Private and Familial Transfers Andrew Mason with assistance

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? Familial Transfers (Inflows) as a Percentage of Total Consumption, Taiwan 1979 1998 Inter-household 5% 6% Intra-household 66% 55% Bequests Perhaps about 5% Private charitable contributions: in the US contributions for welfare about ¼% of GDP; education about ¼% (Lindert 2004).

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 household’s 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 isn’t quite correct because individuals can be outflows for one sector and inflows for another.

Familial Education Transfers (Inflows) by Age, Indonesia. Source: Maliki 2004.

Familial Education Transfers (Outflows) by Age, Indonesia. Source: Maliki 2004.

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