Crowding In or Crowding Out? Old-Age Allowance and Intergenerational Transfers

This blog is based on an article in the Journal of Social Policy by Chenhong Peng, Julia Shu-Huah Wang, Yiwen Zhu and Yue Zeng. Click here to access the article.

One central question surrounding introducing or expanding old-age income transfer programs is will public transfers to the elderly crowd out financial and non-financial transfers (e.g., co-residence and contact behaviour) from adult children? If public and private financial transfers are close substitutes, old-age public transfers will have redistributive effects across the population without necessarily increasing the income security of the elderly. In our study, the results suggest that an aged-based old-age allowance does not change financial transfers or co-residence patterns. Instead, it significantly increases the contact between elderly parents and their adult children. Hence providing old-age public transfers to the elderly should not be hampered by the fear of distorting family support functions.

To dive further into the motives behind intergenerational transfers, prior studies point to several drivers. Intrinsic motives, such as love and filial piety, drive some transfers from adult children, whereas instrumental motives, such as performing transfers in exchange for other supports, or repaying parents’ early nurturing or investment, motivate others. Various motives result in different evaluations of the situation and thus in different behavioural responses to policy changes. Therefore, another intriguing question is what types of motives for intergenerational transfers are more susceptible to policy changes? Are policy changes more likely to alter behaviors from “higher motivators” or “lower motivators”? We found that adult children who have lower levels of altruism, exchanging for financial help, reciprocity, and filial piety, are more susceptible to policy changes. Their contact through making phone calls or paying visits to elderly parents increased after the introduction of the old-age allowance. 

Our study investigated the effect of an old-age allowance programme – the Senior Citizens Welfare Living Allowance (SCWLA) – on intergenerational financial transfers, living arrangements, and contact in Taiwan. It also investigated the heterogeneity of its effects by adult children’s five types of motives for giving: altruism, exchange, reciprocity, affection, and filial piety. Taiwan has recently experienced rapid population aging. It took only 25 years for the proportion of people aged 65 or above to double from 3.5% in 1975 to 14.6% in 2018. The increasing pressure of an aging population, accompanied by the economic crisis in the late 1990s that worsened the income situations of the poor and the elderly, led to the introduction and expansion of old-age income programmes. Established in 2002, the SCWLA targets senior citizens aged 65 or older who are not covered by any social insurance programmes It provides a monthly transfer of NT$ 3,000 (an equivalent of 15% of monthly disposable per-capita income). Although the SCWLA is means tested on the beneficiary’s income and assets, eligibility primarily depends on age because the income and asset caps are set at a high level. In 2011, the SCWLA covered 33.1% of the population aged 65 or older.

Using 2002, 2004, 2005, and 2006 data from the Panel Study of Family Dynamics, we employed a difference-in-difference individual fixed effect model to compare the outcomes across the treatment (aged 65 and older) and comparison groups (aged 55 to 64) before and after the introduction of the SCWLA. We documented several interesting findings. First, we found that the SCWLA crowds in intergenerational contact but does not significantly change financial transfer or co-residence patterns. When a cash allowance program for elders is mostly age based, no substitution between public and private financial transfers to elderly parents was observed. Hence, when weighing the costs and benefits of providing old-age financial support, government should not be deterred by the fear of distorting family support functions. Moreover, we found that an old-age allowance increases intergenerational contacts, potentially through relieving families from financial entanglements and fostering a culture and awareness of old-age support. 

Second, adult children with varying levels of motives respond to policy changes differently (Figure 1). The effects of policy change were less variable by the motivation of love yet more variable by the motives of altruism, exchanges for financial help, reciprocity, and filial piety. In particular, adult children with lower levels of the motives of altruism, exchanges for financial help, reciprocity, and filial piety are primarily driving the rise in intergenerational contact. The marginal cost of changing the behaviors of “high motivators” is higher because their original interaction levels werealready high, whereas more room exists for improvement and hence more malleable among “low motivators”. The old-age allowance does not weaken family solidarity; instead, it demonstrates the importance of showing respect and concern for the elderly to low-motivated adult children. Also, the allowance increased intergenerational communication potentially through increasing elderly parents’ economic independence and reducing the financial strain between them and their adult children. This is an unintended but previously overlooked policy benefit of implementing old-age income support programmes. Our study also highlights the importance of factoring in divergent behavioral responses from adult children with varying motives to design effective old-age policies. 

Our study was conducted in Taiwan, one of the Chinese societies in which the cultural norms of filial piety and respect for the aged are upheld. Additionally, the share of income devoted to private transfers in Taiwan (5.8%) is much higher compared with OECD countries (0.8%). Whether the crowding-in effect of intergenerational contact among the “lower motivators” and the null effect among “higher motivators” revealed in Taiwan would hold up in other societies with different cultural norms towards the elderly is open to further examination. 

About the authors

Chenhong Peng is a Research Assistant Professor at Hong Kong Baptist University.

Julia Shu-Huah Wang is Assistant Professor at the University of Hong Kong.

Yiwen Zhu is a Masters student at the University of Pennsylvania.

Yue Zeng is a PhD Candidate at the Univerity of Hong Kong.

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