Household Retirement Saving and Informal Insurance: Getting by with a little help from friends

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 U.S. households is the presence of informal insurance, in the form of intervivos transfers to retired family members. We perform an empirical test of the hypothesis that potential transfers from family members and friends crowd out retirement saving, using data from various waves of the Health and Retirement Study. We estimate two-stage least squares models of welath accumulation, treating the probability of transfer receipt as endogenous and using characteristics of likely donors to identify the model. We find that an increase in the subjective proabability of receiving and intervivos financial transfer reduces wealth accumulation, especially financial wealth in the forms of checking, savings, money market accounts, CDs, and IRAs. A one percentage point (or roughly 8 ) increase in the probability of transfer receipt leads to a 3020 reduction in financial assets.

RDA 1999-001

Transfers/Retirement Saving/Social Support

10012