The year Millennials and Gen Z will finally get rich

A whopping $3.5 trillion is set to land in the bank accounts of Gen Y and Gen Z by this year - but it won’t equal wealth for all.

In recent years there have been all manner of headlines on the coming wealth transfer from Australians passing away and bequeathing their assets to their children and other beneficiaries. Headlines such as ‘Get ready for the largest wealth transfer in history’ and ‘Australia braces for unprecedented generational wealth transfer’ have been common.

But behind the headlines, what does it mean for the economy and the various generations who are all set to benefit in aggregate on a long enough timeline?

One of the reasons that high housing prices are justified by some commentators is that younger generations such as Gen Y and Gen Z will eventually be net beneficiaries from the increased wealth held by their parents. Over a long enough period of time this is true in aggregate, but it comes with more than a few ifs and buts.

A gargantuan sized pie but only a small slice for most

According to a research paper by the federal government’s Productivity Commission released in late 2021, an estimated $3.5 trillion worth of wealth will change hands by the year 2050. While this is an enormous sum of money in aggregate, the report also found that the median inheritance was $45,000, and that the median recipient in 2018 was a little over 50 years of age.

Based on this, the eldest members of Gen Y won’t reach the median age of being bequeathed an inheritance until 2030. For someone from the middle of Gen Y, it would be 2038 and for the eldest members of Gen Z, it would be 2047.

When putting the median inheritance into perspective with the additional cost of housing experienced by Gen Y and Gen Z relative to their predecessors, a $45,000 median inheritance doesn’t make much of a dent. According to an analysis by CoreLogic, in the late 1990s, a household saving 15 per cent of its gross income could save a 20 per cent house deposit in around five and a half years.

Today it takes around 10.5 years to achieve that same goal. It’s worth noting that this metric is based on median household income, so it incorporates the rise of female workforce participation.

Based on an Australia wide measure, saving 15 per cent of today’s median gross household for an additional five years comes to over $72,000.

For the median member of Gen Y and Gen Z, when they do eventually inherit the wealth of their predecessors, it will likely be a fraction of the additional housing cost they face relative to their parents based on the deposit cost alone.

But this is not to say that these generations won’t inherit an enormous sum of money in aggregate, they certainly will, but it will heavily flow from the wealthy to the wealthy. A 2019 Grattan Institute report had this to say on the subject: “On current trends, much of accumulated wealth in the hands of Baby Boomers will be handed down to the wealthiest Generation Xers, significantly exacerbating wealth inequality, and inequality of opportunity.

“Inheritances reinforce the advantages of having rich parents, such as better schooling, connections, and a greater ability to take risks because of a parental safety net.”

What matters in the here and now

While the slice of the wealth transfer pie flowing to the median Australian is perhaps significantly smaller than the headline of trillions of dollars of wealth being transferred might suggest, it is ultimately the aggregate figure that helps to power the economy.

In 2018, the total outflow of inheritances was $107 billion, up from $48 billion in 2002. Given that the total personal income for households stemming from employment, superannuation and owning a business sat at $983 billion during 2019-20, inheritances could be a significant driver of household consumption.

A 2019 Grattan Institute report found that in 2016, over 80 per cent of inheritances by dollar value flowed to recipients over the age of 50, not including those where a spouse is a beneficiary. With over 60 per cent flowing to people over the age of 55. While these windfalls general prompt additional consumption, from a more comfortable lifestyle to holidays with the grandkids, Grattan Institute data shows that for households over 60, non-housing financial wealth continues to grow over time.

Despite the expectation in some quarters of retirees drawing down savings or superannuation, government data found in net terms significantly fewer than half of aged pensioners drew down their savings.

But all of this data was collected prior to the pandemic. Today, the largest growth in spending by age demographic is among the 55 to 64 and the 65 and over age group. Meanwhile, for the 18 to 24 and 25 to 34 age demographics, both savings and spending are falling in nominal terms.

This raises an interesting and potentially challenging series of questions. Given the changes in consumer psychology that have occurred as a result of the pandemic, are the older demographics who are the recipient of 80 per cent of inheritances by dollar value now more likely to spend a greater proportion of that windfall than they were previously?

If the answer is yes, in the short term there are implications for the fight against inflation, as the RBA continues to squeeze the budgets of mortgage holders, yet has a minimal or even positive impact on the finances of older households. But in the longer term, this raises the possibility of the nation’s economy becoming even more reliant on the consumption of older demographics, as the real spending power of younger generations is eroded by inflation and relatively anaemic levels of wages growth.