The issue of inheritance and wealth transfer in Australia is a hot topic, and it's time to shine a light on this controversial subject.
Imagine you're Kim Day, eagerly awaiting the news of your mother-in-law's passing, not out of grief but with anticipation for the luxurious inheritance that awaits. This scenario, straight out of the beloved comedy series 'Kath and Kim', might seem comical, but it reflects a growing reality for many Australians.
Fast forward two decades, and the joke has lost its humor. Skyrocketing house prices have turned inheritance into a lifeline for younger generations, a potential ticket to home ownership or a means to pay off debts before retirement. For some, it's a pathway to building their own wealth empire.
Over the next 20 years, an astonishing $5.4 trillion is expected to change hands in Australia. This massive wealth transfer from baby boomers, the richest generation ever, to their beneficiaries poses a significant challenge to the country's social and economic fabric. Economists warn that it threatens social mobility, economic equality, and even faith in democracy.
Guy Debelle, a former deputy governor of the Reserve Bank of Australia, calls this intergenerational wealth transfer one of the biggest challenges Australia will face in the near future. With the second-highest median wealth in the world and nearly 2 million millionaires, Australia's wealth is largely tied up in property.
"It matters whether you have a parent with an expensive house or not," Debelle says. If you're renting and your parents are too, you miss out on this wealth transfer.
This wealth transfer is happening in various forms, including inheritances and 'inter vivo gifts' from living parents or grandparents, often referred to as 'the bank of mum and dad'.
Dr Melek Cigdem-Bayram, an applied economist at the University of Melbourne, highlights that while these gifts are increasing, they're also becoming more unequal. About half are worth $1,000 or less, but the top quarter averages over $40,000, a sum that can significantly impact a person's future wealth.
Inheritances, she says, will drive the real shift in wealth and equality, especially as baby boomers age. For some, it means paying off their family home; for others, it's a chance to invest, buy new properties, and accumulate more wealth down the family line.
"That's when we'll see the full implications on wealth and equality," she predicts.
Dr Ken Henry, a former head of the federal Treasury, agrees that this wealth transfer will be very visible, noting that wealth has already become increasingly concentrated among the top earners.
A study by the University of New South Wales and the Australian Council of Social Service found that the top 10% of households under 35 hold almost half the wealth of that age cohort, with the fastest growth in wealth. Bruce Bradbury, an associate professor at UNSW's Social Policy Research Centre, says this growing gap within younger generations is an issue that needs more attention.
"It's more complicated than the gaps between young and old," he adds.
When Ken Henry was growing up, all the houses around him were owned by the Housing Commission. There were five children in his family, and his father, a timber worker, earned the lowest award rate of pay. Despite these challenges, Henry's family believed in the power of education to get ahead and afford a good life.
Henry's story reflects a promise of social mobility that many Australians have held onto. But for a young Ken Henry today, growing up in a similar community, the prospects of building wealth might be vastly different.
"Much, much, much different," Henry says.
Research suggests that Australia is one of the most mobile countries in terms of income, just behind Switzerland. This means there's a good chance you'll earn more than your parents did. However, wealth levels persist between generations, especially among the top 10%, due to wealthier parents investing more in their children's education and other benefits.
With trillions set to transfer between generations by the middle of this century, it's likely that wealth persistence will become more pronounced, impacting future generations' social mobility.
Dr Cigdem-Bayram's research shows a concerning trend: the wealth gap between middle-wealth and high-wealth households is widening, while the gap between middle and poor is narrowing. She warns that this 'middle' is starting to hollow out, impacting home ownership rates and increasing reliance on parental support.
"All you needed was to work hard, and that was doable for everyone. And we're seeing that that's not the case anymore," she says.
This inequality can snowball, limiting social mobility for those starting with low wealth. It changes the fabric of society, leading to declining social cohesion and trust, and concentrating political influence among the wealthiest and most powerful.
Professor Peter Siminski, an applied microeconomist at the University of Technology Sydney, cautions against being overly pessimistic, noting that Australia is still fairly equal compared to many countries. However, he acknowledges that the direction is concerning.
"The larger inheritances are, the more compromised equality of opportunity becomes," he warns.
Ken Henry has long argued that the idea of an egalitarian society in Australia is a myth. He believes that the intergenerational wealth transfer will challenge our belief in a fair go and social cohesion.
"It's going to really test the social compact in Australia," he says.
The impact of this inequality could be significant, eroding faith in government and the democratic system. It's a scenario we've seen play out in other parts of the world, where growing inequality has led to the election of leaders with autocratic tendencies.
Henry hopes that people will "wake up" and swing the pendulum back towards equality. He challenges us to focus on providing a fair go to all, ensuring that everyone has the ability to access a good life.
"I think it's an incredibly important challenge," he concludes.
As we reflect on the journey of Kath and Kim, from the modest house sold for $190,000 in 1997 to its sale for nearly $1.5 million in 2016, we see how the Australian dream of home ownership has evolved. Unless, of course, you have some help along the way.
