Redefining Wealth: The Impact of Usufruct Rights on Household Wealth and Inequality

The paper explores how incorporating usufruct rights into household wealth estimates significantly impacts wealth distribution, particularly in Italy, by reducing wealth inequality. It highlights the importance of accounting for partial property rights to better reflect economic well-being and inform policy decisions.

A recent study by G. D'Alessio, A. Neri, and I. Toma, from the World Bank’s Development Data Group and the Bank of Italy, explores the significant impact of including usufruct rights in household wealth estimates. Usufruct, a concept rooted in Roman law, grants individuals the right to use and enjoy another person’s property without altering its substance. This paper highlights how incorporating such partial property rights into wealth estimates could provide a more accurate picture of economic well-being and wealth distribution, especially in countries where usufruct contracts and similar arrangements are more common. The researchers argue that traditional methods of measuring wealth, which typically focus on assets over which households hold full ownership rights, fail to account for this important dimension of property use. This omission, they suggest, can distort our understanding of wealth inequality, as it overlooks certain assets that households control or benefit from but do not fully own.

Impact of Usufruct on Household Wealth

The study uses Italy as a case study, leveraging data from the Bank of Italy’s Survey on Household Income and Wealth (SHIW). Despite usufruct being relatively rare affecting only about 3% of residential homes in Italy the researchers found that adjusting wealth estimates to include usufruct rights significantly alters the distribution of wealth. For younger households, this adjustment results in an increase in measured wealth, as the value of usufruct rights is typically higher for those with longer life expectancies. The researchers employed actuarial formulas to calculate the value of usufruct based on the age of the usufructuary and the full property value, showing how this can be factored into wealth estimates. In contrast, traditional wealth estimates, which do not account for such rights, may overestimate the wealth of households that have granted usufruct rights to others, such as elderly individuals who retain the right to live in their homes while transferring bare ownership to their heirs.

Reducing Wealth Inequality with Use Rights

By including usufruct rights in household wealth calculations, the paper finds that wealth inequality decreases. Specifically, the adjusted estimates reduce the Gini concentration index, a common measure of inequality, by approximately one percentage point. This reduction is due to a shift in wealth from the top wealthiest households, who are more likely to grant usufruct rights, to middle-income households, who benefit from holding these rights. The paper demonstrates that wealth concentration, particularly among the top 20% of households, is slightly reduced when usufruct rights are accounted for. This suggests that the traditional view of wealth, which focuses solely on full ownership, may exaggerate wealth inequality by ignoring the significant economic benefits that usufruct rights confer on a subset of the population.

Other Forms of Partial Property Rights

The study also discusses other forms of partial property rights, such as the right to inhabit, which is often granted to a surviving spouse when one partner passes away, allowing them to live in the shared home for the rest of their life. This right, like usufruct, contributes to household wealth and economic security but is often excluded from wealth estimates because it cannot be transferred or sold. The authors suggest that such rights should also be considered in future efforts to measure wealth more comprehensively. The paper underscores that in countries where usufruct and similar rights are more common than in Italy, including these in wealth estimates could have an even more profound effect on our understanding of wealth distribution.

Wealth Redistribution Across Europe

In addition to Italy, the researchers conducted a brief analysis of free residential housing across several European countries using data from the Household Finance and Consumption Survey (HFCS). They found that in countries like Austria, Croatia, Cyprus, and Greece, a significant share of households lives in homes that they do not own or rent. While the HFCS does not distinguish between households that live in homes free of charge due to usufruct and those that occupy homes without any formal right, the researchers suggest that the inclusion of use rights in these countries' wealth estimates would likely reveal lower levels of wealth inequality than currently reported.

A Call for Comprehensive Wealth Measurement

The paper emphasizes the need for further research into how usufruct and other partial property rights affect wealth distribution, particularly in countries where informal property arrangements are widespread. The researchers argue that wealth measurement methodologies must be revised to reflect the realities of diverse forms of property use and ownership. By doing so, policymakers and researchers can gain a more accurate understanding of wealth inequality and economic well-being, leading to more informed and equitable policy decisions. The findings from this study highlight the potential for similar analyses to be conducted in other countries where use rights are more prevalent, potentially yielding even greater adjustments to household wealth estimates and a more nuanced picture of economic inequality.