What Comes After Rich Baby Boomers? Kids With a Big Inheritance
The Waltons might be the closest thing we have to the Carnegies or Rockefellers today. The heirs to the Walmart fortune occupy six slots on the most recent Forbes 400 list, and just those six Waltons — not counting their lucky progeny — are worth $145 billion. But the Waltons are in the distinct minority on the Forbes list. In this new Gilded Age, rich Americans are more likely to have made their own fortunes than to have inherited them.
Rich families today are holding onto a big piece of the pie. The top 1 percent of households owns about 35 percent of American wealth, more than the entire bottom 90 percent does. But at least at the moment, growing inequality has not resulted in a big boom in inheritances. Since the 1980s, the value of inherited wealth has only drifted upward slightly. In fact, wealth transfers as a proportion of net worth have fallen, to 19 percent in 2007 from 29 percent in 1989.
But the baby boomers are only now retiring. Once that process accelerates and reaches its inevitable conclusion, get ready for a flood of princelings — and some potentially worrisome consequences for social mobility in the United States, as the immense earnings of an already stratified economy are entrusted to a new generation. The inheritance boom will come, eventually. What’s unclear is what the country will look like afterward.
“People have been talking about an inheritance boom for a long time, and so far it has not really materialized,” says Edward N. Wolff, an economist at New York University, who was once awarded funding to study the phenomenon, only to discover it did not exist — yet. “There are all these offsetting effects that mitigate the influence of inheritances on wealth inequality.”
For one, the wealthy tend to give away a big chunk of their money, leaving less for their heirs, Wolff says. Bill Gates, Warren Buffett, Mark Zuckerberg and many others, for instance, have signed onto the “giving pledge,” promising the bulk of their estates to charity. The government takes out another sizable tranche (even though that 55 percent inheritance tax never did come into effect.) Moreover, he says, inheritors tend to be less well off than their parents, meaning that inheritances serve to spread the wealth thin rather than concentrating it.
It is a dissatisfying form of redistribution when one very rich Walton bequeaths to a less-rich Walton, of course, but from an economic perspective, it is redistribution all the same. Paul Schervish, the director of the Center on Wealth and Philanthropy at Boston College, says that about 7 percent of inheritors get two-thirds of all wealth transfers. But although inherited wealth concentrates in a small population, the money dissipates within it. “Some might go to the kids who took over the family business, some goes to one who ended up a schoolteacher, some goes to a bum like I am,” he says.
Those mitigating factors probably won’t be enough to defray the impact of the inheritance boom when it comes.
“We have more income inequality, and that means that down the road, we are bound to have more wealth inequality and more inequality of inherited wealth,” says Thomas Piketty of the Paris School of Economics, a pre-eminent researcher of the haves and have-nots. “That is, unless the wealthy consume their wealth before they die,” he added. “But when you’re really rich, you want to transmit at least part of that to your children.”
Some will be frittered away. “A lot of these ultra-high-net-worth individuals are men aged 60 to 70,” David Friedman, president of the research firm Wealth-X, says. “They’re sensing their mortality now. And there’s a growing wave of liquidity that’s going to fuel luxury and fuel philanthropy in a way that the market’s never seen.” Extravagant bucket-list items will be crossed out (with so many engraved Montblancs), but a great deal more will be left to children in the form of family businesses, estates, real estate and so on.
A study by the consulting firm Accenture identifies precisely when that shift might peak, starting in 2031. The firm looked at inheritances generation to generation. The baby boomers received a “great transfer” of wealth from their parents. And Generations X and Y will take a greater wealth transfer from the baby boomers, in time.
When that process is underway, 10 percent of the country’s total wealth will change hands every five years through inheritances, estates, gifts and the like. And as income and wealth have become distributed less evenly, the inherited spoils will be distributed unevenly, too. Households with less than $500,000 in net worth will transfer about $3 trillion to their heirs. Ones with more than $500,000 will transfer four times that much wealth.
That money will flow into the bank accounts of the by-then-over-the-hill members of Generation X and Generation Y, and the United States might look a little more like aristocratic Europe, with its Downton Abbeys and super-hyphenated names — maybe with a few more tattoos. Lists like the Forbes 400 might be filled less with financiers and technology entrepreneurs and more with third-generation Waltons and second-generation Zuckerbergs and Bezoses or, perhaps, first-generation Walton-Zuckerberg von Bezoses.
If income inequality continues its upward trend, a new generation of the superwealthy could come to crowd out those inheritors. Not only does family money get chopped apart as it passes from generation to generation, it has great potential for self-destruction. The same story plays out a thousand different ways: Hardscrabble grandfather makes the money, Junior sustains the business while living well all his days and then the Third, softened by a charmed life, fails in his duties as scion. “There’s a phrase: ‘Shirt sleeves to shirt sleeves in three generations,’ ” says John Davis of Harvard Business School, who studies family wealth. “I’ve worked with families in 60 countries. They’ve all got some version of the same saying.”
But it does not seem to matter too much one way or another. Inheritances are just one way that wealthy families help out their children; and not the most important one, either. So-called “inter vivos” gifts help ossify a given child’s social, educational and professional status long before inheritances kick in. Miles Corak, an economist at the University of Ottawa, says the children of the rich benefit from birth: less-stressful home lives as toddlers, expensive education throughout their lives, well-timed donations to alma maters, full Rolodexes on graduation, help with that first down payment, and so on.
That might be one reason that American social mobility seems so stuck, with the odds of escaping poverty half what they are in countries like Denmark. But recent research has suggested that, contrary to conventional wisdom, rates of mobility have not actually declined as inequality has increased. Once that big wave of money hits in 2031, reality could bend more toward expectation.