Capital in the Twenty-First Century (70 page)

FIGURE 11.6.
   Observed and simulated inheritance flow: France, 1820–2100

Simulations based upon the theoretical model indicate that the level of the inheritance
flow in the twenty-first century will depend upon the growth rate and the net rate
of return to capital.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

It is also important to note that the evolution of the wealth-age profile depends
primarily on savings behavior, that is, on the reasons why different groups of people
accumulate wealth. As already discussed at some length, there are many such reasons,
and their relative importance varies widely from individual to individual. One may
save in anticipation of retirement or job loss (life-cycle or precautionary saving).
Or one may save to amass or perpetuate a family fortune. Or, indeed, one may simply
have a taste for wealth and the prestige that sometimes goes with it (dynastic saving
or pure accumulation). In the abstract, it is perfectly possible to imagine a world
in which all people would choose to convert all of their wealth into annuities and
die with nothing. If such behavior were suddenly to become predominant in the twenty-first
century, inheritance flows would obviously shrink to virtually zero, regardless of
the growth rate or return on capital.

Nevertheless, the two scenarios presented in
Figure 11.6
are the most plausible in light of currently available information. In particular,
I have assumed that savings behavior in 2010–2100 will remain similar to what it has
been in the past, which can be characterized as follows. Despite wide variations in
individual behavior, we find that savings rates increase with income and initial endowment,
but variations by age group are much smaller: to a first approximation, people save
on average at a similar rate regardless of age.
¹⁸
In particular, the massive dissaving by the elderly predicted by the life-cycle theory
of saving does not seem to occur, no matter how much life expectancy increases. The
reason for this is no doubt the importance of the family transmission motive (no one
really wants to die with nothing, even in aging societies), together with a logic
of pure accumulation as well as the sense of security—and not merely prestige or power—that
wealth brings.
¹⁹
The very high concentration of wealth (with the upper decile always owning at least
50–60 percent of all wealth, even within each age cohort) is the missing link that
explains all these facts, which Modigliani’s theory totally overlooks. The gradual
return to a dynastic type of wealth inequality since 1950–1960 explains the absence
of dissaving by the elderly (most wealth belongs to individuals who have the means
to finance their lifestyles without selling assets) and therefore the persistence
of high inheritance flows and the perpetuation of the new equilibrium, in which mobility,
though positive, is limited.

The essential point is that for a given structure of savings behavior, the cumulative
process becomes more rapid and inegalitarian as the return on capital rises and the
growth rate falls. The very high growth of the three postwar decades explains the
relatively slow increase of
μ
(the ratio of average wealth at death to average wealth of the living) and therefore
of inheritance flows in the period 1950–1970. Conversely, slower growth explains the
accelerated aging of wealth and the rebound of inherited wealth that have occurred
since the 1980s. Intuitively, when growth is high, for example, when wages increase
5 percent a year, it is easier for younger generations to accumulate wealth and level
the playing field with their elders. When the growth of wages drops to 1–2 percent
a year, the elderly will inevitably acquire most of the available assets, and their
wealth will increase at a rate determined by the return on capital.
²⁰
This simple but important process explains very well the evolution of the ratio
μ
and the annual inheritance flow. It also explains why the observed and simulated
series are so close for the entire period 1820–2010.
²¹

Uncertainties notwithstanding, it is therefore natural to think that these simulations
provide a useful guide for the future. Theoretically, one can show that for a large
class of savings behaviors, when growth is low compared to the return on capital,
the increase in
μ
nearly exactly balances the decrease in the mortality rate
m,
so that the product
μ
×
m
is virtually independent of life expectancy and is almost entirely determined by
the duration of a generation. The central result is that a growth of about 1 percent
is in this respect not very different from zero growth: in both cases, the intuition
that an aging population will spend down its savings and thus put an end to inherited
wealth turns out to be false. In an aging society, heirs come into their inheritances
later in life but inherit larger amounts (at least for those who inherit anything),
so the overall importance of inherited wealth remains unchanged.
²²

How does one go from the annual inheritance flow to the stock of inherited wealth?
The detailed data assembled on inheritance flows and ages of the deceased, their heirs,
and gift givers and recipients enable us to estimate for each year in the period 1820–2010
the share of inherited wealth in the total wealth of individuals alive in that year
(the method is essentially to add up bequests and gifts received over the previous
thirty years, sometimes more in the case of particularly early inheritances or exceptionally
long lives or less in the opposite case) and thus to determine the share of inherited
wealth in total private wealth. The principal results are indicated in
Figure 11.7
, where I also show the results of simulations for the period 2010–2100 based on the
two scenarios discussed above.

