Family transfers as informal insurance and liquidity source?


by Sylvan Herskowitz, Marieke Kleemans, Cristhian Pulido | November 21, 2021

Coping with unexpected shocks and accessing liquidity are major challenges for households around the world. While formal insurance and loan access are widespread in high-income countries, many households in lower income countries continue to rely heavily on informal risk-sharing networks to cope with shocks and on informal resource sharing to meet liquidity needs. Extended kin networks of family members living apart may play an especially important role for both purposes by providing members with informal social protection and helping households share resources and spread risk when needed.

Given few sources of longitudinal quantitative data with large sample sizes, our knowledge of empirical patterns around transfers within these networks in response to shocks is limited. However, understanding these dynamics is important for assessing different households’ vulnerability to risk – and both if and how transfers may be serving to smooth income in the face of shocks across familial networks.

To establish a baseline understanding of transfers in the data we begin by documenting how frequently transfers occur between extended family members.  How big are they? Are they more (or less) important for poorer households? Do they vary over the course of one’s life cycle or depend on the gender and relationship of the givers and recipients?

We are exploring these questions using data from the Indonesia Family Life Survey (IFLS). The IFLS is one of the few major publicly available sources of longitudinal data that carefully documents transfers between extended family members over a long period of time, including transfers to and from parents, children, and siblings living outside the home. The IFLS has been conducted over 23 years and is known for low rates of attrition as they carefully track and re-interview households and household members as they split off, join, or move. The first round of interviews was in 1993 with the most recent, fifth round, in 2014/2015.

Frequency and size of within-family transfers

Our analysis finds that transfers to extended family members are very common in Indonesia. Across all waves of the survey, in nearly 80% of responses (individuals in a given year) individual’s report giving or receiving at least one transfer with a family member living outside their home. While most transfers in the data are fairly small, with median values between 3 and 5% of household income, many reach magnitudes of considerable economic importance. 5% of transfers are above 220 USD and are larger than 28% of household income. Looking at average transfers as a proportion of household income across the income distribution, Figure 1 suggests that they may be especially important for poorer households, even as they remain substantial for wealthier households as well.

Figure 1. Size of household transfers relative to income-by-income level

Patterns in within-family transfers over the life cycle and by relationship

We observe that transfers vary greatly over the course of an individual’s life cycle. Looking at transactions between parents and children (Figure 2, Panel A), we see that relatively younger parents (from ages 35-45) provide substantial support to their children – corresponding to when their children may either be away at school and needing support or setting out to form their own families.

The flow of funds to children declines as parents age. When parents are roughly 55 years old on average, the net flow becomes negative. This pattern suggests that, on average, Indonesian children switch to supporting their parents when they reach this age.

Figure 2. Parent-child net transfers and parent’s age

Panel B splits this relationship by parent’s gender. The data suggest that, at relatively younger ages, fathers report giving a larger amount of transfers to their children than mothers on average. Moreover, at relatively older ages, fathers report receiving a smaller amount of transfers from their children than mothers report receiving. Although it is not possible to identify what underlies this pattern from the data we have, difference could be driven by several factors. One possibility is that although both parents were asked the same questions during their individual interviews, fathers might be more likely to claim responsibility for transfers that are in fact from both parents. The figure also suggests that mothers (especially if they survive their husbands) are more reliant on support from their children than fathers. Even when both are still living, another possibility is that, in old age, men are increasingly cared for by their wives who receive financial support from their children. We plan to explore many more of these dimensions in addition to parental reintegration with children’s families in future work.

While more analysis is needed to understand frequency, volume, magnitudes, and dynamics of transfers among family members, we can already see that these informal safety nets may play an important role in Indonesian households. They may be especially important for poorer households as well as youth and older women.

In ongoing work, we continue to explore how intra-family transfers are affected by household production and health shocks experienced by either children or parents, on both sides of the transaction. Traditions of intra-family support are strong in Indonesia but are likely similar to other parts of the world, especially in low- and middle-income countries where retirement plans remain rare. Better understanding of how these informal financial support mechanisms function, who they serve, as well as when they break down and who they miss, can provide important policy implications for who may need additional support from formal social protection programs.

Note: Authors are currently finalizing a discussion paper exploring these topics further, coming soon.

This work is part of PIM's research on Social Protection for Agriculture and Resilience. Sylvan Herskowitz is a Research Fellow in the Markets, Trade, and Institutions Division at the International Food Policy Research Institute (IFPRI); Marieke Kleemans is an Assistant Professor at the Department of Economics, University of Illinois Urbana-Chapaign; Cristhian Pulido is a Research Analyst in the Markets, Trade, and Institutions Division at IFPRI.

Photo: Shrimp farmer Rusli and his family, Aceh, Indonesia. Credit: Mike Lusmore/Duckrabbit, WorldFish.

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