Skip to main content
Tourists and city workers walk past a homeless man sat on a busy bridge.
Explainer
Savings, debt and assets
Wealth, funding and investment practice

Wealth of evidence? What we know about 'asset effects'

In this blog, the second of four, Tom Clark steps back from public policy questions and looks at the latest information about how wealth is shared – and why it matters.

Written by:
Tom Clark
Date published:
Reading time:
11 minutes

The first thing to know about wealth has lost its capacity to surprise. Namely, that it is very unequally shared. One implication, however, may still shock since it is less familiar: namely, just how many people are left with next to nothing.

Wealth is not merely unequal like the flow of annual incomes, but much, much more so. Indeed, summary inequality statistics for UK wealth sometimes come in at over 70 on the 0 to 100 'Gini' scale, double the typical estimate of about 35 for incomes.

The brute reality of the gap in what people are 'worth' is laid bare by official figures shown in the chart below, which record that the top tenth among us own getting on for half (49%) of everything, and the poorer half of the population share only a small fraction of that (6%). But most crucially, from an anti-poverty point of view, is that the poorest tenth own vanishingly little – with a wealth share of just one-fiftieth of 1%. Inevitably, these very low shares at the bottom end translate into miserably low absolute values.

SOURCE: ONS

NOTE: Population ranked and divided into 10 individual wealth deciles, 1 the poorest and 10 the richest.

Switching from individuals to households, the ONS reports that the bottom 10% are 'worth' less than £15,400 in total. That number might almost sound reassuring, but 'net wealth' is defined extremely broadly, to include not only any work pension, but also vehicles and household contents such as furniture. In 'at least half' of these 'low-worth' households, the ONS relays, such physical possessions are the only source of wealth. The ready cash available to poorer homes will typically be a tiny fraction of the headline net worth figure. More recent data from the Money and Pensions Service suggests just over a quarter of UK adults have less than £100 put away.

With no meaningful buffer for emergencies like a redundancy, a break-up or merely a broken cooker, such events can become a trapdoor to destitution – and indeed debt. That is not only a problem at the very bottom of the range: across the population as a whole, 23% of households have financial liabilities that outstrip liquid assets. But, inevitably, things are worse at the bottom end. For almost half the households in the bottom total wealth decile, what’s owed exceeds what’s owned in ready cash. Which is to say net financial worth is negative.

The absolute dearth of assets at the bottom, then, certainly looks like a serious problem. But how far do we really need to care about substantial inequality beyond that? One soothing thought is that even in a society of perfectly level incomes, you’d expect significant wealth inequality across the age range, as workers saved for retirement. With the official statistics registering that private pensions are the largest single slug of all wealth (representing 42% of the total) this effect is likely pretty important.

Not, however, important enough to explain away more than a fraction of the overall wealth gap. The ownership of financial assets, property holdings and indeed private pensions themselves are all skewed in ways that exacerbate the familiar social fault-lines of social injustice.

Take region: the median individual in the prosperous South-East has £157,000 more in net wealth than their counterpart in the North-East, meaning they owned fully three times as much. Or gender: the wealth holdings of women are – once officials adjust for 'other factors' – £101,000 lower than for men. Or race: the median white person owns four times more than the typical non-white individual. There are signs of even bigger wealth shortfall affecting certain minorities such as the Bangladeshi and black groups, although there’s more to be done in terms of pooling samples and applying controls before these can be gauged with much precision.

In sum, if you are after a fairer society on pretty well any dimension, it would seem rash to dismiss the importance of assets in general. And when it comes to dealing with the rough edges of life, the abject lack of ready funds for a large part of the population looks like an especially acute problem.

It’s the size that counts

The second thing to know about wealth is not that it has necessarily got much more unequal: the recent drift has been that way, but summary gauges of the wealth gap can get blown about by relative movements in the price of stocks (owned by the few) and the value of private housing (owned by many more). Such swings are decidedly second-order from the point of view of opening up life chances for the most disadvantaged.

No, it’s not so much the rise of wealth inequality that is the problem – rather, it is simply the rise of wealth. As property and other asset prices have puffed up in recent years, total household wealth has steadily swollen to the point where – as the Resolution Foundation reports – it is no longer the traditional three times national income, but instead something like seven times as much. It is the upward drift of this wealth-to-income ratio, much emphasised by Thomas Piketty and his American collaborator Gabriel Zucman, that has been reordering a society defined by what you earn into one defined by what you own.

You can see the upshot in all those young – and increasingly middle-aged – workers locked out of buying a house, and into costly private rentals. Or in the analysis the Institute for Fiscal Studies published in the pandemic which concluded that: 'Inheritances are set to be increasingly important in increasing inequalities between those with richer and poorer parents, reducing social mobility.'

If this conclusion is right, it is beginning to sound like the rise of wealth does not just drive gaps in what richer and less well-off families can consume, but can also stifle the one thing that politicians across the spectrum claim to care about – the chance for people who start without great privilege to work hard and 'get ahead'. But is that really true?

Asset effects

The turn-of-the-millennium rhetoric described in my previous blog certainly implied that 'assets for all' would foster an opportunity society. But to establish analytically that assets confer additional advantages – over and above the immediate purchasing power they represent – is more difficult.

Enthusiastic thinktankers spotted early that persuading officials that it was worth spending specifically on wealth-building programmes, rather than on social services, income support or anything else, required nailing down a distinct 'asset effect'. The IPPR produced one pamphlet and a few years later backed a whole book with that name.

