Employment, wages, taxes and benefits – these are the bread and butter of debates on living standards and inequality. All relate to the income families live on year to year and all matter hugely. But too often these debates ignore a longer-term driver of living standards – the wealth we accumulate and draw down on.
This matters because wealth is a key determinant of lifetime living standards, affecting not only our income in retirement but also the price and nature of the housing we enjoy and the resources we leave to our children.
It also matters simply in terms of scale. Family wealth in 21st Century Britain is huge and growing, rising from £9.9 trillion before the financial crisis to over £11 trillion in the most recent data – more than six times our national income. Significant increases have come from house price rises in the 1990s and 2000s, followed by major growth in private pension wealth more recently, as falling interest rates have increased the value of defined benefit entitlements. Wealth is also key for those concerned with questions of intergenerational fairness, given emerging evidence of the asset accumulation challenges faced by younger cohorts, most visibly when it comes to home ownership.
That’s why in this report – the seventh for the Intergenerational Commission – we explore how wealth is distributed across and within different birth cohorts in Britain, and the accumulation patterns via which this distribution has come about.
Britain’s significant wealth is very unequally shared. Wealth inequality fell for much of the 20th Century, with the share of total net wealth held by the top 1 per cent of individuals falling from approximately three-fifths in the 1920s to one-fifth in the 1970s. Yet, despite wealth inequality continuing to fall in the 1990s and 2000s, it still stands at almost twice the level of – much more regularly discussed – income inequality.
While aggregate wealth continued to grow, the wealth of the typical adult fell in the period during and since the financial crisis. Families’ total net wealth per adult – comprising net property wealth, net financial wealth and private pension wealth – declined from £99,000 to £84,000 (by 15 per cent) between 2006-08 and 2012-14. And in this period the long-term story of declining wealth inequality went into reverse, with the Gini coefficient – a common measure of inequality – increasing slightly from 0.67 to 0.69.
The one-third of total net wealth that is held in property is the driving force behind these inequality ups and downs. In particular, home ownership trends have moved from pushing down on wealth inequality between 1995 and 2005 to increasing wealth inequality more recently as ownership rates have fallen. Those falls are concentrated among those with the least wealth, with ownership falling by 12 per cent between 2006-08 and 2012-14 in the bottom half of the overall wealth distribution. By contrast, home ownership has continued to increase among the top 10 per cent of adults.
Private pension wealth, which makes up two-fifths of total net wealth, is more unequally distributed across adults than net property wealth. However, this inequality has fallen slightly since before the financial crisis largely due to the advent of auto-enrolment. This has acted as a slight brake on the upward pressure changes to net property wealth have put on inequality.
Net financial wealth – including bank accounts, savings, shares and unsecured debt – is relatively small compared to property and private pension wealth, but the most unequally held of all.
The level and distribution of adults’ wealth also varies significantly across the UK, with typical wealth actually second-lowest in London, reflecting much lower rates of home ownership and a younger age profile.
Lower property ownership and lack of access to relatively generous defined benefit pensions for today’s young adults have already sounded the alarm with regards the wealth accumulation of younger cohorts.
It should not surprise us that baby boomers (those born between 1946 and 1965) hold significantly more of our nation’s wealth (over half) than millennials (those born between 1981 and 1995 hold only 2 per cent). After all, wealth is accumulated across a lifetime, and peaks around retirement age. If we are to understand differing wealth accumulation trajectories for different generations, it is much more important to track the wealth held by different cohorts at the same age.
Doing so allows us to see that, when it comes to wealth, the expectation that each cohort will do better than last might have been true for significant parts of the 20th Century, but has recently reversed. The millennials, the group on whom intergenerational concerns are currently focused, are certainly not experiencing generational progress on wealth accumulation. A typical adult born during 1981-85 had half as much total net wealth at age 30 as a typical adult at the same age five years before them.
But far from just affecting millennials, generational progress on wealth accumulation has gone backwards for all cohorts born after 1955, that is, including the younger baby boomers themselves. A typical adult in the second-youngest baby boomer cohort born 1956-60 had 7 per cent less wealth at age 55 than the cohort at the same age five years previously. Contrast that to the oldest baby boomer cohort (born 1946-50), which at age 65 had wealth one-fifth higher than the cohort at the same age five years before them.
These shifts reflect reinforcing trends amongst the different forms of wealth. Far from just affecting the millennials, net financial wealth has fallen cohort-on-cohort for those born from the 1950s onwards. This shift has not been driven by increased debt but less saving – younger cohorts have lower overall debt than previous cohorts at same age despite higher student debt.
Private pension wealth changes between generations are less clear cut, but it’s clear that those born between 1946 and 1960 benefitted most from recent increases in the value of defined benefit pensions. 1966 is the tipping point for younger cohorts doing less well in terms of private pension wealth than their predecessors. These trends in part reflect the fact that fewer than one-in-ten private sector employees born in the 1980s are active members of defined benefited pension scheme today, compared to nearly four-in-ten of those born in the 1960s when they were the same age. It’s also important to account for that fact that younger cohorts need higher pension wealth – given rising longevity and higher working-age incomes – to deliver the same level of pension adequacy (normally measured based on a fixed percentage of pre-retirement income). The opposite of that pattern is evident in private pension wealth accumulation trends for younger cohorts, although they are now benefitting from the introduction of auto-enrolment.
