Clearly, μ depends on the age profile of wealth. The more wealth increases with age, the higher μ will be and therefore the larger the inheritance flow.
Conversely, in a society where the primary purpose of wealth is to finance retirement and elderly individuals consume the capital accumulated during their working lives in their years of retirement (by drawing down savings in a pension fund, for example), in accordance with the “life-cycle theory of wealth” developed by the Italian-American economist Franco Modigliani in the 1950s, then by construction μ will be almost zero, since everyone aims to die with little or no capital. In the extreme case μ = 0, inheritance vanishes regardless of the values of β and m. In strictly logical terms, it is perfectly possible to imagine a world in which there is considerable private capital (so β is very high) but most wealth is in pension funds or equivalent forms of wealth that vanish at death (“annuitized wealth”), so that the inheritance flow is zero or close to it. Modigliani’s theory offers a tranquil, one-dimensional view of social inequality: inequalities of wealth are nothing more than a translation in time of inequalities with respect to work. (Managers accumulate more retirement savings than workers, but both groups consume all their capital by the time they die.) This theory was quite popular in the decades after World War II, when functionalist American sociology, exemplified by the work of Talcott Parsons, also depicted a middle-class society of managers in which inherited wealth played virtually no role.6 It is still quite popular today among baby boomers.
Our decomposition of the inheritance flow as the product of three forces (by = μ × m × β) is important for thinking historically about inheritance and its evolution, for each of the three forces embodies a significant set of beliefs and arguments (perfectly plausible a priori) that led many people to imagine, especially during the optimistic decades after World War II, that the end (or at any rate gradual and progressive decrease) of inherited wealth was somehow the logical and natural culmination of history. However, such a gradual end to inherited wealth is by no means inevitable, as the French case clearly illustrates. Indeed, the U-shaped curve we see in France is a consequence of three U-shaped curves describing each of the three forces, μ, m, and β. Furthermore, the three forces acted simultaneously, in part for accidental reasons, and this explains the large amplitude of the overall change, and in particular the exceptionally low level of inheritance flow in 1950–1960, which led many people to believe that inherited wealth had virtually disappeared.
In Part Two I showed that the capital/income ratio β was indeed described by a U-shaped curve. The optimistic belief associated with this first force is quite clear and at first sight perfectly plausible: inherited wealth has tended over time to lose its importance simply because wealth has lost its importance (or, more precisely, wealth in the sense of nonhuman capital, that is, wealth that can be owned, exchanged on a market, and fully transmitted to heirs under the prevailing laws of property). There is no logical reason why this optimistic belief cannot be correct, and it permeates the whole modern theory of human capital (including the work of Gary Becker), even if it is not always explicitly formulated.7 However, things did not unfold this way, or at any rate not to the degree that people sometimes imagine: landed capital became financial and industrial capital and real estate but retained its overall importance, as can be seen in the fact that the capital/income ratio seems to be about to regain the record level attained in the Belle Époque and earlier.
For partly technological reasons, capital still plays a central role in production today, and therefore in social life. Before production can begin, funds are needed for equipment and office space, to finance material and immaterial investments of all kinds, and of course to pay for housing. To be sure, the level of human skill and competence has increased over time, but the importance of nonhuman capital has increased proportionately. Hence there is no obvious a priori reason to expect the gradual disappearance of inherited wealth on these grounds.
Mortality over the Long Run
The second force that might explain the natural end of inheritance is increased life expectancy, which lowers the mortality rate m and increases the time to inheritance (which decreases the size of the legacy). Indeed, there is no doubt that the mortality rate has decreased over the long run: the proportion of the population that dies each year is smaller when the life expectancy is eighty than when it is sixty. Other things being equal, for a given β and μ, a society with a lower mortality rate is also a society in which the flow of inheritance is a smaller proportion of national income. In France, the mortality rate has declined inexorably over the course of history, and the same is true of other countries. The French mortality rate was around 2.2 percent (of the adult population) in the nineteenth century but declined steadily throughout the twentieth century,8 dropping to 1.1–1.2 percent in 2000–2010, a decrease of almost one-half in a century (see Figure 11.2).
