The truth about wealth inequality
The distribution of wealth in the economy has attracted more and more attention among economists following a wealth boom that lasted for four decades.
Between 1980 and 2019, British household wealth increased from three to seven-times national income, as cheap credit helped to fuel consistent rises in house prices.
“For much of the past four decades, Britain has enjoyed an uninterrupted wealth boom,” Simon Pittaway, senior economist at the Resolution Foundation, said.
But new research from the left-leaning think tank suggests that the UK has actually not seen a big increase in overall wealth inequality, making it relatively unusual among rich economies.
In the US, for example, the share of wealth owned by the top one per cent increased by 12 percentage points between 1980-2019, while in the UK the equivalent figure was less than one percentage point.
Inequality was “conspicuously stable,” Pittaway said.
Dig a little deeper, however, and the data shows that questions about distribution have not gone away.
While overall inequality has not deteriorated over the years of the UK’s wealth boom, inequality between the generations has worsened significantly.
In 2018-20, average wealth among Britons in their 60s was 55 per cent higher in real terms than among those of the same age in 2006-08, whereas median wealth for those in their 30s was a third lower.
As a result, in 2018-20, the average person in their 60s was nine-times more wealthy than the average person in their 30s, up from four-times in 2006-08.
How could overall wealth inequality remain relatively stable, even as inter-generational gaps widened?
“Greater home ownership has reduced inequality among older households, though later falls in home ownership have widened wealth gaps between them and younger households,” Pittaway explained.
In other words, falling inequality within age groups helped to offset the impact of rising inequality between age groups.
That was the state of play on the eve of the pandemic. But this trend was brought to a halt by the rapid rise in interest rates. From December 2021, the Bank of England hiked the benchmark Bank Rate rising from near zero to a peak of 5.25 per cent last summer.
This had a big impact on household wealth. Between 2021 and 2023, household wealth fell from eight to six-times national income – with a peak-to-trough fall of £2.6trn in cash terms.
Just over three-quarters of this came as a result of the fall in assets underlying pension valuations, such as government bonds.
“Because this is largely concentrated in Defined Benefit schemes, recipients won’t be materially worse off due to their lower pension wealth,” the report noted.
Nevertheless, it still means that the typical household wealth of someone in their 60s has fallen by 16 per cent between 2018/20 and 2024, from £470,000 to £390,000. For someone in their 30s, in contrast, typical wealth has increased by 17 per cent over the same period, from £50,000 to £59,000.
This means the gap in typical wealth between the two age groups has shrunk by £86,000 in real terms, to its smallest level in more than a decade.
Still, the Resolution Foundation cautioned that the transfer of wealth between generations would be a key determinant of how wealth inequality progresses from here.
Martin Haq, chief executive of abrdn’s financial fairness trust, suggested that inequality would likely increase as gifts from older generations “cascade down”.
“Not only are the wealthiest more likely to receive an inheritance or gift but they also gain larger sums. The richest fifth were three-times more likely to receive an inheritance of over £100,000 than those in the bottom fifth.”
“Such windfalls can be critical in determining who is able to step onto the housing ladder,” Haq added.