By My Parents' Bootstraps: Adult Children, Wealth Transfers, and Inequality

Tuesday, April 7, 2015

It may not come as a surprise that high-income families pass on more money to their children than their low-income peers. And it may seem obvious that this money makes a difference in how well those children do. What my analysis suggests, however, is that these wealthier families continue to transfer considerable asset stores to their 'children' even after they leave home as adults. These transfers are much less visible than the sizable investments that parents make in their younger children, but they may be just as important in shaping the trajectories of young people's lives, subsidizing their advanced educations, cushioning them from economic shocks, and facilitating valuable risk-taking. Significantly, these wealthy families not only transfer more wealth to their adult children, but they also direct those investments for different purposes, with considerable implications for the perpetuation of inequality.

My analysis found that adult children from high-income homes are three times more likely to receive parental asset transfers than those from less economically advantaged backgrounds. The data also show the money higher-income families pass on is more often targeted toward investments in education and assets such as homes. In light of other AEDI research into the economic mobility effects of this higher educational attainment and accumulation of initial asset stores, the productive value of these wealth transfers may be particularly valuable. In contrast, lower-income families cannot pass on as much money (and are far less likely to transfer any at all) and are more likely to use such money for other purposes, such as paying off debts or smoothing consumption.

This research is among the first to use the newest Panel Study of Income Dynamics data and to focus on grown children. A central finding is that the money parents give to adult children plays a small but significant role in perpetuating inequality between generations. Future analysis in the Wealth Transfer Project at AEDI will continue to explore how intrafamilial wealth transfers influence the well-being of children and young adults, in particular, in order to better understand these dynamics and the public policy interventions that could provide similar supports to those without wealthy relatives. The ultimate goal with this project is to give disadvantaged people and families increased equality through policy informed by research. To date, there has been relatively little examination of how families' gifts to their young adult children--increasing, as the period of extended adolescence lengthens post-recession--affects inequality. The focus tends to be on childhood and adolescence, but young adulthood is a critical period for early wealth building, with significant implications for asset holdings and financial well-being later in life.

The American Dream holds that through hard work and education, anyone can improve their lot in life. These findings add to a growing body of research showing that dream fails to meet reality. Even with hard work and education, many people from low-income families are burdened by student debt and unable to save money, buy homes, start families, save for retirement or accumulate money they can pass on to their own children. Young adults from higher-income backgrounds enjoy a hidden advantage. Americans may not like 'handouts', but data show adults from higher-income backgrounds get more handouts from their parents, albeit in often-invisible ways. Increasing our collective understanding about how one's privileged childhood provides significant advantages even after 'launch' into adulthood may galvanize a greater willingness to provide parallel supports for disadvantaged young people, who similarly need a cushion or catapault in their early financial independence.

Data show that families from the first-quartile, or lowest-income group, do pass on money, approximately $3,000 for men and $2,000 for women. Fourth-quartile families, however, averaged $20,000 for men and $23,000 for women. That pattern of inequality followed in findings showing that while 25 percent of men and 27 percent of women received some transfer from their parents, the average amount was $42,000 when removing those who did not receive any transfers.

While the findings from the study show that asset transfers to adult children can perpetuate inequality, they make it equally clear that public policy should be enacted to address such inequalities. Economic mobility accounts with seed money, progressive matches for low-income households' savings, and asset-based alternatives to student debt could help lower-income individuals accumulate assets--financial and human--before the critical point of transition into young adulthood and could help many avoid the often-crippling debt young people face upon completing college. Public investments that encourage and facilitate accumulation of property and long-term wealth among the disadvantaged, such as home ownership and retirement savings, could help level the playing field as well, along with elimination of the asset limits that currently constrain the savings effort of many low-income families.

If the American Dream holds that effort and ability should determine an individual’s fate, and that a child’s future standing should not be dictated by her parents’, then equality demands government-funded transfers to low-income young adults, matching those enjoyed by their higher-income counterparts. The reality is that having wealthy parents matters long after a child grows up. We cannot hope to create equitable opportunities unless we account for these disparities with supports for those not fortunate enough to be born with this head start.

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