Inheritance erosion: Will shrinking legacies impoverish future generations?

Last Updated on Thursday, 20 July, 2023 at 1:08 pm by Andre Camilleri

Various international studies suggest that younger generations are poorer than their parents.  Moneywise (the US equivalent to ĠEMMA), quoting an analysis by the Federal Reserve Bank of St. Louis (2022) posits that millennials (those between the age of 26 and 40) are likely to have less wealth than their parents did at the same age.  A recent report by the National Bureau of Economic Research, also in the US, titled ‘The wealth of generations, with special attention to millennials’ concludes that whilst all generations in the US lost wealth in the financial crisis of 2008, the longer-term trends show that older age groups have generated wealth levels over time, but younger age groups have generated lower wealth levels.  It adds that Millennials, in particular, have less wealth than any similarly aged generation since 2007.  Although they possess a few major advantages over previous generations, Millennials face several “headwinds” that will reduce wealth accumulation.  One of the important ones is intergeneration wealth transfer, the bequeathing of wealth from one generation to another.

It is pertinent to apply this discussion to our context.  Are we, the late baby boomers and Generation X, poorer than our parents?  Will our children, Gen Z, be poorer than us?  Will my generation’s retirement period be cushioned by the wealth we inherit from our parents?  Will we inherit any wealth from our parents, given that as they live longer yet frailer lives, they use, as they rightly should, their wealth to receive the level of care and support they require?

Discussions on quality of life in retirement have always centred on how this will be financed through pension income against wealth accrued over a lifetime.  The exception is property.  We know from the Census (the last one published was 2011) that (a) over 76.4% of persons in Malta own (freehold and ground rent) their home; and (b) on average, 75% of these homes were in good state of repairs.  We know from the Central Bank of Malta’s assessment of household wealth (2023) that real assets – property mainly – constituted 89.4 of a household’s wealth – with the median value of the main residence standing at €300,000.  The 2011 Census also showed that 13.3% of the housing stock available at the time, that is, 22,404 units, were for household occasional use – either as seasonal homes or purchase for rental – with a median value of €180,000 (CBM:2023).  It is this understanding that pension reforms since 2004 have all called for the introduction of home equity release schemes in Malta:  to allow retirees to access wealth accumulated in such property as income during retirement.

Pre-COVID-19, MFSA issued a regulatory framework to launch equity-release financial products locally.  To the best of my knowledge, financial services operators have launched no equity scheme products – which does not surprise me as the regulatory framework is unnecessarily complex.  Nevertheless, we know that informal and unregulated equity release has been happening since private providers in the elderly care home industry started operating in the 1990s.  Many elderly couples exchange their homes for lifetime residency in such privately operated residency.

What is less known is the extent of wealth bequeathed from one generation to the next and how this may influence the recipient’s outlook on their retirement – which should influence the positioning of pension reform measures.  Pension reform working groups sought to study this matter but faced data limitations. 

The afore mentions CBM study on household wealth is the fourth of its kind.  The third such study in the series (CBM:2019), whilst referring that the survey instrument applied for the study collects information on intergenerational transfers, the report itself did not present its findings.  The last report (CBM:2023), however, does.  It shows that:

  • 2020 approximately 25% of households claimed to receive a gift or inheritance.
  • 82% received one gift throughout their lifetime.
  • Most gifts were in cash – 48%; property – 45%; land – 5%; and valuables – 1%.
  • 6.8% of households that owned a house in 2020 reported that they inherited their main residence.
  • 7.7% of households received some form of financial support specifically to purchase their main residence.

The findings of the CBM research show that households benefit from intergenerational transfers throughout their lifecycle through gifts and not necessarily through inheritance only.

Future strategic pension reviews should delve deeply into intergenerational wealth transfer.  I hypothesise that the average person of my generation is likely to have their financial wealth somewhat increased as they are likely to inherit assets – property or cash primarily – from their parents.  This inheritance, together with our accrued financial wealth, will provide us with a better quality of life.  I posit, however, that this is unlikely to be the case between mine and future generations.  If my hypothesis is correct, this means that Malta will follow similar trends elsewhere, where future generations will be poorer than current generations.  In terms of pension reform measures, the issues of pension adequacy become more acute as the gap between income generated during employment and pension gap will not be bridged, at least partly, through inheritance.

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