Intra-Family Cash Transfers in Older American Households
by Sudipto Banerjee, Ph.D., Sudipto Banjerjee is affiliated with the Employee Benefit Research Institute (EBRI.org). Exceprted and reprinted here with permission. Read the complete study here.
When families help each other out financially, who typically pays: Older family members supporting the younger ones, or vice-versa?
Despite the growing wave of retiring Baby Boomers, it’s far more likely to be older Americans transferring cash to their adult children or grandchildren than the other way around, according to recent research by EBRI.
EBRI’s analysis shows that a very small portion of older households receive transfers from their younger generations, while a much larger section of older households transfer money to their younger generations. The amounts transferred by older households are much higher than what they receive. These transfers are highly correlated with income.
Specifically, EBRI found that from 1998 through 2010, there has been an increasing trend of transfers going from older households (those where at least one member of the household is ages 50 and above) to their family members. Very few older households (4 percent to 5 percent) receive cash transfers from their families, compared with those who transfer money (38 percent to 45 percent) to their younger family members.
During a two-year period between 2008 and 2010, the average amounts transferred by households who had at least one member between ages 50‒64 and ages 85 or above were $8,350 and $4,787 respectively. The amount transferred from older Americans to their children and grandchildren generally goes down with age, but the average annual transfer amounts are large enough to be considered as a major spending item in a household budget.
Most of the economic research on intergenerational transfer of wealth (Gale and Scholz, 1994; Kotlikoff, 1988; Modigliani, 1988) has been concentrated on bequests left by people at the time of their death.
But transfer of cash to family members during the lifetime of a person is less studied, although it is a common occurrence—as shown in this analysis. These intra-family transfers can have different implications for retirement security of a household:
First, if made as a gift, a transfer reduces the amount of assets available in retirement by those making the gift.
Second, if older households face liquidity constraints, then sudden needs to transfer money would be met by accessing long-term investments, which may reduce investment returns and increase tax liability.
Finally, it might be useful for the retirement-savings-adequacy models to incorporate these transfers as they might have important implications on retirement security of these households. Therefore, it is important to understand the nature of these transfers.
This study reports the frequency and extent of intra-family cash transfers: both transfers from older households to their children and grandchildren, and vice versa. It also shows how these transfers are correlated with income levels and compares the asset and income levels of households that make such transfers and those that don’t.
The results show that a very small portion of older households (those with at least one member ages 50 or above) receive transfers from their younger generations, while a much larger section of older households transfer money to their younger generations.
The amounts transferred by older households are also much higher than what they receive. These transfers are highly correlated with income. Over time, the percentage of older households transferring money to their families has risen.
The data for this analysis come from the Health and Retirement Study (HRS), a study of a nationally representative sample of U.S. households with at least one member of the household ages 50 and above.
It is the most comprehensive survey of older Americans in the nation and covers topics such as health, assets, income, and labor- force status in detail. It is a biennial longitudinal survey with survey waves in even-numbered years beginning in 1992.
The initial sample consisted of individuals born between 1931 and 1941 and their spouses, regardless of their birth year. Newer cohorts have been added in the following years. RAND Corporation provides an easily accessible version of the core HRS survey data. For the purpose of this study, the individual and family level RAND data files have been used.
The study is sponsored by the National Institute on Aging (NIA) and the Social Security Administration (SSA) and administered by the Institute for Social Research (ISR) at the University of Michigan. Data from the 1998 through 2010 surveys are used for this study. As HRS is a biennial survey, all the results (unless otherwise mentioned) are for two-year periods. All the transfer amounts are converted to constant 2014 dollars. The definition of transfers as defined in the survey instrument is as follows: “By financial help we mean giving money, helping pay bills, or covering specific types of costs such as those for medical care OR insurance, schooling, down payment for a home, rent, etc. The financial help can be considered support, a gift or a loan.”
