wealth of our nation: rethinking policies for wealth distribution re balancing the economy By Ashwin Kumar, Kitty Ussher and Paul Hunter 2011 THE SMITH INSTITUTE wealth of our nation: rethinking policies for wealth distribution By Ashwin Kumar, Kitty Ussher and Paul Hunter The Smith Institute would like to thank the City of London Corporation for supporting this report and associated events. The Institute would also like to thank the authors and all those who fed into this discussion paper. This report represents the view of the authors and not those of the Smith Institute. Published by The Smith Institute © The Smith Institute October 2014 THE SMITH INSTITUTE Contents Executive Summary 4 Introduction 8 Current wealth distribution 10 Drivers of future wealth distribution 20 Policy implications: Is investing in homeownership the best way forward? 24 Appendix: Attendees at March 2014 seminar 30 The data (and tabulations) used in this report were made Neither the original collectors of the data nor the Archive bear any available through the ESRC Data Archive. The data were responsibility for the analyses or interpretations presented here. originally collected by the Office for National Statistics Social Survey Division and funded by the Department for Work and Office for National Statistics. Social Survey Division, Wealth Pensions, Department for Business, Innovation and Skills, HM and Assets Survey, Waves 1-2, 2006-2010 [computer file]. 2nd Revenue and Customs, Department for Communities and Local Edition. Colchester, Essex: UK Data Archive [distributor], 2012. Government, Scottish Government, Financial Services Authority. SN: 7215 , http://dx.doi.org/10.5255/UKDA-SN-7215-3 2 THE SMITH INSTITUTE Executive summary 3 THE SMITH INSTITUTE Executive summary The recent decision by the Office of National Statistics to We then explored ways in which this segmentation might be undertake large-scale data collection on the distribution of expected to change in future decades. household wealth in Britain has significant implications for public policy. This analysis so far exposes a number of key questions that policy makers may wish to consider. In particular: We performed a cluster analysis of the latest publicly available wave of data1 which enabled us to construct a typology of British (1) Changes in longevity mean that households in Britain who households according to their wealth position, as shown below: receive inheritances tend to do so precisely when their wealth is already at its highest. This may be an opportunity Type Description Households to explore ways to incentivise the distribution of wealth (million) more widely to younger family members whose need is No assets Working age: no or low earnings, no 3.5 greater, for example through taxing inheritance at receipt or very low pension saving, renting so rather than bequest, building a deeper market for low-risk no property assets, in debt or minimal equity release products, and exploring pro-market ways to savings encourage intergenerational giving for specific purposes Renter Working age: decent earnings but 2.2 such as education, first-time buying and childcare costs. modest pension savings and no property assets Debt burden Working age: late 20s to 40s, lower- 2.1 (2) There exists a significant cohort of people who own value home, significant mortgage (ltv property but have a low income. These people are in a 75%), above median earnings, but markedly different situation, having a degree of security modest pension savings, in debt or and the possibility of realising their asset if needed, to low savings those on a low income with no property assets. Yet this is Relying on Working age: low or no earnings, 1.7 not recognised in the benefit system - it is still possible to property no or low pension savings, owner- occupier with mortgage paid off, or get low-income benefits if you live in a high-value home - nearly paid off or in discussions around income inequality. Good Working age: mainly 30s/40s, very 2.8 progress good earnings, decent pension, (3) Similarly, there exists a further significant cohort who middling value of property, mortgage have a relatively high income but a significant amount steadily being paid down (50% ltv) of household consumer (non-mortgage) debt. They have Wealth ac- Working age: 40s/50s, high-earnings, 2.7 a greater financial vulnerability than would be presumed cumulator very good pension, high-value home, by looking at income alone; there may be a role for public substantial progress in paying off mortgage (ltv around 25%) policy to crystallise and support people in this situation to Looking Working age: mainly 50s/60s, higher- 1.8 a greater extent. forward to value home, mortgage paid off, retirement good pension, excellent savings, still (4) It is not possible to have a meaningful discussion of working equality without discussing the housing market. At the Happily Working age: 60s (some 50s), higher- 1.0 