Generational wealth within the context of wealth inequality

20 October 2021
4 minute read

Wanting to give your children a better future, one with less financial challenges than you had, is a near universal desire. Mothers and fathers want the comfort of knowing that no matter what happens to them they will be able to ensure their children have a good life.

The contentious Green Paper on Comprehensive Social Security and Retirement Reform recently published by the Department of Social Development, and which was then subsequently withdrawn, has undoubtedly left many thinking about this desire and how we look after ourselves and our families financially, as we age and after we pass away. A key part of these considerations needs to be the role of generational wealth.

In South Africa, however, the ability to build generational wealth is not just a factor of a family’s willingness to instill values of wealth building for years to come. South Africa is a country dealing with a past of dispossession and segregation which built a firm foundation for wealth inequality to continue well beyond the end of Apartheid.

This history has of course been compounded by years of low economic growth, a global recession and the recent COVID-19 pandemic which has driven up the country’s unemployment rate to a staggering 44%. Understandably, this reality makes the aspiration of generational wealth but a pipe dream for countless families living in abject poverty in our country.

On the other hand, international real estate consultant Knight Frank’s annual Wealth Report estimates that South Africa had 44605 High Net Worth Individuals (liquid assets more than $1 million US) and 742 Ultra High Net Worth Individuals (liquid assets more than $30 million US) in 2020. Compare these numbers with Stats SA’s mid-year population estimate for South Africa in 2021 of 60.14 million people. This means these groups represent 0.07% and 0.0012% of the population, respectively.

When it comes to understanding how wealth is transferred from generation to generation, a recent United Nations World Institute for Development Economic Research (UN-WIDER) Working Paper, “Estimating the distribution of household wealth in South Africa” notes that there is a lack of data available to track intergenerational wealth dynamics in South Africa. This means we know there is wealth concentration, but we don’t understand how, and to what extent, this wealth is either lost or passed down in families.

Despite our history and these complex challenges faced since democracy, generational wealth shouldn’t be considered an aspiration for only those who have it already and out of reach for everyone else. Similarly, tackling inequality needn’t be a dichotomy between increasing or decreasing the number of High-Net-Worth Individuals. In fact, changing these perceptions is vital for changing the trajectory of inequality.

Many more young South Africans, from increasingly diverse backgrounds, have post-school education and are earning reliable incomes. This is something to be proud of. Nurturing wealth building for the present and the future for these South Africans needs to be a focus for the financial sector in South Africa. This is a tangible way we can help to build a middle tier of future wealth that combats inequality.

But we must be mindful of the reality these individuals may face. South Africa is notorious for having a poor savings culture and high consumer debt. Young working South Africans also often support their families or have dependents. A recent survey of our customers showed that most don’t have generational wealth; yet over 80% felt that they were expected to create it for their families. But only 39% understood what generation wealth is, and how to create it. This is the difficult context 1Life wants to help South Africans build wealth in.

For these individuals and their families, generational wealth needs to be reconsidered with a realization that there need not be an all or nothing approach. If anything, for many South Africans the journey to build generational wealth needs to start with small steps and a basic approach. Tackling debt, making better informed decisions about the financial services bought (including understanding the opportunity cost of buying funeral cover over life insurance, for example), understanding what constitutes generational wealth and the options available for saving and investment – are all vital first steps in this journey.

We believe that access to high quality and free financial education can help South Africans familiar with these circumstances be empowered to say: ‘generational wealth starts with me’ – taking the first steps to leaving a more financially secure legacy for their children. That is why our financial literacy programme, Truth About Money, is available free of charge to those who wish to start their journey. It gives valuable insight into building generational wealth, regardless of where you are starting from.

Building generational wealth is possible for many more families in this country – but it will take financial institutions working hand in hand with them to make wise choices through financial education. This is by no means the solution to South Africa’s inequality problem, but it is a vital step worth taking and we are proud to be doing more to put more families in South Africa on their wealth journey.

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