The orders of magnitude to bear in mind are the following. In the nineteenth and early
twentieth centuries, when the annual inheritance flow was 20–25 percent of national
income, inherited wealth accounted for nearly all private wealth: somewhere between
80 and 90 percent, with an upward trend. Note, however, that in all societies, at
all levels of wealth, a significant number of wealthy individuals, between 10 and
20 percent, accumulate fortunes during their lifetimes, having started with nothing.
Nevertheless, inherited wealth accounts for the vast majority of cases. This should
come as no surprise: if one adds up an annual inheritance flow of 20 percent of national
income for approximately thirty years, one accumulates a very large sum of legacies
and gifts, on the order of six years of national income, which thus accounts for nearly
all of private wealth.
²³

FIGURE 11.7.
   The share of inherited wealth in total wealth: France, 1850–2100

Inherited wealth represents 80–90 percent of total wealth in France in the nineteenth
century; this share fell to 40–50 percent during the twentieth century, and might
return to 80–90 percent during the twenty-first century.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

Over the course of the twentieth century, following the collapse of inheritance flows,
this equilibrium changed dramatically. The low point was attained in the 1970s: after
several decades of small inheritances and accumulation of new wealth, inherited capital
accounted for just over 40 percent of total private capital. For the first time in
history (except in new countries), wealth accumulated in the lifetime of the living
constituted the majority of all wealth: nearly 60 percent. It is important to realize
two things: first, the nature of capital effectively changed in the postwar period,
and second, we are just emerging from this exceptional period. Nevertheless, we are
now clearly out of it: the share of inherited wealth in total wealth has grown steadily
since the 1970s. Inherited wealth once again accounted for the majority of wealth
in the 1980s, and according to the latest available figures it represents roughly
two-thirds of private capital in France in 2010, compared with barely one-third of
capital accumulated from savings. In view of today’s very high inheritance flows,
it is quite likely, if current trends continue, that the share of inherited wealth
will continue to grow in the decades to come, surpassing 70 percent by 2020 and approaching
80 percent in the 2030s. If the scenario of 1 percent growth and 5 percent return
on capital is correct, the share of inherited wealth could continue to rise, reaching
90 percent by the 2050s, or approximately the same level as in the Belle Époque.

Thus we see that the U-shaped curve of annual inheritance flows as a proportion of
national income in the twentieth century went hand in hand with an equally impressive
U-shaped curve of accumulated stock of inherited wealth as a proportion of national
wealth. In order to understand the relation between these two curves, it is useful
to compare the level of inheritance flows to the savings rate, which as noted in
Part Two
is generally around 10 percent of national income. When the inheritance flow is 20–25
percent of national income, as it was in the nineteenth century, then the amounts
received each year as bequests and gifts are more than twice as large as the flow
of new savings. If we add that a part of the new savings comes from the income of
inherited capital (indeed, this was the major part of saving in the nineteenth century),
it is clearly inevitable that inherited wealth will largely predominate over saved
wealth. Conversely, when the inheritance flow falls to just 5 percent of national
income, or half of new savings (again assuming a savings rate of 10 percent), as in
the 1950s, it is not surprising that saved capital will dominate inherited capital.
The central fact is that the annual inheritance flow surpassed the savings rate again
in the 1980s and rose well above it in 2000–2010. Today it is nearly 15 percent of
national income (counting both inheritances and gifts).

To get a better idea of the sums involved, it may be useful to recall that household
disposable (monetary) income is 70–75 percent of national income in a country like
France today (after correcting for transfers in kind, such as health, education, security,
public services, etc. not included in disposable income). If we express the inheritance
flow not as a proportion of national income, as I have done thus far, but as a proportion
of disposable income, we find that the inheritances and gifts received each year by
French households amounted to about 20 percent of their disposable income in the early
2010s, so that in this sense inheritance is already as important today as it was in
1820–1910 (see
Figure 11.8
). As noted in
Chapter 5
, it is probably better to use national income (rather than disposable income) as
the reference denominator for purposes of spatial and temporal comparison. Nevertheless,
the comparison with disposable income reflects today’s reality in a more concrete
way and shows that inherited wealth already accounts for one-fifth of household monetary
resources (available for saving, for example) and will soon account for a quarter
or more.