Various potential mechanisms were mooted – relating to, for example, psychological security and opportunities to invest in training. But pinpointing such things is tricky. For there are important potential differences between the sorts of people who are able to build up assets and those who aren’t able to do the same. Take the characteristic of thrift: social-scientists might call it the 'ability to defer gratification'. It isn’t easy to observe or 'control for' in the data. But this same trait could theoretically enable you both to build up an asset and to persevere with a testing training programme that eventually boosts earnings. So if people with assets end up earning more, you can’t necessarily conclude this is because of the asset itself, rather than reflecting underlying character.

Differences in the channels through which different types of assets might plausibly confer advantages further thicken the plot. Liquid savings might matter most for navigating day-to-day emergencies, and assuaging the anxiety that can come with them. Other forms of wealth, like property or pensions, might do more to dispel gnawing worries about more distant horizons, and indeed to shape the future that actually transpires. But disentangling in the analysis is tough: even measuring some forms of wealth, such as accrued pension entitlements, can be contentious.

As a result of such conundrums, the academic literature on asset effects was weighed down with heavy caveats. One exhaustive LSE paper which was published just at the point (2011) where political interest in the asset agenda was beginning to fade, attempted various ingenious statistical fixes and suggested that holding (financial) assets did 'have positive effects on wages, employment prospects, excellent general health and in reducing Malaise', but added that ambiguities regarding the mechanisms ruled out any firm conclusion about whether improvements 'could be more efficiently achieved through other policies'.

What since?

So what, if anything, have we learned since politics lost interest in the ideal of 'assets all round'? Well, the OECD has confirmed that while wealth and incomes are strongly correlated, the connection is far from perfect. Moreover, it has identified the UK as one of those countries where there is a 'relatively low degree of correlation' between the two things 'for both rich and poor households'. At the very least, this underlines the importance of giving assets independent thought.

At the same time, we have an awful lot of new information, ably pulled together recently by thinktank Demos, underlining the rising importance of family gifts and inheritance in shaping financial fortunes. Absent tax or other public policy changes, this is simply the inevitable corollary of the rise of wealth. Yet as Demos implies, the obvious danger of, say, parents stumping up for ever-chunkier deposits for houses or grandparents paying school fees is distorting the housing market and education system in ways that stifle opportunity for people who lack the same head start.

On the crunch question of how, exactly, a dearth of assets might hold people back, American researchers have made some progress – and their British counterparts are catching up. Some American studies conducted after the 2008 Global Financial Crisis suggest a connection between a lack of assets and strained family relations. This is an intuitive link. If a family is operating with no contingency fund when, inevitably, a problem crops up there will be sharp dilemmas about how to cope with it – the prospect of debt or the need to cut back on other spending could easily trigger conflict. So it’s easy enough to imagine why households with no financial buffer might end up more stressed, more argumentative and ultimately more prone to break up.

If all this is right, that helps to make sense of something else American researchers are increasingly convinced by. Namely, that asset (as distinct from income) poverty is bad news for child well-being and child development. A major new study centred on the main US household tracking survey follows the fortunes of youngsters whose families are in 'net worth poverty', defined as having (broadly defined) wealth of less than a quarter of America’s annual-income poverty line. The study finds they suffer from an increase in 'problem behaviour' plus a hit to cognition. These negative effects were to be 'similar in magnitude' to the familiar and substantial effects of growing up in income poverty.

Back in Britain, a parallel University College London analysis points in the same direction, but with a couple of twists. It found that wealth matters for child development but doesn’t matter as much as an estimate of so-called 'permanent' (or average lifetime) income. Moreover, some British assets seemed to matter more than others. Whereas, the UCL team observe, in the US it is most 'particularly financial' wealth that has often been found to bolster child development, in the UK the clear link they found was with housing wealth.

In parallel, JRF itself has recently highlighted some more immediate psychological benefits. Deploying a suite of 'anxiety markers' – from feeling worthless to waking up with worry – collected in the giant Understanding Society survey, we compared people with assets to people without. The connection between anxiety and lacking assets appeared strong, and applied with comparable force irrespective of the form the assets took.

First we compared owners and renters: in other words, people with and without property assets. Next we compared minimal savers (with under £1,000) with people who had £5,000 or more squirrelled away. In both cases, the group without assets raised the flag for distress much more often – often twice as frequently or more. Moreover, such asset effects appeared 'substantial when set beside' the more familiar effects 'that register across the income spectrum'.

Where next?

Some of the caveats that still saddle evidence should fall away when policy creates natural experiments, by suddenly starting to do something about assets for an identifiable group or a particular cohort. Insight is there to be had by carefully tracking the fall-out from the myriad asset-building grants and 'development accounts' that have been tried around the world, from South Korea to Wales (which made an extra top-up to Child Trust Funds specifically for children in care).

Most obviously, there is still more to learn from the maturing UK-wide 'baby bonds' as the toddlers of the 2000s come of age and come into their money. Nick Pearce, a former head of the No 10 Policy Unit who is now a Professor at Bath, bemoans just how much work there is that “could be done but is not being done". He points to sources of untapped data on “where the money went” and the potential to link information about the young adults with Child Trust Funds and their outcomes on employment and much else besides.

In sum, there are still many 'known unknowns' in this field, as well as some things so hard to pin down we might call them 'known unknowables'. But there are many 'known knowns' too – and indeed, rather more of them than there were when the spotlight was last on assets. Wealth is assuredly of growing importance as a disequalising force in society, and it certainly looks like it could exert many independent effects on life chances. There is more to discover about the precise mechanisms involved before we can settle the argument about exactly which forms of wealth should be given priority. Nonetheless, the upshot of what we already know is that if – a big if, admittedly – social policy could somehow directly address the asset gap faced by so many, then this would likely be to the benefit of prosperity, health and wider well-being.

Table and items being sold in front of a closed shop.

This explainer is part of the savings, debt and assets topic.

Find out more about our work in this area.

Discover more about savings, debt and assets