Inheritance Closing the Australian Wealth Gap
You may think rich families get richer when their offspring receive an inheritance. Surprisingly, a recent report from the Australian Productivity Commission suggests this is only part of the picture.
The Productivity Commission, an independent research body advising the Australian Government, recently released a report on wealth transfer. The report is one of the first to examine the economic impact of wealth distributed through inheritance. The Government hopes to determine the effects of wealth inequality, mitigating the widening wealth gap.
Increase in Australian Inheritance
Australians are becoming more affluent. As property value booms, so does the relative wealth of the generation who own houses. With falling fertility rates, older Australians have less offspring to distribute these assets to.
Unsurprisingly, the Productivity Commission found that the elderly, typically fiscally cautious, delay drawing down on this wealth. Saving for a ‘rainy day’ has seen an astronomical increase in personal wealth. This, combined with untouched and growing Superannuation (pension), has produced the wealthiest generation of Australians in history.
Struggling Australians Receive Bigger Boost
Inheritance is relative. If you’re already well-off, wealth transferred from your parents after death will have less impact than if you were struggling at the time of the windfall. Productivity Commissioner, Lisa Gropp, suggests that, ‘the less well‑off get a much bigger boost from wealth transfers.’
In recent years, inheritance represented 90 per cent of all inter-generational wealth transfers. The average windfall – AU$125,000. With private wealth re-distributed at such a scale and many Australians as sole beneficiaries, the report suggests this will close the wealth gap in Australia, not widen it.
The Timing of Inheritance Matters
The Commissioner is wary of claims that inheritance is the only important factor in wealth transfer. She suggests it’s the time in life one receives a windfall, that has the greater outcome. ‘But while inheritances weigh on economic mobility — by increasing the likelihood that wealthy parents have wealthy children — the effect is moderated by the lateness in life at which they are received,’ Gropp says.
It’s all very well to receive a hefty inheritance, but if you’re in retirement, this boost may not have a significant impact. Much better, she suggests, to receive inter-generational wealth when you’re making employment and family decisions.
Commission Predicts Huge Wealth Transfer
Over AU$120 billion was passed on between Australian families in 2018, but that figure is set to quadruple in the coming decade. ‘Nevertheless, absent a significant change in how wealth transfers are distributed or saved in the future… they are unlikely to significantly worsen wealth inequality in Australia in the coming decades,’ says Gropp.
The sheer magnitude of wealth soon available and continued frugality will undoubtedly increase personal wealth. However, receiving this wealth later in life may not help as much as it could. Perhaps it’s time for Australians to contemplate what that means.
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