Thomas Piketty’s book Capital in the Twenty-First Century (Piketty 2014) has received enormous attention since its publication. A fundamental question raised is whether a person’s lifetime income is the result of his or her own efforts or, alternatively, founded on inheritance. Even for those who believe that inequality does not matter as long as it is based on one’s own effort, the potential of a return to high levels of inequality based on inheritance is a totally different matter. To many people, such a development would be much less acceptable than increased inequality per se.
Our knowledge of the size of actual inheritance flows in relation to incomes over the long run is, however, limited. The question has only recently been systematically studied by Piketty (2011) for France, and by Atkinson (2013) for the UK. Even if this only gives two cases, combining these studies with the recent work by Piketty and Zucman (2014b) on long-run aggregate private wealth-income ratios (an important component in determining inheritance flows) suggests a fundamental contrast between the European countries and the US. The key historical difference found is that between aristocratic France and England on the one hand, and the American ‘land of equal opportunity’, on the other hand.
This is mainly based on differences in the capital-income ratio, where a lack of historical accumulation in the US explains why past wealth did not dominate new incomes in the US in the same way as it did in Europe. Differences in shocks – in particular wealth destruction by wars and policies related to them – as well as differences in the growth rate of the economy, account for the different developments over much of the 20th century. In recent decades, however, capital-income ratios seem to be rising everywhere, and with them the potential importance of inherited wealth. Piketty (2011) shows that this is the case at least in France, where the annual flow of inheritance as a share of national income has been steadily increasing since the 1950s and is likely to reach levels comparable to those observed in 19th century by 2050.
New research on Swedish inheritance flows
Our recent paper adds to our knowledge about long-run inheritance flows by studying the case of Sweden over the period 1810–2010 (Ohlsson et al. 2014). The results in our paper suggest that the ‘Old Europe vs. America’ dichotomy may not be so straightforward, and also that the recent increase in the capital-income ratio does not automatically translate into increasing private inheritance flows.
Comparing the results for Sweden to those for France and the UK, there are notable differences as well as similarities. The largest difference lies in the overall importance of inheritance flows in relation to income in the 19th century. Whereas the inheritance flow in relation to national income was above 20% in France until around 1900 (and at that time also about 20% in the UK), the corresponding figure in our main series for Sweden is only half of that – around 11% – throughout the 19th century. The biggest contributor to this fact comes from the wealth-income ratio, which in France and the UK was 600–700%, while in Sweden it moved between 300% and 500% up until the early 20th century. This makes the Swedish wealth-income ratio look much more like the American one at the time.
The underlying reasons are a little different though. Sweden was not a frontier country with a short history of accumulation in the same sense as the US, but rather a country with a long history of having a landed elite and high wealth concentration (even though privately owned small farms were also relatively common). But, more importantly it seems, Sweden was a poor country where the savings rate according to our estimates was very low in the 19th century (and, even though it increased, continued to be so in the beginning of the 20th century).
As a consequence, Sweden simply did not accumulate the same levels of wealth as in France and the UK before industrialisation. This relative lack of domestic wealth meant that when Swedish industrialisation took off in the second half of the 19th century it was largely financed by borrowing abroad. Comparing ratios of net foreign assets to total wealth, we see that these figures for France and the UK are about 15–30% in the late 1800s, while the corresponding Swedish figure is minus 10% by 1900.
Figure 1. Inheritance flows as a share of national income (%)
Starting in the beginning of the 20th century, rapid Swedish economic growth and relatively low savings rates lowered the wealth-income ratio to about 250% in 1950, continuing to a historical low of below 200% in the 1970s. In recent decades, however, the capital-income ratio in Sweden has increased rapidly – as in France, the UK, and many other countries. However, this increase has not (at least not so far) resulted in a corresponding increase in inheritance flows in Sweden. Partly this is due to the retirement savings pattern, which shows that Swedes above the age of 65 have lower private wealth and also seem to be running down their wealth faster than their counterparts in France and the UK do. But it may also be the case that much of the new wealth is being accumulated by those who are still to pass it on. In addition, there are reasons to believe that some private Swedish wealth is also not fully visible in the tax-based statistics, although available estimates suggest that the order of magnitude of offshore wealth is not such that it would explain the differences.
Our paper also attempts to estimate the share of inherited wealth in the aggregate stock of private wealth in Sweden, starting in 1850. This relationship was famously the basis for the debate between Modigliani (1986) and Kotlikoff and Summers (1986, 1988) about whether the share in the US during the early 1960s was 20% (Modigliani) or 80% (Kotlikoff and Summers). However, as noted by Piketty (2011), it has also suffered from a lack of long-run evidence.
Using the method suggested by Piketty and Zucman (2014b), we estimate the share of inherited wealth in aggregate private wealth based on data on the capital share in value added, private net savings, and the aggregate inheritance-income ratio. The results shows a high level – around 80% – in the era before World War I, and then a decrease down to half that level immediately after World War II, where it has remained until the present day.
This pattern resembles that found for France over the same period by Piketty and Zucman (2014b), except for the fact that there is a slight up-turn in France over recent decades, while in Sweden there is no evidence of a return of inherited wealth measured in this way. Compared to the US estimates of the early 1960s, Sweden falls roughly in between the low level found by Modigliani and the much higher level found by Kotlokoff and Summers.
Figure 2. Inherited wealth as a share of total wealth (%)
Overall, our analysis of inheritance flows in Sweden since the early 19th century point out two major lessons with respect to the development of capital and its impact on inheritance. Historically, Sweden does not fit the picture of a country where, despite a long history of aristocracy, accumulated capital was large in relation to income (even though inequality and capital concentration might have been high). In more recent times, Sweden stands out as a country where the return of capital has not automatically translated into a return of inherited wealth. It remains to be seen whether this is just a delay based on new wealth being accumulated mainly among the relatively young, or whether inheritance will remain low due to aspects of how intergenerational transfers of wealth are organised in Swedish society.
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Modigliani, F (1986), “Life Cycle, Individual Thrift and the Wealth of Nations”, American Economic Review, 76(3): 297–313.
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Ohlsson, H, J Roine, and D Waldenström (2014), “Inherited wealth over the path of development: Sweden, 1810–2010”, Working Paper.
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Piketty, Thomas (2014), Capital in the Twenty-First Century, Harvard University Press.
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Piketty, T and G Zucman (2014b), “Wealth and Inheritance”, mimeo, Paris School of Economics and forthcoming in A B Atkinson and F Bourguignon (eds.), Handbook of Income Distribution, Vol 2, Amsterdam: North-Holland.