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Parental Income and Wealth Loss and Transfers to Their Young Adult Children

Journal of Family and Economic Issues volume 41, pages 316–331 (2020)Cite this article

Abstract

As young people transition to adulthood, many rely on financial support from their parents to complete schooling and to live independently. Evidence suggests that there has been a gradual lengthening of the time young adults take to transition to adulthood. Young people attempting to move out of their parents’ home, complete college, or enter the workforce during the Great Recession faced uncertain economic times, increasing their need for financial support. At the same time, the income and wealth losses experienced by young adults’ parents may have disrupted transfers from them. We analyze the impact of large and unexpected declines in parents’ income and wealth during and immediately after the Great Recession on monetary transfers to their young adult children using data from the Panel Study of Income Dynamics (PSID) and the PSID Transition to Adulthood study. We find parents’ financial support of their young adult children declined during the Great Recession. The likelihood of receiving a transfer declined from 74% in 2005 to 57% in 2009. Parents’ loss of income was a factor in the amount of decrease but on average was relatively modest—a $10,000 parental income loss decreased transfers to their adult children by $109. However, parents experiencing large declines in income, those at the 75th and 95th percentile of income loss, reduced transfers to adult children by $1150 and $1700, respectively. Declines in parental transfers that reduce college completion rates, increase student loan debt and decrease likelihood of homeownership may have long term consequences for financial well-being.

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Fig. 1

Source 2005–2011 Panel Study of Income Dynamics (PSID) and PSID Transition to Adulthood Surveys

Fig. 2

Source 2005–2011 PSID and PSID-TA Surveys; 2005–2011 ACS 1-year estimates; 2005–2011 LAUS

Fig. 3

Source 2005–2011 Panel Study of Income Dynamics (PSID) and PSID Transition to Adulthood Surveys

Fig. 4

Notes

  1. See Hurd et al. (2011) for a full explanation of their model, which is an extension of Yaari’s (1965) life cycle model of consumption.

  2. There is a significant literature that tests the empirical implications of the lifecycle model by estimating the Euler equation (Flavin 1981) that relates changes in income to changes in consumption for estimates of the marginal propensity to consume.

  3. The majority of private transfers (70–85%) come from parents (Brown and Weisbenner 2004; Gale and Scholz 1994). Thus, we attribute the transfers to the linked parents in the main PSID sample, but we recognize that some of the transfers could come from other relatives.

  4. See Appendix 1 for the PSID-TA questions related to transfers.

  5. In some cases, we eliminate children whose parents left the PSID sample in the survey year due to nonresponse, institutionalization, or death (53 observations). We also eliminate observations with missing data for parents’ income and wealth, our covariates of interest in the main PSID (226 observations).

  6. Some children have parents in different households. Since we do not know which parent provided financial support to the child, we expand our data set to include two observations for these children—one with the fathers’ characteristics and one with the mothers’ (503 observations).

  7. The geographic variables are used illustrate the local economic trends that parents experienced before and after the Great Recession. They are not included as variables in our main models.

  8. Different types of wealth may have differential effects on transfers. Given that only 13–18% of PSID families hold stock during the years in our sample, and housing wealth represents the majority of overall wealth, we also test models using only housing wealth and find the results of our models are quantitatively similar.

  9. The inverse hyperbolic sine (IHS) function is written: sinh−1 = log(yi + (yi2 + 1)1/2). It can be used as an alternative to the log transformation in the presence of extreme values that are both positive and negative, as it allows the variable to take on negative values (Burbidge et al. 1988; Pence 2006). A more general version of the function includes a scalar, θ; however, we use the Stata function asinh which sets θ = 1 (StataCorp 2013).

  10. Following the literature on intergenerational transfers, we model transfers as a two-part decision: (1) whether a transfer is made; and (2) the amount of positive transfers (see, for example, Cox and Rank 1992; Hurd et al. 2011).

  11. In a two-period sample, fixed effects (FE) and first differences (FD) models will produce identical unbiased under the assumption of strict exogeneity of the independent variables (Wooldridge 2012). When the sample includes three or more periods, fixed effects estimates are more efficient if the errors are serially uncorrelated, while first differences estimates are more precise when the errors are correlated. We estimate first difference models as our sample includes the same individuals observed over time and the errors are likely correlated.

  12. We tested the robustness of the results from the linear probability model of transfer likelihood to the use of a probit specification. The main results are qualitatively and quantitatively similar: the marginal effect of parental income on transfers is .026 (p < .05).

  13. The interpretation of IHS-transformed variables is similar to the log transformation, but it can vary at different points in the distribution depending on the value of θ. Thus, we interpret only the sign and significance of the IHS wealth variable.

  14. This lag in the income changes is expected due to difference in the PSID income and wealth survey questions. Whereas income ask about prior year earnings, wealth is measured at the time of the survey.

  15. We tested the first difference models with and without controls for parent and child age and education levels. The results are quantitatively similar to our main models.

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Funding

This research was supported by the National Institute on Aging through the Roybal Center for Health Policy Simulation (P30AG024968) and the MacArthur Foundation Research Network on an Aging Society (07-90553-000).

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Authors and Affiliations

  1. Sol Price School of Public Policy, Schaeffer Center for Health Policy and Economics, University of Southern California, Verna and Peter Dauterive Hall 213, Los Angeles, CA, 90089, USA

    Julie Zissimopoulos

  2. Schaeffer Center for Health Policy and Economics, University of Southern California, Verna and Peter Dauterive Hall 312, Los Angeles, CA, 90089, USA

    Johanna Thunell

  3. Urban Institute, 2100 M St NW, Washington, DC, 20037, USA

    Stipica Mudrazija

Authors
  1. Julie Zissimopoulos
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  2. Johanna Thunell
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  3. Stipica Mudrazija
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Correspondence to Julie Zissimopoulos.

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Appendices

Appendix 1: PSID-TA Survey Questions

Questions about financial transfers in the PSID Transition to Adulthood Surveys, F36.

Whether the respondent received a transfer for rent, home purchase, tuition, expenses, bills or a loan:

The next questions are about financial help that you might have received during [previous year]. This could be in the form of money given to you or money paid on your behalf for goods or schooling. Did your parents or other relatives… [purchase a house or condominium for you, pay rent or mortgage on your behalf, give you a personal vehicle, pay for tuition, cover expenses or bills, give you a personal loan]?

For positive responses, the amount of the transfers:

What was the value of [house, rent, vehicle, tuition, expenses, personal loan]?

Any other transfers not in the categories listed above:

Other than the amounts we just talked about, during the last two years, have you received any large gifts of money or property or inheritances of money or property

For positive responses, the amount of other transfers:

How much was it worth all together, at that time?

Appendix 2: Co-residency Results

See Tables 7 and 8.

Table 7 Percentage of young adults co-residing with the parents by child age, 2005–2011.
Full size table
Table 8 OLS first difference models, probability of living with parents in time t conditional on not living with parents in time t − 1.
Full size table

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Zissimopoulos, J., Thunell, J. & Mudrazija, S. Parental Income and Wealth Loss and Transfers to Their Young Adult Children. J Fam Econ Iss 41, 316–331 (2020). https://doi.org/10.1007/s10834-019-09645-z

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  • DOI: https://doi.org/10.1007/s10834-019-09645-z

Keywords

  • Financial assistance
  • Intergenerational transfers
  • Transition to adulthood