Inheritance and inequality in the UK: counterintuitive findings

Last Friday my old centre at LSE, CASE, launched a new multi-funder programme looking at the effects of the cuts in the UK 2007-2014 – snappily titled Social Policy in a Cold Climate. I think of this as one of the core tasks of academics; as Ruth Lupton put it in an interview with Inequalities earlier this year, “Just on its own, research on inequality can remind people that inequality exists. ” (It’s no surprise then that Ruth is leading on the new CASE programme).

All of which reminded me of a recently completed series of CASE papers looking at wealth inequality; six papers in total, to be followed by more as part of the EU-funded GINI project. One of the most intriguing papers here was by Eleni Karagiannaki, looking at whether rising inheritances 1985-2005 contributed to wealth inequality – and the results are not what you might expect.

The bad news for inequality

The first thing that Karagiannaki makes clear is that the total value of inheritances (‘estates’) more than doubled 1985-2005 in real terms, as shown in the Figure below (taken from the 1pp summary in the CASE annual report).

Secondly, inheritances are – unsurprisingly – both more common and more sizeable among people who were originally wealthier.  People in the top quintile of 1995 net worth already had an average of £265,000, compared to a debt of £2,500 among the bottom quintile. On top of this initial advantage, 37% of the top quintile inherited in the next ten years, compared to 18% of the bottom quintile – and those that inherited received £60,000 on average, compared to £25,000 among inheritors in the bottom quintile.

(From here, Karaginnaki is using the British Household Panel Survey to look at the contribution of inheritances to wealth inequality, looking at 1996-2004 inheritances and the initial level of wealth in 1995; I’m using the figures assuming a 3% rate of return on wealth to estimate the size of the 1996-2004 inheritances).

The good news

Yet despite the fact that inheritances are skewed towards those who are wealthy already, Karagiannaki actually finds that inheritances reduce rather than increase wealth inequality!  The effect is very small – the coefficient of variation of wealth reduces from 1.27 to 1.24  – but it’s clear that inheritances don’t increase wealth inequality as you might expect. Moreover, the UK is not an anomaly here; she cites results from the US (Wolff 2002, 2011), Japan (Horioka 2009) and Sweden (Klevmarken 2004) that are similar.

So what on earth is going on here?  In the US and Japan, the result is because non-inherited wealth is negatively correlated with inherited wealth – in other words, if you have wealth for other reasons, you are less likely to inherit anything. But as we’ve seen, this isn’t true in the UK.

Instead, this result is due to the weak link between initial wealth inequality and inheritances, when compared to the stronger link between wealth inequality in 1995 and 2005. As Karagiannaki puts it (p12), “the disequalising impact which arise from the positive correlation between inheritance with total net worth..has been outweighed by the way in which inheritances weaken the relationship between non-(recently) inherited wealth and total net worth”. You can see this in the figures above, where 18% of the bottom quintile of original wealth still received inheritances in the next 10 years.

This is but one small (yet intriguing) part of this entire package of work on wealth inequality that CASE have recently undertaken. Over the coming weeks I’ll come back to other findings that catch my eye, before trying to tie this together into an understanding of the wider importance of wealth when talking about inequality.

About Ben Baumberg

I am currently a Lecturer in Sociology and Social Policy at the School of Social Policy, Sociology and Social Research (SSPSSR) at the University of Kent. I also helped set up the collaborative research blog Inequalities, where I regularly write articles and short blog posts. I have a wide range of (too many...) research interests, at the moment focusing on disability, the workplace, inequality, deservingness and the future of the benefits system, and the relationship between evidence and policy. You can find out more about me at http://www.benbaumberg.com
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