Mom and Dad We’re Broke, Can You Help? A Comparative Study of Financial Transfers Within Families Before and After the Great Recession

WP#2017-16

Abstract

This paper examines financial transfers within families before and after the great recession.  Transfers within families have historically been an important source of wealth accumulation for younger generations, but what happens to these transfers when incomes and wealth are distorted by a recession? We document patterns of financial transfers within families in the U.S. and Germany before and after the Great Recession.  This paper uses data from the Health and Retirement Study (HRS) and the Survey of Health, Aging and Retirement in Europe (SHARE).

Critical components of the analysis include the estimation of a difference-and-differents model to compare transfer behavior over time, and multiple triple-difference-and-difference models to further study how transfer behavior differs for different population groups.  Key limitations are related to available data.  The SHARE data used does not contain information for year 2007, which thus had to be excluded from the analysis.  In addition, harmonizing the both datasets might introduce some potential of errors.

The paper found that:

  • Transfers from parents to children are pro-cyclical. Fewer U.S. and German parents made transfers to their adult children in 2009 than in 2005, and transfer rates appear to start recovering earlier in Germany than in the U.S.  The estimated decline from 2005 to 2009 was 3 percentage points in the U.S. (8 percent) and 7.5 percentage points in Germany (29 percent).
  • Households who did fairly well during the recession reduce transfers in the same way than households who were not hit by a financial shock.
  • Households who experienced non-employment also did not reduce transfers compared to households who did not experience non-employment.

 
The policy implications of the findings are:

  • Private transfers are important for social policy because private financial transfers may be an important source of economic security during recessions, especially in countries where the social safety net is less generous.
  • Understanding how transfer behavior within family changes during recessions under different public safety nets can inform design of policies to promote economic security and equity.
  • In terms of our study, we (for example) find no relationships between public transfers crowding out private transfers. This result can be used to make current public policies more efficient.