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Volume 17, Issue 3 - September 2017

No retiree is an island

Two MRRC researchers took part in the Thursday afternoon session, “Family Ties & Retirement Security,” which looked past the individual/couple perspective to get a wider view of family influences.

Kathryn Edwards shared findings from “Parents with an Unemployed Adult Child: Labor Supply, Consumption, and Savings Effects,” her study with fellow RAND researcher Jeffrey B. Wenger.

“The name of this paper should be ‘What is the Cost of Being the First National Bank of Mom’ — my mom told me to put that joke in,” Edwards said to audience laughter.

Edwards and Wenger looked at data for mothers and their children from the Panel Study of Income Dynamics (PSID). In the PSID, 60 percent of the unemployment observed occurs before age 30. The median age a mother can expect to be when her adult child becomes unemployed is 55. Therefore, an adult child’s unemployment frequently comes right when Mom needs to focus on retirement.

The researchers divided the mothers into those younger than 62 years old (preretirement), those 62-70 (retirement window), and 70 years and older (retired). Children were required to have been working (not just having graduated from school, for example), and they had to maintain their own household. The researchers did not look at co-residence.

Generally, the research literature finds informal financial assistance provided to adult children in some form. Edwards and Wenger confirmed that there were financial transfers to children. “What’s relevant for retirement security,” said Edwards, “is to what extent do parents adjust their behavior when a child is unemployed…At any given time we expect mothers to send about $270 a year to their kid. The year of unemployment it increases by $64.”

Other findings when a child is unemployed:

· Preretirement mothers increased their employment by three and a half days to a mean of about 32 weeks per year.

· There was a very slight uptake in Social Security claiming for partnered women who hadn’t yet claimed by age 65.

· Food consumption dropped from an average of $11,000 a year by about $224 — with a larger drop for retired moms.

· Preretirement working mothers decreased their retirement savings from .7 percent of income to about .45 percent for that year.

· Retirement-window mothers increased savings by an average of 3.4 percent.

Edwards pointed out that a child’s job loss causes parents to update their assessment of their child. “It’s kind of an awkward way to put it, but if you were to think of your kid as a dividend who’s going to pay off money in future…you might think not only are they not going to give [you] as much, they might require more assistance. ”

This provides evidence that parents, as Edwards put it, “are building a safety net for a younger generation.”

Parental investments at a different stage of a child’s life are the focus of the Eric French (University College London), Andrew Hood, and Cormac O’Dea (both Institute for Fiscal Studies) project, “Transfers, Bequests, and Human Capital Investment in Children over the Lifecycle.” Understanding the degree to which older generations feel altruistic toward younger ones provides insights into viable Social Security reforms.

“There are lots of reforms [under consideration] whereby those near retirement might take a little bit of a cut to their benefits. If they don’t care about their children or future generations, they’d be unwilling to accept those sorts of benefit cuts,” French said. “However, if individuals are very altruistic toward their children, that increases the scope of reforms that might benefit the young that the old would agree to as well.”

Quantifying altruism is hard, however, since it is sometimes difficult to tell altruism (saving to ensure a bequest) from self-insurance (saving for future medical expenses). To better pin down altruism’s prevalence and effects, French and his co-authors built a long-term, over-lapping generations model that looks at transfers of time and money at multiple stages of the life cycle. The researchers used data from Britain’s National Child Development Study (NCDS), which inspired Michael Apted’s “Up Series.” Every seven years, the NCDS collects children’s test scores and asks detailed questions on time investments during childhood (reading to/playing with child), educational investments (choosing residence based on school quality, interest in child’s classes), and as children age, their employment outcomes and parental cash investments of transfers and bequests. The authors then examined the effects of such investments on intergenerational correlations in education, income, and wealth.

The researchers found:

· Parental education is correlated with child’s educational attainment: 66 percent of children with a college-educated father attend college; 20 percent of children with low-education fathers attend college.

· Children with college-educated fathers inherit around $40,000 more than those with low-educated fathers.

· Average lifetime earnings for male children who have fathers with only compulsory education is approximately $951,000 compared to $1,156,000 for those with fathers with some post-compulsory school and $1,327,000 for those with fathers with some college.

“Is this investment versus something else — luck, genes, social connections, perhaps?” asked French. “As it turns out these time investments are highly predictive of future success.

“A one standard deviation increase in time spent with the children at age 7 happens to increase normalized ability by .13 standard deviations at age 11 — important effects,” said French.

The model, French explained, can be used to “simulate household behavior and welfare under counterfactual policies. This, he suggested, would lead help to build more equitable policy reform.

Videos of and slides for Edward’s and French’s presentations are available on the Center for Retirement Research at Boston College’s website.

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