Private Wealth Across European Countries: The Role of Income, Inheritance and the Welfare State

Using micro data from the Household Finance and Consumption Survey (HFCS), this study examines the relationship between income, inheritance, and welfare state policies and net wealth of households. About one third of the households in the 13 European countries we study report having received an inheritance, and these households have considerably higher net wealth than those which did not inherit. Regression analyses show that on average, having received an inheritance lifts a household by about 14 net wealth percentiles. At the same time, each additional percentile in the income distribution is associated with about 0.4 net wealth percentiles. These results are consistent across countries.

 In multilevel cross country regressions, we find that the degree of welfare state activity across countries is negatively correlated with net wealth in private households. These findings suggest that social services provided by the state are substitutes for private wealth accumulation and, in contrast to other academic findings partly explain observed differences in levels of household net wealth across European countries. In particular, the effect of substitution decreases with wealth, as it is mostly the less wealthy households which increase consumption when the state provides a strong safety net. This implies that an increase in welfare state activity might go along with an increase - not decrease - of observed wealth inequality. Our policy conclusion is that isolated normative judgments of wealth inequality are misleading.