ABCtech #32 20JAN15 What to do with the trillion dollar generational wealth transfer

ABCech #32 20JAN15 What to do with the trillion dollar generational wealth transfer

QuikTech Notes  20-JAN-15 SPECIAL EDITION –  WEALTH TRANSFER

What transpires in the US often stirs Canada’s appetite for more of the same. To get a glimpse of what may be in store … tune in tonight to US President Obama’s address to the nation. Of particular interest will be the announcement of what will prove to be a VERY controversial proposal, one that we have been anticipating for some time – see below.  The “wealth transfer tax” will be proposed as a budget supplement for accommodating another round of public services for ageing baby boomers and/or for reducing the $14T federal debt. There are other options.

ABCtech is establishing a task force to consider options for Alberta to consider that encourages any inter-generational wealth transfer to remain a personal decision with incentives to stir the entrepreneurial spirit of the next generation.

What to do with the trillion dollar windfall?

A trillion dollars is about to enter the Canadian market, this is the magnitude of the generational wealth to be transferred as baby boomers formally retire. The transition will be one of the most defining moments of the century. What can we expect of government and industry? And what are the expectations of baby boomers and their offspring? We see 3 options and prefer one.

First, what we’ll term the CONSUMPTION option, is for government to “do nothing”. Everyone will enjoy one of the biggest splurges of consumer spending ever as the offspring of baby boomers eat through their parents’ significant inheritance, many opting to pay off their huge housing debt and further increasing their credit worthiness … for further consumption. Governments benefit from the significant sales taxes and employment generated. This option appears on the surface to be win-win. But is a consumption economy sustaining? We think not.

The second option we term PUBLIC SOLVENCY – and is quite likely. It features  governments grabbing the wealth of baby boomers by introducing a steep inheritance tax. The logic would be to retire government debt accumulated by feeding the voracious appetite of baby boomers for jobs and public services in health, education and governance. This option would have broad “public” appeal, and if introduced gradually, may even avoid shocking the baby boomer’s offspring and causing a significant voter abbreaction. The solvency option does have appeal to debt conscious economists as it would strengthen the dollar and give governments more borrowing power for future spending. However, the option calls for a unifying vision, public confidence in government, and does little to stir the generation of sustaining wealth.

Thirdly, there is the ENTERPRISE option, appealing to economists who worry about the future and how to generate wealth-sustaining assets. This option calls for government and industry to get together to introduce incentives for baby boomers to invest in small business thereby  generating a boom in private equity financing and creating a new generation of enterprise. This approach appears to be gaining favour: governments stimulating entrepreneurship and innovation – already underway, the introduction of creative financing instruments – witness crowd-sourcing and bitcoins, relaxing regulatory restrictions for small investments – the new exempt market, and educating baby boomers who have the time, wealth and savvy to learn – and mentor – angel investing.

We are hopeful that governments will endorse ENTERPRISE, practicing what they’ve been preaching: free enterprise, small business, innovation, and balanced regulatory oversight to ensure sustained prosperity. That governments will allow interest rates – not taxation, and the allocation of natural resource revenues and the proceeds of ENTERPRISE to retire the baby-boomers’ debt. – Esir Pretne