April 16, 2024

The great wealth transfer and inequality

Wealth transfers from baby boomers could make millennials the wealthiest generation ever

For the first time since 2009, none of those on Forbes’ World’s Billionaires list who are under 30 are self-made.

This is due to self-made billionaires ageing into their 30s, and the start of the "great wealth transfer". But what is this great wealth transfer, and what does it mean for New Zealand?

Following World War II, baby boomers, those born between 1946 and 1964, experienced a time of immense economic growth and prosperity, affording them the golden opportunity to accumulate wealth. A recent report by consultants Knight Frank found that in the United States, over the next decade, a massive transfer of wealth and assets will occur as the parents of the baby boomers, and the baby boomers themselves, pass on their wealth to millennials and Gen Z. The shift will see US$90 trillion of assets move between generations.

The great wealth transfer appears to be a continuation of a trend that began in the late 20th century, when the share of inheritance in private wealth began to rise in most countries. The United Kingdom experienced a moderate but steady decline in this trend from 1900–1990, before a slight rise from 1990–2010. The trend in Germany declined sharply from 1950–1970, followed by a sharp increase from 1980–2010. The trends in France and the United States were similar but less accentuated. The OECD warns that if these trends continue, inherited wealth may once again reach the levels of the early 1900s.

What will the great wealth transfer look like for New Zealand?

Forbes notes that “this wealth handover will likely have reverberations in the job market, economy, real estate, and lifestyles of the recipients of this largesse. Millennials, who are contending with credit card debt, burdensome student loan repayments, and the challenges of affording a new home and having children, may see their fortunes change almost overnight.” 

In New Zealand, those born before 1966 currently hold 60 percent of New Zealand’s $2.29 trillion total individual net wealth. The estimated value that will be transferred by those aged over 55 in the next 20 years will be approximately $1.11 trillion. 

The impact is unlikely to be even. Treasury research on the distribution of advantage in New Zealand suggests New Zealand, like all countries, has less than perfect mobility between generations. Children of rich parents are more likely to become rich when they grow up, and children of poor parents are more likely to become poor when they grow up.

Statistics New Zealand household net worth statistics for the year ended June 2021 showed that 50 percent of New Zealand’s households held just over 93 percent of total wealth, the top 10 percent of households held over 51 percent, and the top five percent of households held 37 percent. Additionally, the statistics show that Māori and Pacific People over 55 have much less wealth to pass on than their European counterparts. The average individual net worth of Māori aged over 55 is just under 50 percent less than that of European ethnicity, while Pacific People in this age group have almost 65 percent less.  

Source: Stats NZ, BERL analysis

What does the great wealth transfer mean for New Zealand’s future?

The Organisation for Economic Co-operation and Development (OECD) has warned that the impacts of wealth transfers are likely to become an increasing challenge. Because wealthy households tend to receive more and higher-value inheritances, intra-generational inequality is likely to increase. Additionally, low fertility rates and smaller families may also mean that there are fewer close family members among whom the wealth may be divided, and so the heirs will receive a larger share of the donor’s estate. As well as the financial impacts, this concentration of wealth might also confer additional inter-generational advantages at the top of the wealth distribution tables, reducing equality of opportunity.

The great wealth transfer comes at a time of intense debate about the future of New Zealand’s tax system, especially whether a capital gains tax should be introduced. The International Monetary Fund has recommended the implementation of a comprehensive capital gains tax. 

Should this also include a tax on wealth or wealth transfers? New Zealand is in the minority of OECD countries in not having taxes on end-of-life bequests. Therefore, this significant shift in wealth within the next twenty years could potentially support additional taxes for some of New Zealand’s pressing needs, such as our infrastructure deficit.