Capital in the Twenty-First Century (68 page)

Let us now forget the effects of variations in cohort size: though important, they
are essentially transitory, unless we imagine that in the long run the population
of the planet grows infinitely large or infinitely small. Instead, I will adopt the
very long-run perspective and assume that cohort size is stable. How does increased
life expectancy really affect the importance of inherited wealth? To be sure, a longer
life expectancy translates into a structural decrease in the mortality rate. In France,
where the average life expectancy in the twenty-first century will be eight to eighty-five
years, the adult mortality rate will stabilize at less than 1.5 percent a year, compared
with 2.2 percent in the nineteenth century, when the life expectancy was just over
sixty. The increase in the average age of death inevitably gives rise to a similar
increase in the average age of heirs at the moment of inheritance. In the nineteenth
century, the average age of inheritance was just thirty; in the twenty-first century
it will be somewhere around fifty. As
Figure 11.3
shows, the difference between the average age of death and the average age of inheritance
has always been around thirty years, for the simple reason that the average age of
childbirth (often referred to as “generational duration”) has been relatively stable
at around thirty over the long run (although there has been a slight increase in the
early twenty-first century).

But does the fact that people die later and inherit later imply that inherited wealth
is losing its importance? Not necessarily, in part because the growing importance
of gifts between living individuals has partly compensated for this aging effect,
and in part because it may be that people are inheriting later but receiving larger
amounts, since wealth tends to age in an aging society. In other words, the downward
trend in the mortality rate—ineluctable in the very long run—can be compensated by
a similar structural increase in the relative wealth of older people, so that the
product
μ
×
m
remains unchanged or in any case falls much more slowly than some have believed.
This is precisely what happened in France: the ratio
μ
of average wealth at death to average wealth of the living rose sharply after 1950–1960,
and this gradual aging of wealth explains much of the increased importance of inherited
wealth in recent decades.

FIGURE 11.3.
   Average age of decedents and inheritors: France, 1820–2100

The average of (adult) decedents rose from less than 60 years to almost 80 years during
the twentieth century, and the average age at the time of inheritance rose from 30
years to 50 years.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

Concretely, one finds that the product
μ
×
m
, which by definition measures the annual rate of transmission by inheritance (or,
in other words, the inheritance flow expressed as a percentage of total private wealth),
clearly began to rise over the past few decades, despite the continuing decrease in
the morality rate, as
Figure 11.4
shows. The annual rate of transmission by inheritance, which nineteenth-century economists
called the “rate of estate devolution,” was according to my sources relatively stable
from the 1820s to the 1910s at around 3.3–3.5 percent, or roughly 1/30. It was also
said in those days that a fortune was inherited on average once every thirty years,
that is, once a generation, which is a somewhat too static view of things but partially
justified by the reality of the time.
¹⁰
The transmission rate decreased sharply in the period 1910–1950 and in the 1950s
stood at about 2 percent, before rising steadily to above 2.5 percent in 2000–2010.

FIGURE 11.4.
   Inheritance flow versus mortality rate: France, 1820–2010

The annual flow of inheritance (bequests and gifts) is equal to about 2.5 percent
of aggregate wealth in 2000–2010 versus 1.2 percent for the mortality rate.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

To sum up: inheritance occurs later in aging societies, but wealth also ages, and
the latter tends to compensate the former. In this sense, a society in which people
die older is very different from a society in which they don’t die at all and inheritance
effectively vanishes. Increased life expectancy delays important life events: people
study longer, start work later, inherit later, retire later, and die later. But the
relative importance of inherited wealth as opposed to earned income does not necessarily
change, or at any rate changes much less than people sometimes imagine. To be sure,
inheriting later in life may make choosing a profession more frequently necessary
than in the past. But this is compensated by the inheritance of larger amounts or
by the receipt of gifts. In any case, the difference is more one of degree than the
dramatic change of civilization that is sometimes imagined.