FIGURE 11.2. The mortality rate in France, 1820–2100
The mortality rate fell in France during the twentieth century (rise of life expectancy), and should increase somewhat during the twenty-first century (baby-boom effect).
Sources and series: see piketty.pse.ens.fr/capital21c.
It would be a serious mistake, however, to think that changes in the mortality rate lead inevitably to the disappearance of inherited wealth as a major factor in the economy. For one thing, the mortality rate began to rise again in France in 2000–2010, and according to official demographic forecasts this increase is likely to continue until 2040–2050, after which adult mortality should stabilize at around 1.4–1.5 percent. The explanation for this is that the baby boomers, who outnumber previous cohorts (but are about the same size as subsequent ones), will reach the end of their life spans in this period.9 In other words, the baby boom, which led to a structural increase in the size of birth cohorts, temporarily reduced the mortality rate simply because the population grew younger and larger. French demographics are fortunately quite simple, so that it is possible to present the principal effects of demographic change in a clear manner. In the nineteenth century, the population was virtually stationary, and life expectancy was about sixty years, so that the average person enjoyed a little over forty years of adulthood, and the mortality rate was therefore close to 1/40, or actually about 2.2 percent. In the twenty-first century, the population, according to official forecasts, will likely stabilize again, with a life expectancy of about eighty-five years, or about sixty-five years of adult life, giving a mortality rate of about 1/65 in a static population, which translates into 1.4–1.5 percent when we allow for slight demographic growth. Over the long run, in a developed country with a quasi-stagnant population like France (where population increase is primarily due to aging), the decrease in the adult mortality rate is about one-third.
The anticipated increase in the mortality rate between 2000–2010 and 2040–2050 due to the aging of the baby boom generation is admittedly a purely mathematical effect, but it is nevertheless important. It partly explains the low inheritance flows of the second half of the twentieth century, as well as the expected sharp increase in these flows in the decades to come. This effect will be even stronger elsewhere. In countries where the population has begun to decrease significantly or will soon do so (owing to a decrease in cohort size)—most notably Germany, Italy, Spain, and of course Japan—this phenomenon will lead to a much larger increase in the adult mortality rate in the first half of the twenty-first century and thus automatically increase inheritance flows by a considerable amount. People may live longer, but they still die eventually; only a significant and steady increase in cohort size can permanently reduce the mortality rate and inheritance flow. When an aging population is combined with a stabilization of cohort size as in France, however, or even a reduced cohort size as in a number of rich countries, very high inheritance flows are possible. In the extreme case—a country in which the cohort size is reduced by half (because each couple decides to have only one child), the mortality rate, a
nd therefore the inheritance flow, could rise to unprecedented levels. Conversely, in a country where the size of each age cohort doubles every generation, as happened in many countries in the twentieth century and is still happening in Africa, the mortality rate declines to very low levels, and inherited wealth counts for little (other things equal).
Wealth Ages with Population: The μ × m Effect
Let us now forget the effects of variations in cohort size: though important, they are essentially transitory, unless we imagine that in the long run the population of the planet grows infinitely large or infinitely small. Instead, I will adopt the very long-run perspective and assume that cohort size is stable. How does increased life expectancy really affect the importance of inherited wealth? To be sure, a longer life expectancy translates into a structural decrease in the mortality rate. In France, where the average life expectancy in the twenty-first century will be eight to eighty-five years, the adult mortality rate will stabilize at less than 1.5 percent a year, compared with 2.2 percent in the nineteenth century, when the life expectancy was just over sixty. The increase in the average age of death inevitably gives rise to a similar increase in the average age of heirs at the moment of inheritance. In the nineteenth century, the average age of inheritance was just thirty; in the twenty-first century it will be somewhere around fifty. As Figure 11.3 shows, the difference between the average age of death and the average age of inheritance has always been around thirty years, for the simple reason that the average age of childbirth (often referred to as “generational duration”) has been relatively stable at around thirty over the long run (although there has been a slight increase in the early twenty-first century).
