IFS - Wealth divide between young people with wealthy parents and those with poor parents is big and is greater than equivalent earnings gaps

8 Sep 2021 10:02 AM

Lots of research has demonstrated how people with higher-earning parents tend to have higher earnings. New IFS research, funded by the Economic and Social Research Council and published today, shows that having wealthy parents is even more important when it comes to determining the wealth of younger generations.

This research finds that the persistence of wealth inequality across generations is high in the UK. Those with wealthy parents are much more likely to be wealthy themselves, to be homeowners and to be high earners:

• When they were in their 30s, those born in the 1970s and 1980s, with parents in the wealthiest fifth in their generation, 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.
• 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.
• Having wealthy parents is particularly important for getting to the top of the wealth distribution. Children of the wealthiest fifth of parents are almost three times as likely to be in the wealthiest fifth within their generation as those with average parental wealth. This could be because accumulating the large amount of wealth required to reach the wealthiest fifth is particularly reliant on receiving financial transfers from parents.
• The children of wealthier parents are significantly more likely to be homeowners by age 30 – 65% for those with parents in the top third of the wealth distribution against 56% and 41% for those whose parents were in the middle and bottom thirds, respectively. This is not entirely explained by their higher earnings. For those on average earnings, 56% of those whose parents had an average level of wealth were homeowners, rising to 64% for those whose parents were in the wealthiest third and falling to 47% for those whose parents were in the poorest third.

Around half of the persistence of wealth can be explained by the fact that more highly educated and higher-earning parents have more highly educated and higher-earning children. This leaves significant room for financial transfers from parents to children, differences in saving behaviour, and differences in returns earned on investments, in driving the intergenerational persistence of wealth:

• Even among those whose parents have the same levels of earnings and education, those with wealthier parents tend to earn more. Holding parents’ earnings fixed, those with parents in the top fifth by wealth earned around £6,000 more per year than those with parents in the second-top fifth and £10,000 more than those with parents in the bottom fifth. In part this is because those with the wealthiest parents were particularly likely to be very high earners. One in five of those with parents in the wealthiest fifth earned over £40,000, compared with one in ten of those in the second-wealthiest fifth, despite modest differences in parental earnings between the two groups.
• Even among those who earn the same amount, those with wealthier parents save more as a portion of their earnings. Holding earnings fixed, the average saving rate was 3% of earnings for those with the parents in the poorest fifth and 12% for those with parents in the wealthiest fifth. This could be because the children of wealthier parents receive more transfers and capital income on top of their earnings, and save some of this additional income.
• Among those who earn the same amount, those with wealthier parents are more likely to hold higher-risk, higher-return investments such as stocks and shares. While only a small amount of wealth is currently held in this form among those born in the 1970s and 1980s, this could lead to growing inequalities over time.

David Sturrock, a Senior Research Economist and author of the report, said:

‘These findings emphasise the importance of considering wealth – both as a resource that parents may use to transmit economic advantages to their children, and as a measure of the economic resources and security of young adults – when trying to promote social mobility. Policies that seek to improve educational progression and labour market outcomes for those with low-education and low-income parents could, if designed and implemented well, be important for wealth mobility but would not on their own equalise wealth outcomes between those with wealthier and poorer parents. A significant amount of the inequalities in wealth by parental background appear to be due to other channels through which parents transmit advantages to their children.’

Why do wealthy parents have wealthy children?