Why Do Wealthy Parents Have Wealthy Children?
8th September 2021
The Institute for Fiscal Studies article looks at the reasons why the children of wealthy parents get richer than children from poorer families.
Why do the children of wealthy parents accumulate more wealth than children from poorer backgrounds? Does parental wealth have a role in determining young people's earnings, saving choices, returns to wealth and access to homeownership? How much wealth do parents give directly to their children? What other channels are involved in the persistence of wealth from one generation to the next?.
As wealth has grown compared with earnings, questions about the role of wealth in determining living standards and the transmission of wealth inequalities across generations have come to the fore. This report sheds light on why wealth inequalities persist across generations in the UK, using data that measure the wealth of parents and their adult children. We assess the role of education, earnings, saving decisions, portfolio decisions, access to homeownership and partners' earnings in transmitting inequalities in wealth across generations.
Those with wealthy parents tend to be wealthier themselves. When they were in their 30s, those born in the 1970s and 1980s whose parents were in the wealthiest fifth of parents of the same age had average net wealth (excluding pension wealth) of £107,000, around six times more than the £18,000 held by those with parents in the poorest fifth.
The persistence of wealth across generations in the UK is comparable to that in the US but greater than that in Scandinavian countries. 10% higher parental wealth is associated with 3.7% higher child wealth, a similar level of intergenerational persistence to that seen in the US and higher than that in Denmark, Norway and Sweden.
Having wealthy parents is particularly important for getting to the top of the wealth distribution. Children of the wealthiest fifth of parents are eight times more likely to be in the wealthiest fifth themselves than are the children of the poorest fifth, but the children of the poorest fifth are less than three times more likely to be in the poorest fifth themselves than are the children of the wealthiest fifth.
Young adults' wealth is more related to their parents' wealth than their earnings are related to their parents' earnings. Parents ranked 10 percentiles higher in the wealth distribution (for their generation) have children on average 3.7 percentiles higher in the wealth distribution. Moving 10 percentiles up in parents' earnings distribution is associated with an increase of just 2.7 percentiles for children, on average.
Around half of the persistence in wealth across generations can be accounted for by the intergenerational persistence of education and earnings. This suggests an important role for the transmission of ‘human capital', and other drivers of earnings, in transmitting wealth inequalities across generations, but that other factors such as saving rates or direct wealth transfers are significant too.
Parents' wealth is associated with their children having higher levels of education and earnings. Holding parents’ earnings fixed, those with parents in the top fifth by wealth earned around £10,000 more per year than those with parents in the bottom fifth.
Those with wealthier parents save larger portions of their earnings. While the average saving rate was 3% of earnings for those with parents in the poorest fifth, it was 12% for those with parents in the wealthiest fifth. These differences are not explained by the differences in these children’s earnings or education or by children’s saving rates being related to their parents’ saving rates. One possible explanation for this is that the children of wealthier parents receive more transfers and capital income, and save some of this.
Those with wealthy parents hold a larger share of their wealth as higher-return investments such as stocks and shares. However, given the small amount of wealth held in this form, this cannot be a major driver of the intergenerational persistence of wealth.
The children of wealthier parents are significantly more likely to be homeowners by age 30 and this is not entirely explained by their higher prior earnings. For a given level of child’s earnings, those with parents in the wealthiest third had a 17 percentage point higher homeownership rate than those with parents in the poorest third, at age 30.
Housing capital gains were larger for those with wealthier parents, with the real-terms annual capital gain on housing wealth averaging about £290 for those with the poorest fifth of parents and £2,250 for those with the wealthiest fifth of parents.
However, capital gains were no higher as a share of net wealth for those with wealthier parents than for those with poorer parents. This is because those with wealthier parents had smaller mortgages compared with the value of their home when they became a homeowner. This in turn suggests a greater role for their own savings, or financial assistance from parents, when buying a house.
Those with wealthy and poor parents were equally likely to have a partner, but those with wealthier parents tend to have higher-earning partners. However, this difference is largely accounted for by differences in child’s own earnings, and does not appear to have an independent role in driving intergenerational persistence of wealth.
Read the full report HERE