1 Theoretical Reasoning and Empirical Evidence on Inheritance and Wealth Distribution (on the basis of LWS data) by Peter Mooslechner, Martin Schürz, Pirmin.

1

Oesterreichische National bank

Theoretical Reasoning and Empirical Evidence on Inheritance and Wealth

Distribution (on the basis of LWS data)

by Peter Mooslechner, Martin Schürz, Pirmin Fessler

2


Motivation

• Debate in Austria on abolishment of inheritance tax

• Family values

• Aspects of social justice are neglected

3


Structure

1. Theoretical reasoning- Problems with definition of inheritance

- Heterogeneity of LWS data- Focus on motives of bequest

2. Empirical evidence- Cross country comparison between heirs and

non-heirs- Education levels of heirs and non-heirs

3. Conclusions for data improvements

4


Problems with definition

• Focus on material inheritances

• Focus on individuals

• Complex relationship between gifts and bequests

5


How can LWS data contribute?

INH1-INH3 YRINH1-YRINH3 INH4

INHERITANCE BEQUEST RECEIVED ($)

YEAR INHERITANCE BEQUEST RECEIVED

REMAINING INHERITANCE BEQUEST RECEIVED ($)

Austria X X -Canada - - -Cyprus X X XFinland (98) X X -Finland (94) X X -Germany X X -Italy - - -Norway X X -Sweden - - -United Kingdom X/F X -USA (PSID) X X -USA (SCF) X X X

LWS Variable

X = variable available in data set, - = variable not available in data set, F = flag variable available in data set

6


Heterogeneity in the reported data.

General Information item values reference year unit of collection

Austria inheritance value of all inh.>10;>5;<5 years (refers to last inh. received) Household

Cyprus inheritance value of each inh. year of each inh. Received Primary Economic Unit

Finlandinheritance/inheritance in advance/gifts of cash

value of each inh. (over 15000 marks) all inh. received between 1994-1998 Household

Germany inheritance/gift/lottery winningvalue of each inh. (over 2500 Euro) all inh. received 2002 Household

Norway inheritance/private gift value of each inh. all inh. received 2002 Household (derived from person-level)

United Kingdom inheritance/gift value of each inh. all inh. received 2000 Household (derived from person-level)

USA (SCF) inheritance/gift value of each inh. year of each inh. received Primary Economic Unit

USA (PSID) inheritance/gift value of each inh.

all inh. received in the "last 5 years" (in fact only dates from 1999-2001and estates in progress) Family unit

7


Motives of bequest

self interest altruism

unplanned bequestmotive

bequest motives

retrospectivebequest

care motive

paternalisticbequests

capitalistbequest

strategicbequest



bequest motives



bequest motives


care motive


capitalistbequest

strategicbequest


care motive


capitalistbequest

strategicbequest

8

Oesterreichische National bankAnalytical shortcomings concerning motives

• The available data mix between gifts and inheritance in the LWS does not allow analysing motives.

• Motives for bequests vary over time and are influenced by behaviour itself.

• Motives are related to family values and social

norms and influenced by the institutions in different countries.

9


0%

10%

20%

30%

40%

50%

60%

70%

decile 1 decile 2 decile 3 decile 4 decile 5 decile 6 decile 7 decile 8 decile 9 decile 10

-€ 15,356 € 3,224 € 7,428 € 12,476 € 18,460 € 26,864 € 37,601 € 52,813 € 80,746 € 307,181

0%

200%

400%

600%

800%

1000%

1200%

Percentage of heir-households

Proportion of the Average Money Value of the heritage to Average Total FinancialAssets

Money Value of Inheritances of households ordered by Net Wealth deciles

Means of Net Wealth

Austria

10


Wealth Distribution and Inheritance

• To conclude that the elimination of intergenerational transfers would lead to more inequality has shortcomings:

– Would the wealthy elderly instead consume their wealth then there should be an equalizing effect on wealth distribution

– Definition of wealth remains mainly data driven

– Poorer people rather spend the money while the rich accumulate it

– Inheritances have to be seen in context with other wealth transfers (investment in human capital, gifts, social capital, prestige, power, inheritances)

11


Cross country comparison between heirs and non-heirs

Country

definition heirs (heir household)