It is interesting to take a closer look at the evolution of
μ
, the ratio between average wealth at death and average wealth of the living, which
I have presented in
Figure 11.5
. Note, first, that over the course of the past two centuries, from 1820 to the present,
the dead have always been (on average) wealthier than the living in France:
μ
has always been greater than 100 percent, except in the period around World War II
(1940–1950), when the ratio (without correcting for gifts made prior to death) fell
to just below 100 percent. Recall that according to Modigliani’s life-cycle theory,
the primary reason for amassing wealth, especially in aging societies, is to pay for
retirement, so that older individuals should consume most of their savings during
old age and should therefore die with little or no wealth. This is the famous “Modigliani
triangle,” taught to all students of economics, according to which wealth at first
increases with age as individuals accumulate savings in anticipation of retirement
and then decreases. The ratio
μ
should therefore be equal to zero or close to it, in any case much less than 100
percent. But this theory of capital and its evolution in advanced societies, which
is perfectly plausible a priori, cannot explain the observed facts—to put it mildly.
Clearly, saving for retirement is only one of many reasons—and not the most important
reason—why people accumulate wealth: the desire to perpetuate the family fortune has
always played a central role. In practice, the various forms of annuitized wealth,
which cannot be passed on to descendants, account for less than 5 percent of private
wealth in France and at most 15–20 percent in the English-speaking countries, where
pension funds are more developed. This is not a negligible amount, but it is not enough
to alter the fundamental importance of inheritance as a motive for wealth accumulation
(especially since life-cycle savings may not be a substitute for but rather a supplement
to transmissible wealth).
¹¹
To be sure, it is quite difficult to say how different wealth accumulation would
have been in the twentieth century in the absence of pay-as-you-go public pension
systems, which guaranteed the vast majority of retirees a decent standard of living
in a more reliable and equitable way than investment in financial assets, which plummeted
after the war, could have done. It is possible that without such public pension systems,
the overall level of wealth accumulation (measured by the capital/income ratio) would
have been even greater than it is today.
¹²
In any case, the capital/income ratio is approximately the same today as it was in
the Belle Époque (when a shorter life expectancy greatly reduced the need to accumulate
savings in anticipation of retirement), and annuitized wealth accounts for only a
slightly larger portion of total wealth than it did a century ago.

FIGURE 11.5.
   The ratio between average wealth at death and average wealth of the living: France,
1820–2010

In 2000–2010, the average wealth at death is 20 percent higher than that of the living
if one omits the gifts that were made before death, but more than twice as large if
one re-integrates gifts.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

Note also the importance of gifts between living individuals over the past two centuries,
as well as their spectacular rise over the past several decades. The total annual
value of gifts was 30–40 percent of the annual value of inheritances from 1820 to
1870 (during which time gifts came mainly in the form of dowries, that is, gifts to
the spouse at the time of marriage, often with restrictions specified in the marriage
contract). Between 1870 and 1970 the value of gifts decreased slightly, stabilizing
at about 20–30 percent of inheritances, before increasing strongly and steadily to
40 percent in the 1980s, 60 percent in the 1990s, and more than 80 percent in 2000–2010.
Today, transmission of capital by gift is nearly as important as transmission by inheritance.
Gifts account for almost half of present inheritance flows, and it is therefore essential
to take them into account. Concretely, if gifts prior to death were not included,
we would find that average wealth at death in 2000–2010 was just over 20 percent higher
than average wealth of the living. But this is simply a reflection of the fact that
the dead have already passed on nearly half of their assets. If we include gifts made
prior to death, we find that the (corrected) value of
μ
is actually greater than 220 percent: the corrected wealth of the dead is nearly
twice as great as that of the living. We are once again living in a golden age of
gift giving, much more so than in the nineteenth century.

It is interesting to note that the vast majority of gifts, today as in the nineteenth
century, go to children, often in the context of a real estate investment, and they
are given on average about ten years before the death of the donor (a gap that has
remained relatively stable over time). The growing importance of gifts since the 1970s
has led to a decrease in the average age of the recipient: in 2000–2010, the average
age of an heir is forty-five to fifty, while that of the recipient of a gift is thirty-five
to forty, so that the difference between today and the nineteenth or early twentieth
centuries is not as great as it seems from
Figure 11.3
.
¹³
The most convincing explanation of this gradual and progressive increase of gift
giving, which began in the 1970s, well before fiscal incentives were put in place
in 1990–2000, is that parents with means gradually became aware that owing to the
increase in life expectancy, there might be good reasons to share their wealth with
their children at the age of thirty-five to forty rather than forty-five to fifty
or even later. In any case, whatever the exact role of each of the various possible
explanations, the fact is that the upsurge in gift giving, which we also find in other
European countries, including Germany, is an essential ingredient in the revived importance
of inherited wealth in contemporary society.