Intergenerational transfers, insurance, and the transmission of inequality

Context

Children of economically successful parents tend to be economically successful themselves, having relatively high levels of income, education and wealth. By some estimates, the intergenerational association of economic status in the UK is the strongest in the developed world. These gaps are not only large by international standards, but have also grown in recent decades.

Given that equality of opportunity is a common policy goal, disparities in economic outcomes determined by parental background are in urgent need of attention. Tackling such disparities requires an understanding of how they arise and which policies can have an impact.

Aims and objectives

We propose an ambitious programme of research that will further our understanding of the mechanisms whereby parents transmit their economic status to their children, and how this process is influenced by various government policies. We aim to make several advances over the existing literature by employing novel methods, exploiting large linked administrative datasets, and building cutting-edge models of economic decisions.

Our first strand of research will provide the first causal estimates of the impact of increases in parents' housing wealth on child outcomes. Parental assistance has become increasingly important for young home-buyers. We will exploit newly-available data on parent-child links in the UK, and a novel empirical approach, to quantify the transmission of wealth shocks from parents to children. This will help us to understand the impact of the increases in UK house prices in recent decades on inequalities in wealth and homeownership amongst younger generations.

Our second strand of research will draw on newly available transfer data, and a novel model of intergenerational transfers and home purchases, to estimate the impact of both parental financial assistance in home purchasing and policies to encourage home ownership on inequality.

Our third strand of research considers inter-vivos transfers from parents to their adult children and role such transfers might play in insuring children against adverse shocks. Understanding the reasons when and why parents make such transfers to their children is an important consideration for the design of the taxation of transfers and provision of social insurance. We will use an unrivalled source of intergenerationally-linked administrative data covering inter-vivos transfers to explore how parents respond to unemployment and other shocks that their children experience.

In the fourth and final strand of research, we will use a model of parental investments of time and money in their children to estimate important interactions between different transfers and the ways in which parents choose between different investments. This will allow us to explicitly separate the contribution of different factors (parental time investments, educational investments, and cash-transfers) in shaping child outcomes. We can then simulate the responses of parents and children to policy reforms, such as changes in access to higher education, to determine their effect on investments in children and, ultimately, the intergenerational transmission of inequality.

Applications and benefits

This research will yield a number of insights relevant to policy-makers, researchers and those in the private and third sector interested in property and inheritance taxation, saving and housing policy, education policy, and social mobility. We will maximise potential benefits by producing a range of outputs including a series of academic articles that will be submitted to top economic journals and non-technical summaries that communicate our key findings to non-academic audiences.

Our proposed research has implications for a number of important policy areas, including taxation, housing and education policy. It therefore has the potential to have a lot of impact.

Our research will inform policy-making in two ways. First, we will contribute to our understanding of recent economic trends, including the evolution of inequality, changes in the housing market, and the extent to which the wealth increases associated with the most recent housing boom were passed on to younger cohorts. In doing so, we will significantly add to the general evidence base that shapes policy priorities and design.

Second, we will provide estimates of the effects of specific policy reforms. For example, what effect would a change in inheritance or property taxation have on the intergenerational transmission of inequality, access to homeownership, and wealth accumulation? How would changes in access to higher education affect parental investments? Evidence of this type is clearly useful to policy-makers with responsibility in these areas. HM Treasury (who have responsibility for taxation), The Dept. for Work and Pensions (responsible for promoting saving for retirement), The Dept. for Housing, Communities and Local Government (homeownership) and The Dept. for Education are the key agencies here. A number of other agencies including the Social Mobility Commission, Office for Budget Responsibility and Bank of England also have an interest in understanding the effects of these policies. The research team and wider IFS has excellent links with officials in these departments and agencies.

We will take a number of steps to maximise our impact among both policymakers and the broader public.

We will establish a project advisory group comprising policymakers from government departments and devolved administrations. This group will meet multiple times over the course of the project, assisting us with planning, feedback and dissemination of our work. At key points in the research process, we will also discuss individual strands of research with interested parties through small meetings with interested policymakers.

We will hold two events in Westminster towards the end of the project to publicize the results to non-academics in an accessible way. We will also hold additional events in Cardiff and Edinburgh. These events will draw on the regional dimensions of our work (for example those relating to strand 1 which makes use of differences in regional housing markets) in order to maximise their relevance for local audiences. As the project progresses we will also disseminate our findings through specific presentations at high-profile conferences and workshops aimed at policy audiences.

In addition we will write up our findings (particularly those that are relevant to current policy debates) in the form of short 'Observations' to be published on the IFS website and promoted using the IFS's impressive social media presence and press and policy contacts. Experience shows that concise and topical outputs of this kind are particularly effective means of dissemination. Our research will be relevant to a number of topical policy debates, including the determinants of wealth inequality, social mobility and tax policy. We therefore expect to be able to reach large audiences. We will write several such pieces for different media outlets, linking our emerging research findings to topical debates where possible. In the past, pieces of this kind written by IFS researchers (on topics such as the returns to higher education and 'seven reasons it helps to have rich parents') have page views in the hundreds of thousands (and higher).We aim to repeat this success.