The Impact of Inheritances in the Portuguese Wealth Distribution
Non-financial assets represent 88% of the total household assets, with particular emphasis on the household main residence (HMR). It accounts for more than half of that type of assets, showing little variation along the net wealth percentiles. However, the relative importance of the HMR varies between 75.6% in the less wealthy households to 29.6% in the 10th decile. It is ‘other real estate’ ownership by the latter (41.6%) that explains the apparent gap. Significantly, 71.5% of the households own their HMR, but only 16.9% of the less wealthy do so compared to more than 90% of households in the 5th-10th deciles.
The composition of the Portuguese households’ financial portfolio reveals a strong preference for low risk assets: 12.5% of their financial assets are held in current accounts and 58.1% in savings accounts. Again, the main differences are recorded in the 10th decile, where current accounts represent only 7.2%, savings accounts are still high at 55.5%, but shares, bonds and investments funds holdings rise to 20.7% of the households’ financial portfolio.
Finally, household indebtness is dominated by HMR mortgages (80.3% of total debt). Together with the profound economic crisis at the time of the survey, this suggests negative equity as a plausible (partial) explanation for negative net wealth: 4.4% of households have either negative (2.6% of total) or zero (1.8%) net wealth leading to a (negative) mean of its 1st decile (-2,584€; median of 50€).These proportions are relatively low, but not unique, as discussed in Bogliacini et al. (2014), who find that measurement error is an important factor. Nevertheless, it affects the calculation of inequality measures, as they discuss. Net wealth distribution is highly unequal: P90/P10 ratio of 286.92 and P80/P20 of 21.40, versus 7.97 and 3.94, respectively, for gross income (164.01 and 16.07 for gross wealth).
The objective of this paper is to analyse wealth inequality focusing on the role played by inheritance and inter vivos gifts. This renewed focus on inherited wealth is linked to the interest generated by Piketty (2014), but its relevance can be judged by the high proportion of Portuguese households, 28.8% of the total, that report having received intergenerational transfers (both inheritances and inter vivos transfers). However, this proportion varies between 6.0% of the households in the 1st decile of net wealth (or 7.1% if the gross wealth concept is used) and 47.0% in the 10th (47.1%). Thus, it is important to differentiate amongst types of assets that were bequeathed. Just over 9% of the households inhabit an inherited HMR, whereas 23.3% of the households have received other (non-HMR) types of intergenerational transfers. Their distribution per net wealth deciles reveals a steadily increasing importance: only 4% of the households in the 1st decile of net wealth received non-HMR transfers, but this rises to 43.8% of the households in the 10th decile.
This paper will investigate intergenerational transfers and their contribution to household wealth and its (unequal) distribution in detail, including their amount and different types - HMR, other real estate, businesses, cash, financial assets, other valuables such as jewellery and works of art. The data used is taken from the 2010 HFCS survey, the first Portuguese survey that covers this theme. A further data limitation to the scope of the analysis is imposed by the non-existence of inheritance tax in Portugal (abolished in 2003). Initial results confirm the expected link between inheritances and higher levels of wealth, particularly for financial assets. Other important issues that are being taken into account are the capitalisation of intergenerational transfers, as discussed in detail in Cannari and D’Alessio (2008), for example, and whether the HMR should be treated differently, as proposed in Atkinson (2014). The inequality of inherited wealth is calculated using the standard inequality measures, but whether it increases or decreases wealth inequality, as discussed in Wolff and Gittleman (2011) and Karagiannaki (2011), for example, will be discussed.
The current age of the head of the household, the date of bequeaths, plus the head’s relationship with the bequeather, are also taken into account, testing the standard assumption that it is mostly the aging households that inherit and from direct relatives. This provides a promising starting point to another of the aims of this paper: the analysis of the impact of intergenerational transfers on social mobility. The analysis of the above information on inheritances together with their types and amounts can be linked with the information available in the survey on the type of occupation of the head of household and his/her parents, and the head’s attained level of education. This analysis will provide a better understanding of Portuguese social mobility in the beginning of the 21st century.
In a country where resources are unequally distributed, social mobility is limited and redistributive policies lack efficiency, a detailed analysis of wealth and its distribution is instrumental in understanding the generating process of inequality and its propagation through the Portuguese society. Unlike the recurrently studied income distribution, wealth distribution has not been analysed in detail, particularly its top end. The information available in the HFCS 2010 will enable this analysis and shed light on other sources of household income not covered in such detail in other household surveys. More specifically, the focus on wealth transfers through inheritances and inter vivos gifts will provide a deeper knowledge of the intergenerational transfers themselves, but will also lead to a more informed discussion on the proposal of more equitable and efficient redistributive policies in Portugal.