‘I bestow upon you, messenger of dawn … Prophesies your power, love and inspiration. Preserving my generous bequest, you will live long and worthily.’
Anna Akhmatova, Poet
The news that the birth rate in England and Wales has fallen to 1.49 births per woman means that Britain, along with most other non-African countries, is well below the 2.1 ratio necessary to maintain a stable population. Well, the natural world might breathe a sigh of relief at the prospect of fewer humans, but it means that our societies changing radically as migration compensates for falling numbers of young people, and there's an increasing cohort of old people with fewer direct descendants.
In the United States, nearly 40% of total non-pension wealth is held by households whose heads are 65 or older. This concentration of disposable assets will apply across most of the developed world; but as those retirees have fewer and fewer children and grandchildren, on whom should they bestow their assets? We therefore need to develop a new approach designed for inter-generational rebalancing.
As we know, Government finds this a challenge, because its political horizon is so short. It would rather draw in as much of this wealth as possible in the form of inheritance tax in order to apply it to current spending, including the interest on its bloated level of public debt (that interest now accounts for over 10% of public expenditure in the UK).
The case for hypothecating inheritance levies remains strong, but do we also need to call for wealthy old folk to consider a new approach to their bequests, so that large numbers of unrelated young people can be empowered to achieve their potential in adult life?
Professor Eric French, John Bailey Jones and Rory McGee* have recently published a research paper in the Journal of Economic Perspectives entitled, ‘Why Do Retired Households Draw Down Their Wealth So Slowly?’. It's an engaging read, looking closely at the key drivers of savings in old age: precautionary motives (to cope with potential longevity and health challenges), bequest motives, and the desire to stay living in their own home as they get older.
It's based on statistical analysis from the United states, but there’s no doubt that its findings apply equally strongly in the United Kingdom and most other ‘first world’ countries.
One of the most striking charts is on the ninth page in, showing how bequest recipients are principally their own children (80%). Following them come other relatives (15%), friends (3%), and charities — which comprise just 2% of all bequest receipts.
The report attempts to disentangle the different motives for holding on to wealth. It shows how insurance choices in the form of both annuities and private medical insurance are significantly under-employed, notwithstanding the unknown risks of longevity and health care (it was interesting to read of the latter in relation to our own proposals for mandatory private health insurance for wealthy old folk, in order to tackle the health crisis in the United Kingdom).
But it's the bequests to their children and the huge contrast with very limited allocation to charity which are the really striking features of the report.
We referred to the Carnegie Conjecture last week in our commentary ‘What's required for a good start to adult life’, drawing attention to the risk of undermining a young person's drive to achieve their own potential by overdoing the inheritance support that they're given. However, for most young people there is no inheritance support, and the contrast becomes sharper as the birth rate among the wealthiest falls.
The endowment that's needed for children from disadvantaged families and unaccompanied asylum-seeking young migrants is a combination of starter capital accounts and life skills gained through incentivised learning. However, The Share Foundation stands alone in providing a charitable channel for philanthropists to fund these starter capital accounts: this was made clear during its lengthy charity registration process nineteen years ago. And yet, over these past two decades, the Foundation has enabled over £150 million from a variety of sources to provide individual empowerment for these young people.
It has to be said, however, that not much yet has come from voluntary philanthropy, although a new promotional approach is now being taken in that direction.
It's important to raise the priority of this kind of charitable giving for the bequests of wealthy old folk. Few of them appreciate the significant tax breaks which are available for this purpose: for example, in the UK the Inheritance Tax rate drops from 40% to 36% if more than 10% of the estate is pledged to charity. Also, when gifting shares, the tax breaks include not only waiving capital gains tax on the assets but also providing income tax relief on the donation.
As we've argued in the past, the logical best solution is to commit systemically to using the proceeds of Inheritance Tax for inter-generational rebalancing. But Professor Eric French and his colleagues have shown that there is also an urgent need for a more generous approach to be taken in broadening the bequests of wealthy old folk to benefit disadvantaged young people.
Gavin Oldham OBE
Share Radio
* Eric French is the Montague Burton Professor of Industrial Relations and Labour Economics,
University of Cambridge, Cambridge, United Kingdom. He is also a Research Fellow, Centre
for Economic Policy Research, and Co-Director at the ESRC Centre for the Microeconomic
Analysis of Public Policy, Institute for Fiscal Studies, both in London, United Kingdom. John
Bailey Jones is Vice President of Microeconomic Analysis in the Research Department, Federal
Reserve Bank of Richmond, Richmond, Virginia. Rory McGee is an Assistant Professor of
Economics, University of Western Ontario, London, Ontario, Canada. He is also an International
Research Associate, Institute for Fiscal Studies, London, United Kingdom.