Intergenerational Transfers

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INTERGENERATIONAL TRANSFERS


An intergenerational transfer is the transmission of something from a member of one generation to a member of another. Unlike an exchange, loan, or purchase, there is no expectation that the recipient will repay the giver either directly or indirectly. Often, this refers to a transfer across generations of kin, for example from a grandparent to a grandchild. However, generation is a loosely-defined concept, and it can simply mean a different age group; a public sector intergenerational transfer could be said to occur between a 25-year-old taxpayer and a 17-year-old student in a public high school.

Although transfers do not involve a quid pro quo between the giver and the receiver, they may instead involve an understanding or at least an expectation that the recipient will make a similar transfer to someone in a symmetric position. For example, children may receive transfers from their parents with an implicit understanding that they will in turn make similar transfers to their own children when they are adults. Alternatively, adult children may support their elderly parents with the implicit understanding that their children will support them in their old age.

Intra-family intergenerational transfers are important in all societies. Examples are child-rearing costs borne by parents; costs of higher education borne by parents; end-of-life bequests to children or grandchildren; economic support of elderly parents by their children; time spent by adult children caring for or managing the care of their elderly parents. But significant intergenerational transfers can also be mediated through the public sector. Examples are tax receipts used to provide public education, state-run pension schemes, and other publicly financed payments or in-kind services to particular groups. In the United States, Social Security, Medicare, Medicaid, and various programs providing child benefits, welfare payments, and unemployment insurance exemplify such arrangements. Still other intergenerational transfers are imposed indirectly by the public sector, such as when governments incur debt today for consumption-type expenditures (rather than capital items)–debt which must be repaid or serviced by future generations.

Why Study Intergenerational Transfers?

While intergenerational transfers are pervasive in all societies, with the rise of the modern welfare state, there has been an increase in public sector transfers and a decrease in private transfers. Study of these transfers is important for many reasons, as they affect individuals, families, and whole populations.

Transfers have a major influence on the inter-personal distribution of income, because a high proportion of total household income is reallocated from the earner to some other person, either through public or private channels. Beyond the distribution of income, transfers are important in the study of families. A major component of the costs of rearing children is borne by parents. Although the level of such transfers is subject, within certain limits, to parents' discretion, they constitute a crucial element in parental fertility decisions. If parents intend to leave a bequest for each child, the level of these intended bequests is also a part of the cost of child rearing. Decisions about the level of private costs, or the size of the transfer to children, also determine the human capital of the next generation. The greater share of elder care is also provided by relatives, rather than by alternative institutional arrangements.

A further reason to study transfers is that the patterns of intergenerational transfers, both public and private, are a major determinant of the financial consequences of changing population age distributions, and specifically of population aging.

Private transfers can add to, substitute for, or be crowded out by public transfers. To design policy, and to understand the impact of existing age-based or need-based policies, it is essential to understand and quantify these processes of substitution and crowding out. In particular, the interaction between public and private transfers depends in part on the motives for private transfers–for example whether they are motivated by altruism (in which case there should be a high degree of substitution and crowding out, because altruists care about the well-being of another person rather than about the transfer itself) or by exchange (in which case there should be very little crowding out, because there is an obligation to repay).

Patterns of intergenerational transfers in traditional societies may play a key role in shaping fertility decisions and trigger the onset of secular trends (as is argued, for example, in John Caldwell's theory of the demographic transition). Patterns of transfers in preindustrial societies also may play an important role in evolutionary processes affecting fertility and mortality. Theorists suggest, for example, that the elderly contribute to the reproductive fitness of their children and grandchildren, which may explain why humans have such long post-reproductive survival.

Theorists like Laurence Kotlikoff and Lawrence Summers argue that the desire to make familial intergenerational transfers, particularly bequests, may be the dominant motive for saving, investment, and capital formation in industrial countries–more so than the life cycle saving motive.

Public Sector Transfers

Development of the modern theory of intergenerational transfers began with a seminal paper by Paul Samuelson published in 1958. Samuelson showed that in a world without durable goods, in which workers wished to provide for consumption in old age, the competitive market for borrowing and lending would lead to a negative interest rate with high consumption when young, and very little consumption when old. Life-cycle utility would be correspondingly low. However, if the population enacted a binding social compact according to which workers would transfer income to the old, without any expectation of being repaid by them, but with the assurance that they would be similarly treated when they were old, then consumption could be more evenly distributed across the life cycle, and life-cycle utility would be higher. In place of the negative rate of interest provided by the market outcome, people would earn through the transfer system an implicit rate of return equal to the population growth rate (plus, in a more realistic context, the rate of productivity growth). Thus intergenerational transfers supported by a social compact could make everyone in every generation better off.

Systems of this sort are called pay-as-you-go, or PAYGO, because the obligations created are not backed up by assets accumulated in a fund; rather, future payments of benefits come from future contributions by future workers. Such a system is politically easy to start–at least when the age distribution of the population is such that the size of the working-age population is much larger than that of the old-age population (hence modest per-capita contributions by the former can provide generous per-capita benefits for the latter)–because all current and future generations apparently gain. These systems are very painful to end, however, because if the compact is terminated the last generations of workers end up making transfers to the elderly but receive nothing in their own old age. At any time during its operation, such a transfer system has an implicit debt that is owed to those who have already paid in, thus acquiring an entitlement for later support.