Percentage of Heir H. % of Heir H.: 38% % of Heir H.: 41% % of Heir H.: 18% % of Heir H.: 2%

Mean heirs/Mean non-heirs

Median heirs/Median non-heirs







Total Financial Assets 2.01 2.01 2.15 1.68 2.16 2.92 2.15 naTotal Debt 1.37 na 1.25 48.00 1.39 na 2.90 naWage na na 1.39 1.99 1.51 2.24 1.42 1.75Number of Persons 1.01 1.00 1.14 1.33 1.21 1.00 1.10 1.00Age of Household-head 1.09 1.15 0.91 0.92 0.92 0.96 0.94 0.96*5,94573 mk = 1 €.

Country

definition heirs (heir household)

Percentage of Heir H. % of Heir H.: 3% % of Heir H.: 4% % of Heir H.: 18% % of Heir H.: 5%









Total Financial Assets 1.62 2.51 2.00 3.56 2.62 7.10 1.64 8.33Total Debt 1.35 1.92 1.56 26.82 1.56 2.01 1.77 6.50Wage 1.41 1.48 1.67 3.00 1.22 1.13 1.34 1.35Number of Persons 1.21 1.00 1.10 1.00 0.95 1.00 0.99 1.00Age of Household-head 0.98 1.02 0.93 0.93 1.12 1.18 0.96 1.04

inherited some amount (no exact dates)

inherited some amount (dates from 1940 to 2003)

inherited (received large gift) some amount > 15000 marks* from 1994 to1998

inherited (received large gift, lottery winnings) some amount >2500 Euros in 2001

Austria Cyprus Finland Germany

inherited some amount in 2002

inherited some amount in 2000

inherited some amount (dates from 1940 to 2000)

inherited (received gift) some amount (dates from 1999 to 2001; +estate in process)

Norway United Kingdom USA (SCF) USA (PSID)

12


Education levels of heirs vs. non-heirs• Level of education: indicator for parental

• Education levels are very heterogeneous in LWS

• Rudimentary classification according to ISCED 1997

<33 (Upper) Secondary Education

>3

non-heirs 15.00% 75.60% 9.40%heirs 11.20% 71.30% 17.50%

non-heirs 40.90% 35.70% 23.40%heirs 24.00% 38.20% 37.90%non-heirs 17.50% 61.60% 21.00%heirs 12.50% 56.70% 30.60%non-heirs 19.10% 50.80% 27.90%heirs 11.10% 47.60% 41.10%non-heirs 9.80% 39.20% 51.00%heirs 3.50% 27.20% 69.10%non-heirs 9.00% 38.70% 48.00%

heirs 1.80% 22.20% 73.30%

HIGHEST EDUCATION LEVEL (ISCED 0-6)

Austria

Finland

Germany

Norway (some unspecified)

USA (SCF)USA (PSID) (some unspecified)

13


Why cross country differences?

• Differences in the freedom to select beneficiaries: family centered pattern of Germany versus the individual-centered pattern of the US.

• Differences in welfare regimes will create different needs for family transfers.

• Differences in gifts and inheritance taxes may affect actual behaviour and may also be a reason that respondents are unwilling to respond in survey interviews.

• Differences in wealth distribution: As rich people make most of the wealth transfers countries with a high wealth concentration should have a higher share of wealth transfers.

14


How to improve cross country comparison?

• Comparable money values of inheritances.

• Wealth transfers from whom to whom?

• A sharp distinction between inheritances and other transfers like lottery winnings or gifts from non-family members.

• At least some information on the parents of the household head or spouse beyond the age/not living information.

• A comparison of inheritances over time (at best panel data) would allow to further investigate possible changes in the importance of different transmission channels.

15


Information on parents?Ohlsson (2005) stated that, „the most useful information for

understanding transfers received is data on whether the individual‘s/the spouses‘s parents are deceased and, if so, when at

what ages they died.“

at least one person one generation ago not alive*

all persons one generation ago not alive*

Cyprus heirs 68.8% 11.3%non-heirs 72.0% 14.8%

Germany heirs 57.6% 5.5%non-heirs 61.5% 9.4%

US-SCF heirs 84.4% 21.5%non-heirs 67.6% 11.0%

*father and/or mother of household head and/or spouse

donors and recipients

16


Conclusions

• This paper argues for caution in several ways. Theoretical reasoning has not only to refer to but also to conceptualize the complexity of social reality.

