Unequal Scotland? - Wealth inequality and the link to pensions
All this week I am looking at how equal or otherwise Scotland is. Here, I examine wealth inequality and discover that it's not the price of your property but the price of your pension that really matters in the wealth stakes.
When we talk of the well-off, the prosperous or the minted, what do you have in mind: how much they trouser, or how big the stash?
There's an important difference, but they're often confused.
Think of it in terms of water - income as the flow of earnings, and wealth as the reservoir it flows into. If the spending taps are on and money flows out of the reservoir, then there won't be much wealth amassed.
Some start life with the advantage of a big reservoir of wealth. What's different, and unlike water, is that wealth can be used to generate more wealth.
So, to say Scotland has similar levels of output per head to the rest of the UK (measured by Gross Domestic Product) is not to say it's a wealthy country (a claim often made during the independence referendum campaign), but that it has a comparable annual income stream.
- BBC Scotland's Douglas Fraser poses the question - How unequal are people in Scotland?
- If Scotland were 100 people, they would be.....
- How our income shapes who we are
- Prof David Bell on income inequality
- Throughout this week, the BBC's Reporting Scotland (Monday-Friday 18:30) and Scotland 2016 (Monday-Thursday 22;30-23:00) will be looking at inequality in Scotland.
Income feeds into wealth, depending how you use it. So do legacies, windfalls, rising asset prices, such as house valuations, and accumulated earnings from investment.
Wealth is made up of four main elements. For most households in Britain and Scotland, the most obvious asset is the home itself. That accounts for a third of total Scottish wealth. Two thirds of Scots households occupy their own homes.
The belongings in it, and the car parked outside, make up the category that is spread most evenly across the population. It's known as physical wealth.
And that extends to the belongings you may have elsewhere - in your second home, if you're wealthy enough to have one. Physical wealth adds up to 14% of the total.
How does our wealth measure up?
The four key elements
PROPERTY - 34%
PHYSICAL - 14%
FINANCIAL - 12%
PENSIONS - 40%
The least evenly spread segment is in financial wealth, with 12% of the total. That can include cash, but the big ticket items are savings and paper investments, in stocks and bonds.
The Scot in the middle - with half the population wealthier and half the population less wealthy - had £5,100 of financial assets at the start of the decade.
And then there's the biggest category, though it's one that is out of sight and out of mind for much of your life - the occupational or private pension.
More than 40% of Scots' wealth was held in pensions in 2010-12 (the most recent Scottish government figures), and just below 40% for the UK as a whole. That is a lot more than some comparable European countries, and property wealth is also relatively evenly spread.
However, wealth is still very unevenly spread, and more so than income. That's partly because wealth tends to accumulate for those who already have something to invest, and who have collateral with which to borrow more.
How unequal is wealth in Scotland?
Of the £714bn of wealth held by Scots at the start of this decade, the wealthiest 1% of people owned 11%.
In other words, just over 50,000 people lived in households where wealth amounted to nearly £80bn.
The wealthiest 10% of households owned 44% - more than £300bn - while the least wealthy 10% owned little or no wealth. The least wealthy 30% owned merely 2% of the total.
It is only above that level - households which are above the bottom 30% - that wealth begins to accumulate, a little. Home ownership begins to have an impact, so the least wealthy half of Scots owned 9% of the total.
Inequality is much greater in financial wealth. The most wealthy 10% of households owned almost three-quarters of financial wealth, while the least wealthy 50% owned less than 1%.
Within the least wealthy third of people, less than a quarter had a savings account, and hardly any had shares.
Physical wealth, or belongings, was more fairly spread about, though the wealthiest 10% of households owned 33% of it, and the least wealthy 50% had amassed only 20%.
Let's look at pensions - the largest element of wealth. The wealthiest tenth had amassed 55% of the nation's total pension pot, while the bottom half had less than 3%. (This does not include entitlement to state pension.)
- Did you know? - In Scotland, about 27% of people have no source of pension other than the state state.
At the risk of bamboozling with numbers, the top 10% had 964 times more saved in pensions than the bottom 30% of households.
On home ownership, this chart shows that the least wealthy 30% have almost no wealth held in homes, and the share rises from the fourth decile, getting much steeper for the wealthiest 10% of households.
Keep in mind that the lowest-income half of the population is not made up of all the same people as the least wealthy half.
You can be wealthy, by owning your own big house, while having a low income (typically, a single retiree who didn't move out after the kids left).
Or you can earn a lot while renting your home (the footballer hoping to be signed next season to a big English club).
Who are the least wealthy?
It probably comes as no surprise that the least wealthy are more likely to be single and lone parent households, and with no qualifications.
Partly because pensions build up through a working life, younger people more often fall into the less wealthy categories.
Until about 20 years ago, retired and unemployed people used to be more likely to be poor.
But the striking picture painted by the most recent statistics shows work is no guarantee of becoming even a bit wealthy.
Half of households in the least wealthy group were headed by somebody in work.
How does it compare?
The spread of inequality across Scottish households is broadly similar to the spread across the UK.
But there are some differences of degree. From the 2010 to 2012 figures, the wealthiest 20% of homes in Scotland owned 87 times more than the least wealthy 20% of Scots. Across Great Britain, the top fifth owned 105 times more than the bottom.
