The juicy details: http://www.nytimes.com/2014/09/20/your-money/estate-planning/parents-the-children-will-be-fine-spend-their-inheritance-now.html?ref=business&_r=0
According to a recent study, 86% of adults between 59 and 96 plan on leaving an inheritance to their kids but only 44% of kids between 40 and 60 expect to receive one. Further there are only 2.4% of kids who expected to receive while their parents did not plan to give. This means that most adults, who likely are financially stable, are not expecting to receive an inheritance when their parents die. While not an overwhelming majority, there is still significant feeling that parents would be better off spending their money in their retirement than to leave it for their descendants. The author thinks that the parents should be utility-maximizing in the strictest sense, and put their money toward their individual happiness not that of their family and community. This exemplifies two different methods of thinking: the individual vs. the community.
Does the author's idea of spending all of one's money represent the second fundamental theory of welfare economics? Can resources be reallocated through spending (as compared to a high inheritance tax) and would this eventually lead to an efficient use of resources?
Scott, way to relate the second fundamental theorem to this article. I have to somewhat disagree with the author here. Even though I see both sides, I can't say which is more economically efficient, but I do believe in moral obligation to family and that is where my focus on money would me. So, I guess I am more for supporting and saving money for inheritance towards family when compared to the individual.
ReplyDeleteI can't say I'm surprised at the statistics in the article, that seems about what I would predict. I think most of us expect to receive some sort of inheritance.
I agree with Cam's beliefs to an extent. I think that there are some cases where one person can set his family up for a multiple generations. There should be a higher tax in situations like this.
ReplyDeleteAside from my moral beliefs, as an economist I have to be in favor of the article. Redistribution of wealth can give the economy a better chance at high growth rates. Financially stable adults should still receive a small amount of the wealth that their family had accumulated. This gives more incentive for an individual to work hard and work with the idea of self-interest in their mind. Without self-interest, the economy doesn't function properly. This is one small reason why economic growth isn't at its peak.
Given all of Piketty's recent work on wealth and inheritance, this article is very timely. Piketty points out that under a very neo-classical life cycle theory of saving, parents should spend all the money they save, but then Piketty points out that the data certainly don't support this, but never really delves into thoughts of why, which this article does a bit.
ReplyDeleteI think the second fundamental theorem certainly applies here (with the usual caveats that markets aren't perfect), but the issue is one of equity. For inequality to be practical, I think we have to believe that people get rich because do things others voluntarily pay them for. Riches from inheritance can cause discontent, hence the rationale for taxes.
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