• Despite that bequests and gifts have to be analyzed separately we argued for a broader understanding of inheritance (“inheritance of inequality”).

•A sharp distinction between inheritances and other transfers like lottery winnings or gifts from non-family members is necessary.

•As inter vivos transfers are more likely to be intentional they are more likely to be informative about wealth transfer motives.

• Substantial differences of opinion remain on the long-term effect of bequests on wealth distribution. We showed on the basis of LWS data that the situation of the heirs is significantly better than the one of the non-heirs.

17


Annex

Inheritance in Austria

18


0%

10%

20%

30%

40%

50%

60%

Compulsory education at most Apprenticeship, vocational/technicalschool

Academic secondary school, higher-leveltechnical and vocational school

Fachhochschule, university

Percentage of heir-householdsPercentage of heir-households (total population)

Heritages ordered by Education of Household head

37,7 %

-6,7 %-3,3 %

+3,0 %

+15,3 %

19


0%

10%

20%

30%

40%

50%

60%

up to EUR 749,-- EUR 750,-- to EUR 1349,-- EUR 1.350,-- to EUR 2.249,-- EUR 2.250,-- to EUR 2.999,-- EUR 3.000,-- or more

Percentage of heir-householdsPercentage of heir-households (total population)

Heritages ordered by Net Income

37,7 %

-10,6 %

-6,4 % -3,9 %

+4,8 %

+11,8 %

20


Self-employed 60.1% 39.9% +4.9%

Entrepreneur 61.8% 38.2% +3.2%

Employee 63.5% 36.5% +1.5%

Public servant 58.9% 41.1% +6.1%

Farmer 71.0% 29.0% -6.0%

Worker 74.7% 25.3% -9.7%65.0% 35.0% +0.0%

up to EUR 749,-- 72.9% 27.1% -10.6%

EUR 750,-- to EUR 1349,-- 68.7% 31.3% -6.4%

EUR 1.350,-- to EUR 2.249,-- 66.2% 33.8% -3.9%

EUR 2.250,-- to EUR 2.999,-- 57.5% 42.5% +4.8%

EUR 3.000,-- or more 50.5% 49.5% +11.8%62.3% 37.7% +0.0%

*Deviation to the Total-Population-Proportion of Heir-Households in percent-points

Occupation

Working Population

Net Income

Total Population

Socioeconomic Characteristicsnon-heir households

heir households Deviation*

21


Net Wealth <= Median 72.0% 28.0% -9.7%

Net Wealth > Median 61.3% 38.7% +1.0%

Net Wealth > doubled Median 51.5% 48.5% +10.8%

Net Wealth > 5-times Median 37.2% 62.8% +25.1%62.3% 37.7% +0.0%

Detached/semi-detached house 53.2% 46.8% +9.1%

Owner-occupied apartment 61.9% 38.1% +0.4%

Cooperative apartment 70.3% 29.7% -8.0%

Rental apartment 71.4% 28.6% -9.1%

Subsidized apartment 75.4% 24.6% -13.1%

Company housing 62.7% 37.3% -0.4%62.3% 37.7% +0.0%

Compulsory education at most 69.0% 31.0% -6.7%Apprenticeship, vocational/technical

school 65.6% 34.4% -3.3%Academic secondary school, higher-level

technical and vocational school 59.3% 40.7% +3.0%

Fachhochschule, university 47.0% 53.0% +15.3%62.3% 37.7% +0.0%

*Deviation to the Total-Population-Proportion of Heir-Households in percent-points

Education

Total Population

Net Wealth

Total Population

domestic circumstances

Total Population

Socioeconomic Characteristicsnon-heir households

heir households Deviation*

22


52%

42%

30%

23%

20%

9%11%

0%

10%

20%

30%

40%

50%

60%

18 - 29 30 - 39 40 - 49 50 - 59 60 - 69 70 - 79 80+

Did anybody support you financially the first time you founded a household of your own?

Percentage of supported Households

Age of Household head

1 Theoretical Reasoning and Empirical Evidence on Inheritance and Wealth Distribution (on the basis of LWS data) by Peter Mooslechner, Martin Schürz, Pirmin.

Documents