An Investigation of the Effect of Informal Insurance on Household Retirement Saving

The literature on wealth accumulation suggests that social insurance programs serve to weaken the precautionary saving motive. Elsewhere, it has been suggested that family members can establish informal insurance arrangements that serve to reduce earnings variation in the same manner as social insurance. Together, these findings imply that another potential explanation for the inadequate retirement saving of many low income U.S. households is the presence of informal insurance, in the form of intervivos transfers to retired family members. In this paper, we describe a set of testable conditions that would support this contention, and examine in turn the empirical support for each. We perform an empirical test of the hypothesis that potential transfers from children crowd out retirement saving, using data from Wave 1 of the Health and Retirement Study. We find no evidence that parents with larger families adjust retirement wealth levels downward. WE find some evidence to suggest that parents' retirement portfolio composition is affected by family size.

RDA 1999-001

Transfers/Retirement Saving/Social Support

10022