Australia’s ballooning inheritance payouts are reinforcing absolute wealth inequality and eroding social mobility, according to a new Productivity Commission report.
However, the paper also argues intergenerational wealth transfers can ease relative wealth inequality, as inheritances directed to poorer recipients are likely to boost their net wealth by a larger margin than windfalls bequeathed to well-off recipients.
In a new 182-page report, released Tuesday, the Productivity Commission said the total value of wealth transfers, through inheritances and gifts, reached over $120 billion in 2018 — more than double the figure posted in 2002.
Many older Australians have received extraordinary benefits from rising house prices and surging superannuation holdings, driving the average inheritance to around $125,000.
But the median inheritance is much lower, at around $45,000, the paper found. This suggests that massive payouts from rich benefactors are pulling up the average.
And because wealthy families are more likely to raise wealthy children — largely thanks to the support, networks, and education their parents can provide throughout life — the biggest inheritances largely reinforce existing socio-economic privilege.
“Over the past two decades, wealthier people typically received more via wealth transfers than poorer people,
increasing absolute wealth inequality,” the report found.
“This is intuitive because wealthier parents have more wealth to transfer to their children, and their children tend to be wealthier even in the absence of those transfers.”
This kind of wealth transfer can also “impede social mobility”, the report found, while noting social mobility is a distinct concept to raw wealth inequality.
Inheritances can ease relative wealth inequality, report finds
There is some good news, however, for Australians who aren’t already minted, the report said.
The Productivity Commission states inheritances which flow to poorer Australians have a much larger impact on their net worth on a percentage basis.
“When measured against the amount of wealth they already own, those with less wealth get a much bigger boost from inheritances on average, about 50 times larger for the poorest 20% than the wealthiest 20%,” said Productivity Commissioner Catherine de Fontenay.
This means that some inheritances can reduce relative wealth inequality, which the report states is inequality in the overall share of wealth held by each person, compared to the overall amount they hold.
The report put it this way:
Over the past two decades, wealthier people inherited more than poorer people. Hence, at the point at
which inheritances were received (the immediate term), they increased absolute wealth inequality. But
inheritances reduced relative wealth inequality in the immediate term, because wealthier people
received less as a share of their initial wealth.
Given these purported benefits, the Productivity Commission challenged the position of economist and best-selling author Thomas Piketty, who in 2016 called for Australia to institute an inheritance tax to address wealth inequality and promote social mobility.
The report dismissed such proposals out of hand.
“Academic work by Piketty and others has argued that wealth transfers, and inheritances in particular, might contribute to worsening wealth inequality in the future,” the report said.
“We do not find compelling evidence for this.
“As is commonly believed, wealth transfers do largely go to the rich, but on some measures wealth transfers actually reduce wealth inequality.”
The ‘Bank of Mum and Dad’ is coming under scrutiny
Intriguingly, the report also offers an insight into the economic effects of the ‘Bank of Mum and Dad’, the colloquial term for parents offering to buy their child a home, cough up a deposit, or lend their kids money for a home.
As they are used to promote homeownership, such gifts “may contribute to greater intergenerational wealth
persistence if the wealthiest parents provide the largest ‘bank of mum and dad’ transfers,” the report said.
That suggestion is in keeping with recent admissions from the Reserve Bank of Australia, which last month said the best bet for prospective homebuyers to enter the market is to lean on homeowning parents.
However, the full impact of that kind of parental assistance was largely out of the report’s scope.
“There is no comprehensive data on the characteristics of [the Bank of Mum and Dad], which makes it difficult to assess their size and prevalence, let alone identify genuine wealth transfers as opposed to loans and other in-kind assistance,” the report said.