The Declining Importance of Inheritances or the Coming Inheritance Boom?

Project Date:
Jun 2008
Award Amount:
$115,851
Project Programs:
Social Inequality

According to recent estimates, slightly less than a quarter of all American families have received inheritances or financially significant gifts from living relatives or friends. These transfers are unequally distributed: one study found that only 10 percent of families with net worth below $25,000 received any inheritances or gifts, compared with 45 percent of families with net worth above $1 million. Even more striking, the size of transfers received by the wealthy families was more than 25 times as large as the transfers received by the poorest families. The extreme inequality of this distribution suggests that any increase in the share of household wealth deriving from inheritance is likely to lead to a rise in the inequality of household wealth and an increase in its persistence across generations. Thus, inheritance provides one link between inequality in the past and inequality in the future.

 

Economist Edward Wolff has already looked at recent trends in the relative size of bequests as a share of household wealth in order to get an early indication of whether the steady rise in economic inequality in the United States over the past thirty years is likely to reproduce itself in the future. He has shown that the present value of gifts and inheritances has fallen, as a share of net worth, from 30 percent in 1983 to 19 percent in 1998. Wolff hypothesizes that there are reasons to believe this trend may reverse itself. The current generation of elderly, who benefitted from the high-growth decades after World War II, is the richest generation in American history, and the large baby-boom generation has now reached the age (50-59) when inheritances are usually received. With an award from the foundation, Wolff will update his study of the size and distribution of inheritances with data from the Survey of Consumer Finances and the Panel Study of Income Dynamics covering the last ten years. He will track the aggregate share of inheritances and gifts as a fraction of net worth and chart the differences by race, education, age, marital and parental status, income class, and wealth class.

 

Past research has shown huge differences between groups. For example, between 1984 and 1994, white families received, on average, 13 times as much in inheritance as black families. The current project will determine whether such differences have grown or diminished in the last ten years. Wolff will also construct a simulation model to estimate inheritances between 1983 and 2007 using data on wealth, income, savings rates, and capital gains. On the basis of mortality rates by age cohort and age differences between generations, the study will simulate the transfer of inheritances between parent and child and make projections to the year 2025, based on past trends.

 

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