Traditional familial support systems for the elderly are PAYGO transfers, but are sustained by individual values and social norms instead of a formal social compact (although private transfers can sometimes be reinforced by law, as is the case in Singapore). Public pension systems in much of the industrial world, including the U.S. Social Security system, are operated on a pay-as-you-go basis. The transition from a family support system to a public system is relatively painless, since the implicit debt to be repaid is just transferred from one system to the other.

Slow population growth and rising life expectancy make both familial and public pension systems much less attractive compared to such systems in a situation when population is growing rapidly and expectation of life in old age is short. Nonetheless, despite growing dissatisfaction with such arrangements generated by the emergence of demographic conditions marked by slow population growth and longer life expectancies, and the appeal of potentially higher rates of return available from other kinds of investments, the systems cannot be shut down or converted to privately-funded systems without repaying the implicit debt. For families, such a shift would mean that one generation would have to support both its aging parents and save for its own retirement. For current public sector programs, the existing implicit debts are typically huge–often one, two, or three times the size of the country's annual gross domestic product–and often larger than the existing explicit government debt. Nonetheless, a number of countries, mostly in Latin America and most notably Chile, have made or initiated the transition to a funded system.

In the late 1980s Gary S. Becker and Kevin M. Murphy developed an influential theoretical construct that would link the provision of public education and public pensions, so as to bring about an efficient level of investment in education when parents' altruism is insufficient to ensure such a level, and institutions that would enforce repayment of intergenerational familial loans do not exist. The introduction of a modified public pension system would compel the children who received the education to repay their parents through their contributions to the system, and no generation would get a windfall gain or suffer a loss.

Family Intergenerational Transfers

Transfers to and from children and the demographic aspects of such transfers are discussed in a substantial literature. Caldwell argued that "in all primitive and nearly all traditional societies the net flow [of wealth] is from child to parent" (1976), and that this net flow motivated high fertility. At some point, labeled the "great divide," the direction of flow reverses as children become costly rather than assets in modern industrial settings. At that point, in narrowly economic terms it would be rational to have no children; positive fertility results from the psychic utility children represent for parents. Caldwell's wealth flows theory has been criticized by behavioral ecologists, who argue that species have evolved to maximize reproductive fitness by transferring resources from parent to child, and that parents would not use children merely as a means to supply family labor or to support them in old age. Arguing in this vein, Hillard Kaplan reported in 1994 that in a hunter-gatherer group in the Amazon Basin, even the oldest members of the population make transfers to their children and grandchildren, and the more of these they have, the greater the transfers they make. Thus transfers are downward rather than upward, counter to Caldwell's claim. Ronald Lee also found that in agricultural and pre-agricultural societies, the net direction of total transfers is strongly downward across age, from older to younger. In modern industrial societies, however, new institutional arrangements reverse the direction of net intergenerational flow of resources, in part reflecting the generosity of public pension and health-care transfers to the elderly, and in part a result of population aging which greatly increases the proportion of elderly in the population. Even in modern industrial societies, however, private net flows within the family are downwards.

At the micro-level, there is extensive theoretical and empirical work on transfers to children, since transfers are equivalent to investments in child quality–a crucial element in fertility theory. There is also an extensive literature on the motivations for familial intergenerational transfers (see, for example, Cox, 1987). A debated issue is whether apparent altruistic intrafamilial transfers actually involve an implicit quid pro quo, and, therefore, are best interpreted as exchanges. Empirical findings shedding light on the answer are mixed.

See also: Age Structure and Dependency; Caldwell, JohnC.; Evolutionary Demography.

bibliography

Becker, Gary S., and Kevin M. Murphy 1988. "The Family and the State." Journal of Law and Economics, April: 1–18.

Caldwell, John C. 1976. "Toward a Restatement of Demographic Transition Theory." Population and Development Review 2: 321–366.

Cox, Donald. 1987. "Motives for Private Income Transfers." Journal of Political Economy 93: 508–546.

Kaplan, Hillard. 1994. "Evolutionary and Wealth Flows Theories of Fertility: Empirical Tests and New Models." Population and Development Re-view 20: 753–791.

Kotlikoff, Laurence J., and Lawrence H. Summers. 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation." Journal of Political Economy 89: 706–732.

Lee, Ronald. 2000. "A Cross-Cultural Perspective on Intergenerational Transfers and the Economic Life Cycle." In Sharing the Wealth: Demographic Change and Economic Transfers between Generations, ed. Andrew Mason and Georges Tapinos. Oxford: Oxford University Press.

Samuelson, Paul A. 1958. "An Exact Consumption-Loan Model of Interest With or Without the Social Contrivance of Money." Journal of Political Economy 66: 467–482.

Ronald Lee