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Inheritance will decide living standards for millennials

"It's really tough for us," is the eternal complaint of the young, as they chase money, careers and first homes. To which older generations offer a classic response: "You don't know what tough is."

In Britain, the frantic scramble for jobs is beginning to ease slightly for school-leavers and graduates. Unemployment fell sharply in October to its lowest level since 2009, but it is unlikely to stem mounting concern that the modern economy is not generating the opportunities that were available for previous generations. Political strategists of all parties struggle to find answers to the ultimate middle-class anxiety: What if our children end up worse off than us?

The true picture of generational wealth in the U.K., revealed this week in an analysis of birth cohorts between 1940 and 1970, is both more complex and more disturbing. After large improvements in living standards since the Second World War, earnings growth is tailing off, savings rates are falling and home ownership is declining. However, at the same time, the expectation of inheritance is higher for those of the most recent generation. According to the research by the Institute of Fiscal Studies, the future living standards of those born in the U.K. in the 1970s will depend more on their ability to inherit wealth than for previous generations. What this means is that the rapid improvement of average living standards of the post-Second World War generations is coming to a halt.

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A multitude of factors lie behind this failure of general uplift, says the IFS. Many of them tally with popular prejudice but some are suprising, including the lack of household income growth over the past decade. While the 1970s cohort started working life with much higher incomes than the post-war baby boom generation that preceeded them, their incomes have failed to increase at the same rate as their aspirations, or even sufficiently to meet living standards, as the demands of family life put pressure on budgets. Those born in the seventies are not putting money aside; the 1970s cohort are spending more and saving less than the baby-boomers.

Meanwhile, differences in income have widened over the decades, exacerbating inequalities later in life. Those are likely to increase for younger generations for two reasons: changes in pensions, and house prices. If you were born in the 1970s or later your pension will match a smaller proportion of your salaried income due to the decline of defined benefit private pension schemes. At the same time, your position on the "housing ladder" will be weaker; according to the IFS, home ownership rates for the 1970s at age 35 were 66 per cent compared with 71 per cent for baby boomers. But while the older generation's rate of ownership peaked at 80 per cent, it has simply stopped rising for the younger cohort.

What this means, for most young people in Britain, is that living standards in middle age and at retirement will have everything to do with inheritance and the wealth of parents. With static incomes, meagre savings and inadequate pensions, the prospect of an easy retirement depends on a wealth transfer from a previous generation. The good news is that more people expect to inherit. Among those born in the late 1970s, 70 per cent hoped to receive an inheritance compared to less than a third of those born immediately after the Second World War. The worry concerns the huge inequality of inheritance among those born in the 1970s, with more and larger inheritances concentrated among the wealthy and within the same families.

These trends appear to show that the expansion of opportunity after 1945 has run its course; in the new century, wealth is expanding among the better off and opportunity for the many is diminishing.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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