Over the preceding six years, Scotland had gone from being more unequal than the rest of Britain to being a bit less so.
- Did you know? - Income is more fairly distributed in Scandinavian countries, but when it comes to wealth distribution (property, savings and pensions) they are more unequal than Scotland and the UK as a whole
During those years, property prices and financial assets went through the turmoil of the Great Recession, which took the wealthy down a peg or two.
The stock of wealth is much higher where people own more valuable homes.
So just as the hyper-earners of London's financial district skew the distribution of income, the property market in the south-east of England means there is geographical inequality of wealth distribution. That is the clearest sign there is of a north-south divide.
It is the main explanation of the average Scots household having £186,600 average wealth, according to the Office for National Statistics, while the average household across the whole of Britain had £225,000. It was south-east England that pulled up the English figure, at £342,400.
How does it compare internationally?
So, if Scotland is broadly similar in wealth inequality to the UK as a whole, how does the UK compare internationally?
This chart was compiled by the Organisation for Economic Co-operation and Development (OECD), and compares 17 mostly similar countries.
It's quite a complex chart. The blue bars show the share of wealth held by the wealthiest 10%. The lighter blue square within the blue column marks the share of wealth held by the wealthiest 5%. The black triangle represents the share for the top 1%, and the white circle shows the wealth held by the least wealthy 20%.
What it shows is that the USA is far more unequal than the other 16 countries. At the other end, Slovakia is the only country in which the least wealthy fifth hold more assets than the most wealthy 5%.
The UK, while unequal, is in 10th place on this comparison, and below average. It is more equal in wealth distribution than the USA, Austria, the Netherlands, Germany, Portugal, Luxembourg, Canada, Norway and France
The UK is more unequal in wealth than Finland, Australia, Italy, Belgium, Spain, Greece and Slovakia.
How much does wealth depend on your parents?
Wealth cascades through the generations. Some generations blow it all. But for most, it's a way of "hoarding opportunity", as it's sometimes called in social policy.
The obvious transmission is through legacies. Parents pass money to their offspring when they die, or they can manage their tax affairs so that some is passed on before then.
Inheritance tax has been much discussed in recent Westminster elections. Because property prices have risen, many more people are caught by it, with their assets falling above the threshold.
- Did you know? - Widowed men and women are likely to live in wealthier households. Although such individuals often live in single adult households, they are also likely to be older and have inherited the wealth of their former spouse.
That is why the UK government has sought to respond to the pressure from middle-class, middle-earning home-owners to raise the threshold.
But parents and grandparents can pass on wealth in other ways. Paying the fees for private schooling is seen as giving an advantage in life chances. Buying a home in the (more expensive) catchment area of a high-performing school can have the same effect.
Good schools tend to lead to the best universities. And in funding your way through university, if your parents have some wealth behind them, it's a less daunting prospect to take on the risk of amassing student debt.
For those wanting to get on the property ladder, the Bank of Mum and Dad plays an ever bigger role.
Parents with property (in which they have benefited from steeply rising valuations) or other assets can use that as collateral to help fund a deposit, or invest jointly in their offspring's starter home. If your parents can't do that, then you're on your own.
What could be done about wealth inequality?
The simple response is to use the taxation system, though watch out for unintended consequences. There are other changes can be brought about by intervening in markets.
That starts with the property market. If the supply of homes is increased at a faster rate than demand, by relaxing planning restrictions for instance, then the price ought to fall. That reduces the advantage which current property owners have, and should make it easier for others to get on to the property ladder.
There are incentives that could be created to encourage people to save for pensions. Through the taxation system, these can be skewed to lower earners, such as giving more tax relief for pension saving at lower levels of income.
Taxation rates could be raised on capital gains - that is, the increase in the value of assets. That could be on financial instruments such as shares, for instance. Or allowances and loopholes could be reduced.
Inheritance tax could be increased. But if it is raised to very high levels, that would reduce the incentive to save. It would create an incentive to splurge money late in life. Or those with good accountants could manage their tax affairs imaginatively, to minimise the eventual bill.
Professor David Bell, an economist and expert in inequality at Stirling University, argues that the biggest shift in wealth equality could be achieved through tax on property.
At present, capital gains tax is not levied on a first home, where many people build up much of their wealth. It doesn't have to be that way. The tax is levied on second home sales.
At present, Britain taxes property through council tax and through transactions tax (formerly stamp duty and now devolved in Scotland).
Transactions tax is a blunt lever to raise revenue, which acts as a brake on people moving to more appropriately sized homes in more appropriate locations. It has, however, been made more progressive, as it is levied at higher rates on more expensive properties.
Council tax has the opposite effect of reducing wealth inequality. The proportion of income paid by lower earners (in this chart, divided into tenths of the population) is significantly higher than the proportion of income paid by higher earners.
The reform of Scottish council taxes, recently passed at Holyrood, changes the ratios between high and lower-value homes, so that the most valuable homes could see annual bills rise by more than £500. That is after a freeze on council tax, imposed in 2008.
The household savings from that freeze, at least in cash terms, has disproportionately helped those in bigger properties.
The reforms being introduced for next April are seen as a modest shift towards making council tax less regressive.
But the reform failed to tackle the problem that valuation of homes is 25 years out of date, so bills bear a very distorted relationship to wealth for those who have benefited from rising valuations.