The new wealth of our nation: the case for a citizen’s inheritance

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Executive Summary

Over the past two years the work of the Intergenerational Commission, hosted by the Resolution Foundation, has set out in detail the state of and prospects for different cohorts’ living standards in Britain. In the labour market, in housing and in the welfare state, the Commission has demonstrated that, too often, young adults’ situations are no better than those of their predecessors when they were at the same age, in a break with the generation-on-generation improvements that were the norm during the second half of the 20th century.

This situation is of course partly driven by the 2007-08 financial crisis and its aftermath, the impact of which was felt most acutely by the cohorts starting out their adult lives at this time. But the Intergenerational Commission’s work has shown that generational differences in living standards run far deeper, starting before the financial crisis and being set to endure even as its immediate impacts fade.

Beyond the weak earnings and incomes performance of young adults today, the Intergenerational Commission has identified two major trends which barely featured in political debate for much of the 20th century. The first is that risk is being transferred from firms and government to families and individuals, in their jobs, their pensions and the houses they live in. The second is that assets are growing in importance as a determinant of people’s living standards, and asset ownership is becoming concentrated within older generations – on average only those born before 1960 have benefited from Britain’s wealth boom to the extent that they have been able to improve on the asset accumulation of their predecessors. Both trends risk weakening the social contract between the generations that the state has a duty to uphold, as well as undermining the notion that individuals have a fair opportunity to acquire wealth by their own efforts during their working lives.

This paper, the 22nd report for the Intergenerational Commission, makes the case for a citizen’s inheritance as a means to address these interlinked challenges of growing risk and stalling wealth accumulation.

A policy shift is needed to mitigate risks and promote asset accumulation for all

Changes in the distribution of risk and the accumulation of wealth are linked. Individuals and families use assets to manage risk, something that has also underpinned policy makers’ wish to help people acquire a stock of assets. Assets are important in this regard because they help people smooth consumption over their lifetime, they insure against risks in the future, and they can provide a basis for positive risk-taking, for example to advance people’s careers. Asset-based policies such as Right-to-Buy, pension tax incentives and matched saving schemes have sought to provide these things, and they continue to have an important role to play. But for many members of today’s younger cohorts, existing policy will not be enough.

There is some good news in the pipeline if we look at the prospects for younger cohorts’ accumulation of assets over the next two decades. Britain’s wealth has increased sharply as a multiple of national income – from 2.5 times in the 1970s to almost 7 times today – and it will not disappear when its current holders pass away. It will instead cascade down to younger generations.  The real value of estates passed on at death has more than doubled in the past twenty years, and is set to double again in the next twenty. These inheritances are also set to be somewhat more widely shared among younger generations than the inheritances of old, due to higher home ownership rates among today’s older population than in the past.

Yet while this trend is good news for some millennials’ lifetime living standards, it is neither the silver bullet to eliminate the increased levels of risk young adults are bearing, nor the way to entirely change the fact that many of them are unable to easily accumulate assets on their own behalf. That is partly because, despite being more widely shared than before, inheritances will remain unequal, with most going to those young adults who already have assets. Crucially, inheritances will still increase absolute wealth gaps within younger generations, with already-wealthy millennials set to inherit more than four times as much as those with no property wealth. Almost half of 20- to 35-year-old non-home owners do not have parents with any property wealth. These trends are amplified at the household level, given the propensity for people to couple up with others expecting similar-scale inheritances to their own.

The timing of inheritances is as important as who gets them, to their effectiveness in managing risk among younger adults. With the most common age of inheritance among today’s 20-35 year olds set to be 61, even people who will receive inheritances are likely to receive them too late to mitigate the risks they face at the most critical stages in early adulthood.

The greater risks that young adults experience today underscore the importance of the assets they have in reserve during the crucial phases of early adulthood, when people build careers, start saving for later life, and think about starting families. While inheritances will help some of today’s young adults later in life, they cannot overcome the weak asset accumulation trajectories that many of them face in the here and now. This mismatch between the greater risks young adults bear and the assets they have to manage them should be a key focus of public policy.

We have of course been here before. Since the late 19th century it has traditionally been the state that has stepped up to address challenges of intergenerational fairness, asset accumulation and risk sharing. The State Pension was introduced a century ago when more people started to live beyond working age, more homes were built to house the children of the baby boom in the mid-20th century, and a rapid expansion of the education system was put in place in the late-20th century to keep younger cohorts’ skills at the highest international standards. Each policy aimed in part to ensure Britain continued to honour the intergenerational contract as each cohort passed through. Today however, far from facing up to the new issues younger generations face, the state risks moving in the other direction, with welfare cuts falling on families of working age, and particularly those in the child-rearing years. Public policy needs to shift again, to address the new challenges of managing risk and accumulating assets that young adults face.