But does the fact that people die later and inherit later imply that inherited wealth is losing its importance? Not necessarily, in part because the growing importance of gifts between living individuals has partly compensated for this aging effect, and in part because it may be that people are inheriting later but receiving larger amounts, since wealth tends to age in an aging society. In other words, the downward trend in the mortality rate—ineluctable in the very long run—can be compensated by a similar structural increase in the relative wealth of older people, so that the product μ × m remains unchanged or in any case falls much more slowly than some have believed. This is precisely what happened in France: the ratio μ of average wealth at death to average wealth of the living rose sharply after 1950–1960, and this gradual aging of wealth explains much of the increased importance of inherited wealth in recent decades.
FIGURE 11.3. Average age of decedents and inheritors: France, 1820–2100
The average of (adult) decedents rose from less than 60 years to almost 80 years during the twentieth century, and the average age at the time of inheritance rose from 30 years to 50 years.
Sources and series: see piketty.pse.ens.fr/capital21c.
Concretely, one finds that the product μ × m, which by definition measures the annual rate of transmission by inheritance (or, in other words, the inheritance flow expressed as a percentage of total private wealth), clearly began to rise over the past few decades, despite the continuing decrease in the morality rate, as Figure 11.4 shows. The annual rate of transmission by inheritance, which nineteenth-century economists called the “rate of estate devolution,” was according to my sources relatively stable from the 1820s to the 1910s at around 3.3–3.5 percent, or roughly 1/30. It was also said in those days that a fortune was inherited on average once every thirty years, that is, once a generation, which is a somewhat too static view of things but partially justified by the reality of the time.10 The transmission rate decreased sharply in the period 1910–1950 and in the 1950s stood at about 2 percent, before rising steadily to above 2.5 percent in 2000–2010.
FIGURE 11.4. Inheritance flow versus mortality rate: France, 1820–2010
The annual flow of inheritance (bequests and gifts) is equal to about 2.5 percent of aggregate wealth in 2000–2010 versus 1.2 percent for the mortality rate.
Sources and series: see piketty.pse.ens.fr/capital21c.
To sum up: inheritance occurs later in aging societies, but wealth also ages, and the latter tends to compensate the former. In this sense, a society in which people die older is very different from a society in which they don’t die at all and inheritance effectively vanishes. Increased life expectancy delays important life events: people study longer, start work later, inherit later, retire later, and die later. But the relative importance of inherited wealth as opposed to earned income does not necessarily change, or at any rate changes much less than people sometimes imagine. To be sure, inheriting later in life may make choosing a profession more frequently necessary than in the past. But this is compensated by the inheritance of larger amounts or by the receipt of gifts. In any case, the difference is more one of degree than the dramatic change of civilization that is sometimes imagined.