moment, financial security is strongly linked to housing retired early value home, mortgage paid off or ownership, and the gap between those who have housing nearly so, good pension, excellent savings, not working and those who do not is expected to widen: because Renting in Pensioner: renting, no property assets, 1.9 housing is in limited supply and the returns on ownership retirement no or low pension assets, modest are so great. savings Getting by Pensioner: older pensioner, above- 2.4 This opens up a real policy choice. On the one hand a case average property value, owned could be made to discourage property ownership compared outright, modest pension, some to other forms of investment to reduce speculative savings purchasing and encourage greater saving in support of Silver success Pensioner: high-value home, owned 2.5 the real economy. Tools to do so could include targeted outright, good pension, excellent savings, younger pensioners, some taxation to incentivise a behavioural shift, new institutions still working and policies to guarantee security of tenure in other ways and proactive intervention to reduce the attractiveness of 1 There are three data points in this series, relating to information gathered in 2006-10, high-value areas and encourage investment in low value 2008-10 and 2010-12. The detailed original data analysis in this paper uses the 2008- areas. 10 information because the Office of National Statistics has not, at the time of writing, made the full 2010-12 data files publicly available. However the ONS kindly made sufficient information available privately to us from the latest data in order to satisfy On the other hand a case could simultaneously be made for us that the overall picture arising from the analysis performed for this report remains measures to extend property ownership as far as possible, valid. And some high-level results are available from 2010-12, which are referenced widening opportunity from the middle classes out and in the text where appropriate. We will refresh the analysis in this report when the full datasets are publicly available. shrinking the group of people whose overall wealth 4 THE SMITH INSTITUTE position is constrained by the continuing need to pay • the creation of a “national housing bank” to promote for housing costs. That this choice exists is the proverbial equity release, long-term tenancies and mixed communities elephant in the policy room when discussing distributional in high price areas equity in Britain. • financial incentives for landlords to shift to offering longer-term tenancies 5) For those who have pension assets, they are built up during • reform of the council tax system to reduce tax on residency working lives and drawn down in retirement. The imminent and increase tax on ownership changes to the annuity market may alter the rate at which • a supplementary charge on ownership as a regeneration this happens. We expect a further segmentation in future tool, similar in concept as the existing varying rates of years between (a) those who purchase an annuity at an stamp duty but levied annually. It would be set at zero for early stage of retirement (b) those who seek greater control low-value areas and a higher level in high-price areas to and save for longer as a precautionary measure leading to discourage speculative investment greater inheritances, and (c) those who decide to draw down • to support this, regular official house price valuations more at an early stage and so rely on others as their age • greater real-time data sharing to give vulnerable increases. consumers access to their overall credit position. Based on our analysis we make some policy recommendations for The data analysis for this project was undertaken by Ashwin discussion, including: Kumar, who formerly headed the Model Development Unit at the Department for Work and Pensions (with responsibility for • a shift to taxing inheritances at receipt, rather than at the Pensim2 model). He is now the chief economist at Tooley bequest, with a life-time allowance Street Research alongside his own consultancy firm, Liverpool • a re-introduction of asset-based welfare provisions to Economics. The project was devised, written and managed encourage life-time saving, including a consideration by former Treasury Minister Kitty Ussher as a Smith Institute of savings schemes that pay out in tradable vouchers to research fellow, who is also the managing director of Tooley support life events Street Research. Paul Hunter is head of research at the Smith • an equalisation of the taxation treatment between housing Institute. and other investment assets 5 THE SMITH INSTITUTE 6 THE SMITH INSTITUTE Introduction 7 THE SMITH INSTITUTE Introduction This paper explores the implications for public policy from the opens up opportunity and gives people freedom to take risks, to new Office of National Statistics (ONS) data source on wealth invest for the future, to buy time, and to give.