The UK should introduce a citizen’s inheritance to show that Britain has something to offer all young people, whatever their background

This paper makes the case for the UK to adopt a citizen’s inheritance – a universal sum of money made available to every young person when they reach the age of 25 to address some of the key risks they face – as a central component of a policy programme to renew the intergenerational contract that underpins society. The policy would mean Britain can offer a basic stock of assets to all of its citizens, no matter who their parents are, and it would help ensure a fairer distribution of wealth both between age cohorts and among the working-age population of the future. A citizen’s inheritance, with use restrictions, could also help to mitigate some of the excessive risks affecting young people as they enter adult life, and enable them to invest more in their education, in pension savings, or in deposits for house purchases or rental. These material gains would have knock-on effects in improving people’s psychological sense of security, their ability to participate fully as citizens, and their orientation towards the future.

This paper models and costs a citizen’s inheritance policy for a transition period that begins in 2020 and lasts ten years.

  • In the steady-state from 2030, the scheme would pay £10,000 to every 25 year old British national or person born (and resident) in the UK.
  • Grants would sit in government-approved interest-bearing savings accounts, and could be spent at a time of their recipients’ choosing on any combination of four permitted uses: education and training (including paying off tuition fee debt), deposits for house rental or purchase, pension saving, or the start-up costs of new businesses being supported through recognised entrepreneurship schemes.
  • During the transition period, to reflect the experience of cohorts who entered the labour market around the time of the 2007-08 financial crisis, the policy would pay smaller amounts to cohorts aged over 25. The transition would start in 2020 by paying £1,000 each to 34- and 35-year-olds, and then an increasing sum would be paid to successively younger cohorts until the scheme reached a steady state in 2030.
  • The citizen’s inheritance would be funded primarily by ending the current inheritance tax system and replacing it with a new lifetime receipts tax, as has been set out in detail in a previous policy paper for the Intergenerational Commission. Other funding would come from ending existing matched savings schemes that primarily benefit wealthier young adults, such as Help to Buy ISAs and Lifetime ISAs. Our view is that there is symbiosis between our proposed policy and its main funding source: reforms to inheritance tax would be likely to garner more support if they were tied to plans for investing the proceeds in the country’s young people.
  • Citizen’s inheritances would count as part of their recipients’ £125,000 lifetime receipts tax allowances. This would help ensure the policy is progressive, while bringing forward the timing of inheritances for those due to receive money later in life.

A citizen’s inheritance would give young adults greater agency and security, and demonstrate that the intergenerational contract can evolve for the 21st century

A citizen’s inheritance would be an effective means to provide a base of assets to many young adults who don’t currently have them. If £10,000 was paid to all 25-29 year olds today this would:

  • At least double the net wealth of almost two-thirds (62 per cent) of young adults.
  • Cover 40 per cent of the average first time buyer’s home deposit, and more than half the average first-time buyer deposit in half of the regions and nations of the UK.
  • Pay for multiple home rental deposits and support people with the challenge of putting down a new deposit before the old one has been returned. In March 2018, a typical deposit (of six weeks’ rent) outside London was £1,051, while in London it was £2,172.
  • Pay for Master’s degree tuition in many universities (the loan available for Master’s degree fees is £10,609 for the 2018-19 academic year).
  • Pay off almost a third of student tuition fee debt for graduate cohorts who started university in 2012 or since.
  • If saved into a private defined contribution pension at age 25, add an estimated £45,000 to a pension pot by the age of 68.

Assets provide people security in and of themselves, and help them potentially to accumulate further assets in the future. They also provide a base to take positive risks, for example to get careers moving by retraining or moving for work. A citizen’s inheritance would be a bold change in public policy that should not be done lightly, and it would need to be accompanied by careful cross-partisan consensus-building. But the policy is achievable and affordable, and it is key to overcoming some of the challenges our country faces in the future in a way that that unifies both across ages and within younger generations. For these reasons, a citizen’s inheritance for all young British adults – provided at the age where it is most needed – would be a lasting demonstration that the state’s role in delivering the intergenerational contract can evolve for the 21st century.