Wealth, Inheritance and the Estate Tax
Thursday, September 21, 2006
by Jagadeesh Gokhale and Pamela Villarreal
Table of Contents
Wealth Distribution and Inheritance
The distribution of wealth changes over time for various reasons. A 2004 National Bureau of Economic Research study found:1
- The shocks of the Great Depression, the New Deal and World War II dramatically reduced the share of wealth held by those at the top of the wealth distribution.
- This decrease is concentrated within the richest 0.1 percent of the wealth distribution, with more modest changes for lower-wealth groups within the top 1 percent.
- The shocks that large wealth-holders experienced in the first part of the century seemed to have had a permanent effect; top wealth shares increased modestly during the stock market booms of the 1960s and 1990s but are still much lower today than before the Great Depression.
Thus, contrary to the common assumption, there is little evidence that wealth is becoming more highly concentrated. It has fluctuated over the past century, but has not changed much since the 1990s.2
“The top 5 percent hold half the wealth.”
Wealth Among Retirees. The distribution of wealth also varies widely among specific demographic groups, especially among those who reach retirement age and are at the peak of their wealth accumulation over their life cycle. For example, in 2003, according to the Survey of Consumer Finances:3
- The top 1 percent of wealth holders in the United States (with lifetime accumulated wealth of $13.8 million per household or more) held nearly 26 percent of the wealth among married households ages 60 to 69. [See Figure I.]
- The top 5 percent of wealth holders (with accumulated wealth of $4.02 million or more per household) had almost 51 percent.
- The top 10 percent had about 63 percent of the wealth.
- By contrast, the bottom half of the income distribution had only 6 percent of the wealth.
Several reasons account for unequal wealth distribution among those reaching retirement, including how much they earned and saved throughout their lifetimes, the number of children they had to support and the rate of return on their savings.4 Inheritances play a minor role.
The Role of Bequests in Wealth. Several studies have attempted to examine the link between inheritances and wealth inequality. For example, a British study found that in 1973, 58 percent of men who died with at least £100,000 in wealth had fathers who had left them at least £25,000. Moreover, 67 percent of the variation in the son's estate was explained by the size of the father's estate.5 But this does not prove that those inheritances contribute to inequality since it was unknown exactly how much sons inherited after taxes and how estates were divided among siblings.
A 1969 study by economist Joseph Stiglitz that assumed an individual's consumption increased as wealth increased found that bequests distributed evenly among adult children have an equalizing effect on the wealth distribution.6
But there is more to wealth inequality than the distribution of inheritances. Calculations from the most recent Survey of Consumer Finances show that only 16 percent of households expect to receive any inheritance, and only 2 percent of households expect to receive substantial bequests of $1 million or more in the future. [See Figure II.] Although leaving a bequest is a motivation for accumulating assets, the fact that lifespans are uncertain means that chance plays a role and bequests can occur even when there was no bequest motive to begin with. Indeed, most bequests are unplanned; they are due to incomplete annuitization - which means they occur because people do not consume all of their assets before death. Thus many bequests are randomly distributed among the children of the rich, the middle class and the poor. Interestingly:7
- For every two recent inheritances of more than $500,000 (in constant 2006 dollars) that high-earning households received, 13 were received by those with incomes of less than $200,000 a year.
- For every two large inheritances received by those with relatively high incomes since 1940, nine were received by households with relatively low incomes.
In general, the link between inheritances and wealth is very tenuous. According to data from the 2004 Survey of Consumer Finances:8
- Among the wealthiest 1 percent, with a net worth averaging $32 million per household, 17 percent of their wealth, or about $5.5 million, came from bequests. [See Figure III.]
- Among the poorest 50 percent, with a net worth averaging $158,000 per household, almost 7 percent, or $10,740 of their net wealth, was a result of bequests.
“Inheritances are a minor source of wealth.”
Even for the wealthiest households, bequests are not the primary source of wealth. According to surveys in 1998 and 2006 by the U.S. Trust Corporation:
- Nine of every 10 affluent Americans became wealthy without inheritances.9
- Earnings from a privately owned business (46 percent), corporate employment (33 percent) and a professional practice (29 percent) were more significant sources of wealth.10