Wealth of the Dead, Wealth of the Living
It is interesting to take a closer look at the evolution of μ, the ratio between average wealth at death and average wealth of the living, which I have presented in Figure 11.5. Note, first, that over the course of the past two centuries, from 1820 to the present, the dead have always been (on average) wealthier than the living in France: μ has always been greater than 100 percent, except in the period around World War II (1940–1950), when the ratio (without correcting for gifts made prior to death) fell to just below 100 percent. Recall that according to Modigliani’s life-cycle theory, the primary reason for amassing wealth, especially in aging societies, is to pay for retirement, so that older individuals should consume most of their savings during old age and should therefore die with little or no wealth. This is the famous “Modigliani triangle,” taught to all students of economics, according to which wealth at first increases with age as individuals accumulate savings in anticipation of retirement and then decreases. The ratio μ should therefore be equal to zero or close to it, in any case much less than 100 percent. But this theory of capital and its evolution in advanced societies, which is perfectly plausible a priori, cannot explain the observed facts—to put it mildly. Clearly, saving for retirement is only one of many reasons—and not the most important reason—why people accumulate wealth: the desire to perpetuate the family fortune has always played a central role. In practice, the various forms of annuitized wealth, which cannot be passed on to descendants, account for less than 5 percent of private wealth in France and at most 15–20 percent in the English-speaking countries, where pension funds are more developed. This is not a negligible amount, but it is not enough to alter the fundamental importance of inheritance as a motive for wealth accumulation (especially since life-cycle savings may not be a substitute for but rather a supplement to transmissible wealth).11 To be sure, it is quite difficult to say how different wealth accumulation would have been in the twentieth century in the absence of pay-as-you-go public pension systems, which guaranteed the vast majority of retirees a decent standard of living in a more reliable and equitable way than investment in financial assets, which plummeted after the war, could have done. It is possible that without such public pension systems, the overall level of wealth accumulation (measured by the capital/income ratio) would have been even greater than it is today.12 In any case, the capital/income ratio is approximately the same today as it was in the Belle Époque (when a shorter life expectancy greatly reduced the need to accumulate savings in anticipation of retirement), and annuitized wealth accounts for only a slightly larger portion of total wealth than it did a century ago.
FIGURE 11.5. The ratio between average wealth at death and average wealth of the living: France, 1820–2010
In 2000–2010, the average wealth at death is 20 percent higher than that of the living if one omits the gifts that were made before death, but more than twice as large if one re-integrates gifts.
Sources and series: see piketty.pse.ens.fr/capital21c.
Note also the importance of gifts between living individuals over the
past two centuries, as well as their spectacular rise over the past several decades. The total annual value of gifts was 30–40 percent of the annual value of inheritances from 1820 to 1870 (during which time gifts came mainly in the form of dowries, that is, gifts to the spouse at the time of marriage, often with restrictions specified in the marriage contract). Between 1870 and 1970 the value of gifts decreased slightly, stabilizing at about 20–30 percent of inheritances, before increasing strongly and steadily to 40 percent in the 1980s, 60 percent in the 1990s, and more than 80 percent in 2000–2010. Today, transmission of capital by gift is nearly as important as transmission by inheritance. Gifts account for almost half of present inheritance flows, and it is therefore essential to take them into account. Concretely, if gifts prior to death were not included, we would find that average wealth at death in 2000–2010 was just over 20 percent higher than average wealth of the living. But this is simply a reflection of the fact that the dead have already passed on nearly half of their assets. If we include gifts made prior to death, we find that the (corrected) value of μ is actually greater than 220 percent: the corrected wealth of the dead is nearly twice as great as that of the living. We are once again living in a golden age of gift giving, much more so than in the nineteenth century.
It is interesting to note that the vast majority of gifts, today as in the nineteenth century, go to children, often in the context of a real estate investment, and they are given on average about ten years before the death of the donor (a gap that has remained relatively stable over time). The growing importance of gifts since the 1970s has led to a decrease in the average age of the recipient: in 2000–2010, the average age of an heir is forty-five to fifty, while that of the recipient of a gift is thirty-five to forty, so that the difference between today and the nineteenth or early twentieth centuries is not as great as it seems from Figure 11.3.13 The most convincing explanation of this gradual and progressive increase of gift giving, which began in the 1970s, well before fiscal incentives were put in place in 1990–2000, is that parents with means gradually became aware that owing to the increase in life expectancy, there might be good reasons to share their wealth with their children at the age of thirty-five to forty rather than forty-five to fifty or even later. In any case, whatever the exact role of each of the various possible explanations, the fact is that the upsurge in gift giving, which we also find in other European countries, including Germany, is an essential ingredient in the revived importance of inherited wealth in contemporary society.
Capital in the Twenty-First Century Page 45