder Law 3 March 2005

Dr Simon KellyNATSEM University of Canberra

Outline and Background

Examine the current and future levels of inter-generational wealth transfers

Two views• From the givers• From the receivers

Very little data available

The Baby Boomer view

Good news for baby boomers

Frugality was the norm for those born 1930-1950• ‘Work hard and save’ ethic

Families are now smaller • The denominator is smaller

Life expectancy has increased• Wealth compounds over time• Strong relationship between age and average wealth

Houses and share market have boomed• Average wealth has increased significantly especially for

homeowners

Average wealth per person increasing

6.0

219.9

0

100

200

1960 1970 1980 1990 2000

Wea

lth ($

'000

s pe

r per

son)

Source: Economic Roundup, 2003, private sector wealth at market value

Even in real terms…

213.5

60.9

0

100

200

1960 1970 1980 1990 2000

Wea

lth ($

'000

s pe

r cap

ita, 2

001-

02 p

rices

)

Source: Economic Roundup, 2003, Real private sector wealth per person at market value

Growth has averaged almost 10% per year

0

10

20

30

1960 1970 1980 1990 2000

Cha

nge

in re

al w

ealth

per

yea

r (%

) Per person ($'000s)

10yr average

Distribution of wealth

Major shift in wealth towards older Australians

20

111

230

272 265

177 166

99

226

427454

408

319

140

100

200

300

400

500

15-24 25-34 35-44 45-54 55-64 65-74 75+

Ave

rage

inco

me

unit

wea

lth (2

001

$'00

0s) 1986 2001

Kelly, 2003

Estimated share of wealth by age group

0

54

22

0

16

55

29

0

12

50

38

0

10

42

47

23

0

20

40

60

15-24 25-44 45-64 65+

Pro

porti

on o

f tot

al w

ealth

(%) 2000 2010 2020 2030

Source: Kelly, 2003

Growth in inheritances

0

25

50

75

2000 2010 2020 2030

Tota

l val

ue ($

bill

ions

)

Estimated inheritance ($18k pa in retirement)

Estimated inheritance ($30k pa in retirement)

Source: Kelly and Harding, 2003

Possible (but fraught) conclusions for baby boomers

Wealth is growing strongly, especially for older Australians, and the baby boomers will inherit this wealth

Continue spending as we have for the past 30 years

No need to save for retirement, inheritance will cover it

Bad news for Baby boomers- you can’t rely on the old folks’ money

Uneven distribution of wealth

Generation skipping

Changing attitudes to bequests

SKI’ing

Escalating costs of medical and aged care

The distribution is heavily skewed- richest quintile have 63% of total net wealth

585

222

434

1277

0

500

1000

1500

Q1 (poorest 20%) Q2 Q3 Q4 Q5 (richest 20%)Wealth Quintiles

Ave

rage

Val

ue ($

'000

s)

Household net wealth

Financial assets

Non-financial assetsDebt

Source: Kelly, 2004

Older women in Sydney - the classic “asset rich , income poor”

561

482 482

191

82 82

11.8 11.60

100

200

300

400

500

600

Annual income from allsources

Net Wealth Value of home Equity in home

Women living alone aged 65-69

Valu

e ($

'000

s)

Sydney

Rest of NSW

Source: Kelly, 2004

Generation skipping

Greater longevity means parents could live to 90 years old• Children may be around 60 years old

Grandchildren (aged around 30) in greater need of financial help

UK research shows attitude varies with income• People who were better off more likely to skip a generation

Changing bequest ethic

Past behaviour based onPast behaviour based on

Intergenerational altruism• parents believed their children had a greater need

than themselves

Parents gained pleasure from the givingThe inheritance was used to induce desired behaviourBequest was an unintentional by-product of not knowing exactly then they would die

Changing bequest ethic

But …But …

Children are better educated and have higher incomes than parentsMany have dual incomesMany choose to live independently interstate or overseasFew children continue in the family business

Spending itParents may choose to spend it on themselves• SKI (Spending the Kids’ Inheritance)

– If you don’t travel first class – the kids will !!• In the US those in their 60s are bigger spenders than those in their

30s• Reacting to the fact that no-one helped them• Many think children will lose ambition if they are given too much

Donating a sizeable chunk to charity

Living longer costs more in terms of health and aged-care

% with 1+ long term priority diseases

0%

20%

40%

60%

80%

100%

0-14 15-29 30-44 45-54 55-64 65+

Low income Middle income High income

AsthmaCancer cardiovascular health

Diabetes Injury preventionMental health

Arthritis Musculoskeletal conditions

Source: Walker et al, 2003

Australian Distribution of Inheritances

How many inherit and how much do they get?

16.8

35.5

48.5

65.1

76.2 78.3

60.3

0

1

2

3

4

<18 18-34 35-44 45-54 55-64 65+ All

Prop

ortio

n of

pop

(%)

0

20

40

60

80

100Avg Inheritance Amt ($'000s)

Prop'n that inherited in previous year

Source: HILDA wave 2 (2002)

But averages can be deceptive…

All ages

39%

12%21%

17%

11%$1-10,000$10-20,000 $20-50,000$50-100,000 $100,000+

18-34

60%

7%

14%

8%

11%

$1-10,000$10-20,000 $20-50,000$50-100,000 $100,000+

Source: HILDA wave 2 (2002)

SummaryGood news for baby boomers• Parents lived a frugal life• Families are now smaller • Wealth has grown at almost 10% per year over the last 20

years

Bad news• Very uneven distribution of wealth• Generation skipping• Changing attitudes to bequests• SKI’ing• Escalating costs of medical and aged care

Only 1-2% inherit each year • The average for those most in need (aged 18-34) is $35,500• Even this average is deceptive

– Six in ten get less than $10,000

References cited in presentation

Kelly, S. 2003, Forecasting wealth in an ageing Australia – an approach using dynamic microsimulation, Paper presented at the 7th Nordic Seminar on Microsimulation Models, Helsinki, Finland, 13 June.

Kelly, S. and Harding, A. 2003, ‘Wealth and inheritance’, AMP.NATSEM Income and Wealth Report, Issue no. 5, AMP Ltd, Sydney, June.

Kelly, S. 2004, Trends in household wealth, assets and savings, Seminar in the Department of Family and Community Services ‘Wealth and Debt’ seminar series, Canberra, 4 May.

Walker, A., Kelly, S., Harding, A. and Abello, A. 2003, ‘Health and Income in Australia’, AMP.NATSEM Income and Wealth Report, Issue no. 4, AMP Ltd, Sydney, March.

Contact:

Dr Simon KellyPrincipal Research FellowNATSEMUniversity of CanberraCanberra ACT 2601

E-mail:Simon.Kelly@natsem.canberra.edu.au

All papers and this presentation available from www.natsem.canberra.edu.au

AMP-NATSEM reports available from:www.amp.com.au/ampnatsemreports