Private and Familial Transfers Andrew Mason with assistance of Nicole Mun-Sim Lai

Outline Describe the methods Present illustrative results Identify problems that need to be addressed

Private Transfers Reallocation of economic resources from one age group to another Familial transfers –Inter-household transfers –Intra-household transfers –Capital transfers Non-familial transfers: transfers through private foundations, religious organizations, etc.

How important are these forms of transfers? Private charitable contributions: in the US contributions for welfare about ¼% of GDP; education about ¼% (Lindert 2004). Familial Transfers (Inflows) as a Percentage of Total Consumption, Taiwan Inter-household5%6% Intra-household66%55% BequestsPerhaps about 5%

How important are these forms of transfers? Inter-household and intra-household for Taiwan from Nicole Bequests – crude estimate: 5% of C (1/life expectancy of a household times assets divided by consumption) Private charitable contributions: in the US contributions for welfare about ¼% of GDP; education about ¼% (Lindert 2004).

Inter-household Familial Transfers Assumption: All inter-household transfers are between household heads Inter-household transfers are estimated directly from FIES or similar surveys Capital transfers are excluded Discrepancies between inflows and outflows –Reporting error: giving > receiving –Gifts to and from ghost households –Remittances from abroad

Modified Arrow Diagrams Foot is at mean age of outflow Head is at mean age of inflow Per Capita Inflow and outflow are not equal –Per capita outflow is width of arrow at base –Per capita inflow is width of arrow near head Expressed relative to total consumption to facilitate inter-temporal comparison

Inter-household Transfers: Issues Reporting errors and absence of aggregate controls Distinguishing inter-household transfers from capital transfers

Intra-household Transfers By assumption, household heads hold all assets; save and dis-save; give and receive inter-household transfers; hence, Consumption by non-head household members must equal labor income + public transfer + intra-household transfers.

Intra-household Transfers

A Simplification Intra-household transfers can be estimated without estimates of public consumption by age; Public consumption and in-kind public transfers are identical; hence, they drop out of the calculation of intra-household transfers for members; Substitute private for total consumption and net cash public transfers for public transfers.

Intra-household Transfers Intra-household transfers for any household j must sum to zero; hence, intra-household transfers to the head equal to – transfers to members:

Warning! Method requires estimates of key variables by headship status (or assumption that the variable in question is independent of headship status); For Taiwan, we have labor income and net public cash transfers for each household member; Consumption is assumed to be independent of household status.

Inflows and Outflows No direct measure available. If NO household member both receives and gives household transfers, then: –Outflows and negative net transfers are identical; –Inflows and positive net transfers are identical.

Sector Specific Transfers: Education and Health Sector specific transfers are valuable complement to public sector specific transfers However, household transfers are not governed by an explicit program or contract Strategy: specify the transfer system a priori

A proposed sector specific transfer system Two kinds of programs –General support –Targeted support (health and education) Targeted support system –Spending on targeted consumption is financed entirely by transfers to the individual consuming the good –Transfers are financed by taxing the households taxable income

Education Transfers Transfer inflows: Transfer outflows:

Education Transfers

Taxable Income Broad measure has advantage that it will be greater than zero for all households Equation (6) suggests labor income + net public transfers + net inter-household transfers + asset income. Perhaps the imputed return to durables (if any) and owner-occupied housing should be excluded.

Intra-household Transfers: General Support Intra-household transfers for general support are calculated as a residual, i.e., the difference between intra-household transfers and targeted transfers Equation 8 isnt quite correct because individuals can be outflows for one sector and inflows for another.

Source: Maliki Familial Education Transfers (Inflows) by Age, Indonesia.

Source: Maliki Familial Education Transfers (Outflows) by Age, Indonesia.

Intra-household Transfers: Issues Intra-household transfers are only as good as consumption estimates and, hence, subject to the same problems; Importance of imputing labor income by headship status; Sector specific estimates –Direct estimation of health expenditure profile needs testing; –Arbitrary nature of outflows.

Generational Succession: Familial Capital Transfers Inter- and intra-household transfers support current consumption Capital transfers are intended to transfer wealth, per se, to descendant generations

A Simple Model of Patrilineal Succession Households consist of father and his sons; Father is the head until his death; eldest son takes over as head; brothers remain. Mortality of eldest males and households equivalent. Capital outflows: –Identical to bequests; –Depend on mortality of males/households and co-variance between mortality and wealth. Capital inflows: –New households are reconstituted ghost households (with sons as heads) –Estate taxes.

Complexities Head may abdicate household leadership prior to his or her death –Household fusion –Headship succession –In NTA system wealth follows headship: death of the household not death of an individual leads to a capital transfer.

Complexities Intra-generational succession –In many societies, household leadership passes to the surviving spouse if any; –In NTA, this is a non-event in the sense that the household of age a survives; –However, the death of the head may precipitate an inter-generational transfer even though the household persists; –Relevant to modeling relationship between household transitions and mortality.

Complexities Intra-generational transfers II –If individuals or couples purchase annuities, their death leads to an intra-generational transfer rather than an inter-generational transfer;

Complexities Sharing rules for intergenerational transfers –Eldest son –Equal division –Other? Estate taxes –Bequests –Other capital transfers

Complexities Other Capital Transfers –Estate tax avoidance –Other inter vivos capital transfers Dowry Bride price Fancy wedding Help with house

NTA Bequests Transfers that arise due to the decline in the number of households: Decline is due to: –Death to the household head –Fusion (parents move in with their children) –Generational succession (headship designation passes to younger generation)

NTA Bequests - Outflows Survival of cohort wealth: Survival of households: Correlation between wealth and survival: Coefficient of variation for wealth:

NTA Bequests - Outflows The correlation between wealth and household survival captures some of the complexities: –Effect of wealth on individual survival –Effect of wealth on household fusion and headship transition

NTA Bequests - Inflows Sharing Rules –Equal sharing among offspring –Parity bias, e.g., eldest or eldest son –Gender bias – no effect Inflows are to households of non-head beneficiaries

Other Issues Estate taxes Other capital transfers