Cash Transfer Rates From Older Households to their Families
Figure 1 shows the percentage of older households, 50 and above, that have made cash transfers to their children and grandchildren in the past two years between 1998 and 2010. It shows that, first, a significant percentage of older households make cash transfers to their families.
Second, the percentage of older households making cash transfers to their families has increased with time, from 38.6 percent in 1998 to 44.6 percent in 2010. There are also two notable drops during this period: One between 2000 and 2002, and the other between 2006 and 2008, both of which coincide with financial-market drops.
Finally, the largest increase in percentage of older households transferring cash to their families is shown between 2002 and 2004. It should be noted that in 2004, HRS for the first time included part of the Baby-Boomer generation in the study (Early Baby Boomers, those born between 1948 and 1953).
Therefore, part of the time trend Figure 1 captures could be a result of a cohort effect.
Cash Transfer Rates From Families to Older Households
Figure 3 shows the percentage of older households, ages 50 and above, that received cash transfers from their family members in the two-year periods between 1998 and 2010. There are a couple of important observations.
First, a very small number of older households receive cash transfers from their families, compared with how many (in Figure 1) make cash transfers to their families. Between 2000 and 2010, only between 4 and 5 percent of older households received cash transfers (it should be noted that all transfers are self-reported by the older households, so to the extent they are unwilling to reveal to the interviewer that they received help from their children or grandchildren, there could be some underreporting of these transfers).
Second, unlike Figure 1, there is no clear time trend in the percentage of older households receiving cash transfers from their families. In 1998, only 3.8 percent of older households reported receiving cash transfers, increasing slightly to 4.2 percent in 2010.
But there is one similarity with Figure 1: There are two notable drops in Figure 1, first between 2000 and 2002 and then between 2006 and 2008. In Figure 3, there are also two notable increases, exactly during those same two periods.
This means that both types of intra-family transfers are correlated with financial market movements. Figure 4 breaks down Figure 3 by age group of the older-recipient households. Here also there is an age pattern, which is just the opposite of Figure 2. Older households are more likely to receive transfers from their families. For example, in 2010, 3.8 percent of households in Age Group I received cash transfers, compared with 5.7 percent among those in Age Group IV. Also, there is no clear time trend within the age groups. Between 2006 and 2008, the youngest age group (those between ages 50 and 64) experienced the highest increase in cash transfer receipts (1.1 percentage points).
Average Cash Transfers From Older Households to Their Families
Figure 5 shows the average transfer amounts, in 2014 dollars, from older households to their younger family members. It is important to note that the reported averages are for two-year periods.
From 2004 onwards, Age Group I stands out from the rest (it should be noted again that in 2004 the Early Baby Boomers were included in the sample for the first time). In 2010, the average transfer amount for Age Group I was $8,350 during the preceding two-year period, while the average transfer amount for all other groups was somewhere near $5,000 ($5,300, $4,891, and $4,787 for Age Groups II, III, and IV respectively).
Also, from 2004 onward there has been a general pattern between age and average transfer amount: Older households are more likely to transfer less, on average. One exception has been the oldest cohort, Age Group IV, between 2006 and 2008.
These averages are high enough to be considered a major expenditure category for older households. A formal comparison between different major expenditure categories and cash transfers has been provided at the end of the report, but suffice it to say that cash transfer to families is an important discretionary spending item in the budgets of older households.
Figure 6 also shows the average transfer amounts, but with one difference: Here the average cash transfers are calculated only for those who reported a non-zero transfer. First, the average conditional transfers are much higher. This is intuitive, as all the zeros are removed from the calculation. So, for older households that actually transfer money to their families, the average is more than $10,000 during a two-year period for each age group, and sometimes significantly higher.
Also, in recent years the difference between age groups has been relatively small. For example, in 2010, the average transfer amounts were $16,272, $13,639, $14,704, and $16,835 for Age Groups I, II, III, and IV respectively.
Read the complte study, with charts, here