This article is an excerpt from the Shortform book guide to "Capital in the Twenty-First Century" by Thomas Piketty. Shortform has the world's best summaries and analyses of books you should be reading.
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What is the Great Wealth Transfer? Should you worry about it?
Inherited wealth will come to account for a much greater share of overall wealth than that earned through work and savings. This is because of the Great Wealth Transfer, where baby boomers transfer their wealth to the younger generations.
Learn more about why the Great Wealth Transfer is coming.
The Baby Boomer Inheritance Windfall
In Capital in the Twenty-First Century, Thomas Piketty projects that increased mortality rates—as the large and aging baby boomer cohort begins to die off—will contribute significantly to the growth of inherited wealth. The baby boomers, he writes, were the largest generation at the time of their birth—larger than any cohort that preceded them.
The Great Wealth Transfer is coming, but why? Because of their long lifespans relative to previous generations, they had more time to accumulate large stocks of capital—and, as long as the rate of return on capital is greater than the rate of economic growth (r>g), these stocks of wealth will continue to beget still greater wealth relative to economic growth as a whole. As the baby boomers begin to die off en masse, those growing capital stocks will be bequeathed to their heirs—representing a massive windfall of inherited wealth.
What this portends, Piketty warns, is a return to a historical era—like the Gilded Age in the United States, the Victorian Era in Britain, or the Belle Époque in France—in which getting a good education, working hard, saving, and investing wisely all count for far less than having the good fortune to be born to wealthy parents.
In Defense of Inheritance
Some economists dispute Piketty’s notion of a looming inheritance windfall. One paper found that from 1989 to 2007, the share of households reporting a wealth transfer through inheritance fell by 2.5 percentage points. Moreover, these researchers found that wealth transfers as a proportion of current net worth during this period dropped precipitously, from 29 to 19%. In contrast to Piketty, the authors of this paper found that inheritances and other wealth transfers tended to reduce wealth inequality by redistributing household wealth.
On a more fundamental level, other economists contend that there is nothing wrong or objectionable about inheritance even if it does result in significant inequality. In Capitalism and Freedom, Milton Friedman writes that it is impossible to determine how much anyone’s wealth is “earned” or “unearned,” however we choose to define the terms. But even if a system could somehow be devised that only redistributed “unearned” wealth (like from an inheritance) and left “earned” wealth alone, it would still be harmful to economic freedom.
This is because there is no moral difference between earned wealth and inherited wealth. Even if you inherit a vast fortune from your family, Friedman writes that it is still ultimately a product of human endeavor—at some point, someone did create that wealth. Moreover, Friedman argues that economic freedom demands that individuals can do as they please with their property, so long as it does not impose a cost on someone else. Thus, choosing to pass property along to one’s heirs is a legitimate act within a capitalist system.
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Here's what you'll find in our full Capital in the Twenty-First Century summary :
- An analysis of incomes, tax returns, and estate tax returns across different countries
- How capitalism, by its nature, generates economic inequality
- How inherited wealth will soon account for more than earned income
