What are the implications of the coming historic wealth transfer?

Over the ten years between 2024 and 2033, younger generations are expected to receive around €300 billion in housing wealth through gifts and inheritances. That is according to a BNR article based on an analysis by financial advisory firm Van Bruggen. What economic effects can be expected from this historic wealth transfer? We discuss it with Maarten Lafeber, Senior Strategist at APG.

Will the transfer stop at €300 billion, or will it continue to grow after 2033?
"The wealth transfer will continue well beyond 2033. Statistics Netherlands (CBS) figures show that households with a primary earner between the ages of 65 and 95 currently hold more than €1 trillion in wealth combined. We are therefore looking at a massive transfer of wealth from the baby boomer generation to the generation below it, roughly people aged 45 to 65.

This is not a uniquely Dutch phenomenon, by the way. In the United States, people even talk about the Great Wealth Transfer. The explanation is similar: baby boomers have benefited from favorable economic conditions, particularly the strong rise in house prices. According to CBS, around two-thirds of the wealth held by this group of households in the Netherlands consists of homeownership."

What are younger generations likely to do with that inherited wealth?
"There are broadly three possibilities: consume more, save, or invest. Intuitively, you might think people will spend the extra money and that this will stimulate the economy. But I think it is important to consider who typically receives the money. For people between the ages of 45 and 65, the major expenses in life, such as paying for children's education, starting a family, or buying a first home, are usually already behind them.

Of course, some people may buy an electric car sooner or make their homes more sustainable, but I do not expect this wealth transfer to trigger a major wave of consumption. The economic literature supports that view. People who expect to receive an inheritance at some point often already take that future wealth into account when making spending decisions. Economists refer to this as consumption smoothing.

Research from the United States shows a similar pattern. Studies have looked at what happens when the last surviving parent passes away. The investment income of heirs subsequently increases, while their labor income declines slightly. That suggests people mainly invest the money and, in some cases, choose to work a little less.

All things considered, I therefore expect inheritances to lead primarily to higher levels of saving and investing. I do not see this as a major new driver of economic growth."

What do you see as the most important societal implications?
"At the macro level, you could argue that this wealth transfer reduces differences between generations. Wealthy baby boomers are passing part of their wealth on to younger generations. Within those younger generations, however, differences are likely to increase. It makes an enormous difference whether your parents own their home or rent it. Based on CBS data, researchers have calculated that parents who own a home pass on an average of around €400,000, whereas the amount is only a few tens of thousands of euros if the parents rent.

There is another factor as well: the amount of wealth being passed on is increasing, while the number of heirs is declining. In 2011, there were on average around three heirs per estate. Today, that figure is roughly 2.3. As a result, wealth is being divided among fewer people, which further increases the amount received by individual heirs.

All of this has implications for social mobility and labor mobility. Imagine you are a police officer in Arnhem and would like to work in Amsterdam. That becomes increasingly difficult if you have not received wealth from your family. The housing market then literally limits your ability to relocate. This has a direct impact on opportunity.

Wealthy families also tend to succeed in preserving their wealth across generations. That raises the question of whether we want to live in a society where opportunities are determined primarily by income or by family wealth."

To what extent can inheritance tax help mitigate these effects?
"In theory, inheritance tax can be a tool for somewhat mitigating the effects of rising wealth inequality, although it is politically very sensitive. The debate is often framed around the idea that governments should keep their hands off inherited wealth. At the same time, you could argue that an inheritance is money the recipient did not earn themselves.

From an economic perspective, it is also difficult to justify taxing labor more heavily than inherited wealth. Labor generates economic activity, and taxes on labor can discourage that activity, whereas an inheritance largely represents unearned income. That is why I do not find the argument that inherited wealth has already been taxed particularly convincing. Salaries are taxed as well, and when you spend that income you pay sales taxes or VAT again. The same euro being taxed at different moments is very common within our tax system.

What I find especially interesting about this topic is how large a role chance has come to play in our society. This applies not only to homeownership, but also to financial wealth that can continue to grow through investments. As a result, existing differences can reinforce themselves. As economist Thomas Piketty argues, when the return on capital exceeds economic growth, wealth inequality increases. Those who already have wealth can therefore continue to accumulate more.

In the pension system, that element of chance plays a much smaller role. Everyone in paid employment builds up a pension, contributes premiums, and benefits from the same system. While differences in homeownership and private wealth are growing, the pension system remains a relatively level playing field."