Inheritance is Key to the Concentration of Wealth

A paper by Pirmin Fessler and Martin Schürz, both OeNB, was among the 2015 winners of the renowned Progressive Economy award presented at the Annual Progressive Economy Forum held at the European Parliament. The winning paper, selected by a high-level Scientific Board including Jospeph Stiglitz, James K. Galbraith, Lucrezia Reichlin and Jean-Paul Fitoussi, is entitled “Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State.“

The key message of the paper is that, across all euro area countries, inheritance plays a decisive role in defining the relative position of households in the distribution of wealth. In Austria, for instance, receiving an inheritance is, on average, tantamount to receiving a rise in paid income that would catapult a household ahead of more than half of all households in the distribution of income. This neatly illustrates the different potential of saving and inheriting for influencing households’ position in the distribution of wealth.

Graph - Functions of Wealth

Another key finding of the paper is the importance of the welfare state for the distribution of wealth. An effective and well developed welfare state goes hand in hand with lower levels of private wealth. The measured inequality of wealth is higher in countries with a relatively more developed welfare state. Why is this the case? The welfare state generates a safety net by providing income for retirement or emergency assistance. This safety net is much more relevant for less wealthy households than for more affluent households, as the latter benefit from both the services of the welfare state and their private stock of wealth. Less wealthy households, by contrast, have no safety net other than the welfare state, which moreover enables them to increase their consumption expenditure somewhat. Yet for more affluent households the welfare state is an asset protection tool rather than a safety net.

Fessler, P. and Schürz, M. (2015): Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State. ECB Working Paper Series.