While home ownership levels overall peaked as recently as 2004, the cohort that has experienced the highest levels of home ownership at each age was born as far back as the 1940s. Each subsequent cohort has experienced lower levels of home ownership at the same age. This means that every cohort from the 1950s onwards currently has less property wealth than those at the same age a decade before them. Younger millennials born in the 1980s have roughly the same net property wealth as the cohort born 20 years before them at age 30. Given lower ownership rates, they look set to fall even further behind.
As well as average wealth levels, there are also big differences in how equally wealth is distributed within generations. Overall wealth inequality within cohorts looks to have risen slightly for each successive cohort born during the 1960s, 1970s and 1980s, compared to older cohorts at the same age. No such effect is apparent for those born before 1960.
This effect has principally been driven by shifts in net property wealth, reflecting the different experiences of home ownership mentioned above. For millennials and generation X (those born between 1966 and 1980), poorer families have zero property wealth. By contrast, even those poorer families born in the 1940s or earlier experienced big cohort-on-cohort improvements in levels of net property wealth, pushing down on within-cohort inequality.
Gaps in net financial wealth between poorer and better-off members of older cohorts are very large and have risen in recent years as increases in such wealth have meant typical and wealthier individuals have pulled away from poorer adults. Recent increases in private pension wealth have also benefitted better-off adults most, particularly those born in the 1950s. For both financial and private pension wealth, the tipping point after which cohorts hold less wealth than the cohort before them at the same age comes earlier for lower-wealth adults. For example, the private pension wealth of poorer families stopped improving cohort-on-cohort for those born from the mid-1950s onwards, while for better-off families progress continued until the cohort born in the late 1980s.
Addressing the question of whether the distribution of wealth is fair across generations also requires us to explore the source of the wealth different generations have been able to accumulate.
In particular, this report assesses how much of different cohorts’ wealth is the product of active savings behaviour – for example putting income into savings products or a deposit on a house – and how much can be considered windfall gains. Such windfall gains come about ‘passively’ as a result of external and unexpected impacts on asset values, be they significant house price rises or longevity increases making defined benefit pension entitlements more valuable.
This analysis makes clear that the vast majority (82 per cent) of net property wealth growth since the early 1990s has been driven by the house price boom rather than active savings behaviour, equivalent to a real-terms increase in aggregate net property wealth of £2.3 trillion over the past couple of decades. Indeed in the early 2000s, these passive effects were so large that up to 17 per cent of working-age adults in home owning families made more from their house than their job in some years.
Turning to private pension wealth, we find that significant wealth windfalls from the increasing value of defined benefit pension entitlements due to rising longevity and falling interest rates explain three-quarters of private pension wealth changes between 2006-08 and 2012-14, a windfall totalling £800 billion across families.
Overall, unexpected ‘passive’ and ‘valuation’ changes to property and private pension wealth account for most of families’ wealth changes in relation to these two most important components of wealth, over the period we are able to analyse. Much of wealth in Britain today is something we hold but not something we have earned. And these windfall gains have boosted wealth levels for the cohorts containing the baby boomers in particular. For example, those born in the 1950s benefited from an average real-terms property wealth windfall of £80,000 over the two decades to 2012-14, and an average pension ‘valuation’ windfall of £45,000 in the period during and since the financial crisis. The figures for those born in the 1970s – who are too young to have benefited through the entirety of the house price boom – are £35,000 and £10,000 respectively.
Importantly, our analysis raises serious doubts as to whether wealth windfalls of this nature will be replicated for younger cohorts. Certainly they cannot be assumed. This is both because the wider economic shocks driving them look unlikely to be repeated at anything like the same magnitude, and because a smaller proportion of younger cohorts look likely to have the property and defined benefit pensions that would put them in a position to benefit.
By separating out upward pressure on wealth driven by wider economic shifts, our distinction between active savings (and dis-saving) behaviour and passive or ‘valuation’-driven wealth changes gives us a more accurate picture of decumulation patterns among older cohorts than standard analysis does. For example, the 1930s cohort actively ran down around 40 per cent of their wealth in real terms between 2006-08 and 2012-14, when they were mainly in their 70s. Nonetheless, decumulation is not as rapid as we would expect if the sole purpose of wealth was to support living standards in later life. It looks like decumulation remains a complicated business, with potential practical barriers to running down property wealth in particular, and assets often earmarked for purposes other than just a retirement income.
The absence of wealth from much of our national debate on living standards and inequality extends from analysis to policy making. Both the scale of wealth and profound shifts in the ability of younger cohorts to accumulate it should take greater prominence in current debates.
Even as wealth has risen significantly as a share of national income, the amount of taxation raised from it has fallen or remained flat since the 1980s. This is despite public finance pressures both from the financial crisis and from an ageing population in the coming decades.
Policy responses to that fact are complex and need to recognise not just the scale of wealth held and whether it has been derived from active saving or unexpected windfalls, but also the extent of wealth inequality between and within cohorts. Not all baby boomers were able to benefit from house price rises or fast growth in the value of defined benefit pensions and policy responses need to reflect that fact.
As well as questions of the mix of revenue-raising, a rounded policy response would look at supporting asset accumulation for younger cohorts. That would include policy across all types of wealth – from housing to savings and pensions.
These policy questions will be explored in more detail in subsequent reports for the Intergenerational Commission.