Róbert Iván Gál
Flow of transfers among overlapping generations
The studies below were published as chapters of
Gál, R.I. (ed.)(2003): Fathers and sons and grandsons: Flow of transfers among overlapping generations (in Hungarian).Budapest: Osiris
Publications and working papers available in English based on the book:
Gabos, A., Gal, R. I. and Kezdi, G. (2005): Fertility effects of the pension system and other intergenerational transfers: Test on Hungarian Data. PIE Discussion Papers 259. Tokyo: Hitotsubashi University.
Gal, R.I. and Tarcali, G. (2003): Pension reform and intergenerational redistribution in Hungary. The Economic Review (Keizai Kenkyuu, Tokyo), 54, 237-47.
We gratefully acknowledge the permission of Iwanami Shoten Publishers to upload the paper.
Table of content (all chapters are available only in Hungarian):
1. Introduction: Flow of transfers among overlapping generations: the family, the market and the sate
2.1 The "old-age security" hypothesis of fertility and the pension system
2.2 Fertility effects of pensions – methods and international results
2.3 Fertility effects of family benefits – methods and international results
2.4 Fertility effects of family benefits – test on Hungarian data
3. Redistribution among generations
3.1 Redistribution among generations – methods and international results
3.2 Redistribution among generations – test on Hungarian data
4. Private transfers of income and wealth
4.1 Private transfers of income and wealth – theories
4.2 Private transfers of income and wealth – methods and international results
4.3 Private transfers of income and wealth – test on Hungarian data
These studies derive from six stylised facts that characterise all societies. First, human life cycle consists of three phases, childhood, the active age and old age. Although these phases may differ across historical periods, societies and individuals, the pattern seems to be general. Second, there is a discrepancy in the consumption path and the productivity path of the life cycle: children and old people have to consume even if they are not productive. Third, there are technical or conceptual constraints of the accumulation of goods and services. Fourth, societies are inhibited by people of different ages. Children, active age adults and old people live together. Fifth, each individual faces longevity risk in that nobody knows when he or she will die. Finally, sixth, in order to smooth out the discrepancy between the consumption path and the productivity path each society builds an institutional setting that governs the flow of transfers between overlapping generations.
Consumption smoothing is less risky if the risk-pool is larger. However, the larger risk-pool creates problems non-existent in the case of intrafamilial transfer flows. Monitoring problems arise as free-riding is less visible. Emotional links and altruistic motivations are weaker. The amount of transfers may deviate from the requirements of long-term sustainability and it may become subject to short-term political decisions. In addition, the emergence in the course of short period of new institutions such as annuities markets or social security of-fers a leeway for a generation and gives them an opportunity to cheat on their obligations towards a generation before or after them.
The chapters above discuss these processes and further consequences. Chapter 2 focuses on the fertility consequences of the shift from family generations to social generations in the intergenerational chain of transfer flows. The argument goes as follows. In a society of families old age income is secured, lacking other vehicles of consumption smoothing, by high fertility. The extension of the risk-pool reduces the required number of children. In addition, the profits of private investments in human capital are shared by people who do not contribute or only indirectly contribute to the costs of raising children. People having no children can also get pensions even though they contribute to raising the next generation of tax-payers only indirectly through the education system and other public programs. This line of argument, the old age security hypothesis is accepted by most of the empirical literature while some references reject it. This debate is summarised in section 2.1. The methodological and empirical literature, which grew out from this debate, is reviewed in section 2.2.
A frequent next step in the argument is that declining fertility induces a renewed push for higher family benefit programs. However, there are alternative explanations of the fertility impact of the welfare system; the "old-age security" hypothesis is just one of them. Section 2.3 starts with the review of the "child as durable consumption good" theory. Despite differences at some points, both economic theories of fertility predict a positive effect of family benefits on fertility. The rest of section 2.3 reassesses the methodological problems of testing the hypothesis and international empirical results published in the literature. In section 2.4 we show in a time-series analysis of how family benefits affected fertility in Hungary.
The emergence of capital markets and insurance markets and the expansion of social security took place in a historically short period. Capital markets let the generation just in their active age at the time the market alternative of intra-familial relations takes shape quit the chain of intergenerational transfers: it offers a chance to get old age income without honouring obligations towards the old. Pay-as-you go pension schemes, to the contrary, favours the first-coming old generations and cohorts close to the retirement age since they get pension for shorter service years and lower contributions rates. Both institutional innovations induce systematic redistribution across overlapping generations. The literature of this subject is reviewed in section 3.1. In section 3.2 we test empirically the intergeneration redistribution in the Hungarian pension system.
In chapter 4 we discuss private transfers of income and wealth. Much of the chapter focuses on a crucial issue of the subject, the significance of altruism in the flow of transfers. Do public transfers crowd out private transfers knowing that the emotional link between family generations is stronger than between social generations? Is leaving bequeath voluntary or it is merely due to the adverse selection in annuity markets, which makes annuities all too expensive? Following the line of previous chapters we first discuss theories, than we review the literature on methods and empirical results and finally test the hypothesis on Hungarian data.