How do private transfers differ by race and ethnicity, and do such differences explain the racial and ethnic disparity in wealth? Using the Panel Study of Income Dynamics, this study examines private transfers by race and ethnicity in the United States and explores a causal relationship between private transfers and wealth. Panel data and a family-level fixed-effect model are used to control for the endogeneity of private transfers. Private transfers in the form of financial support received and given from extended families and friends, as well as large gifts and inheritances, are examined. We find that African Americans and Hispanics (both immigrant and nonimmigrant) receive less in both types of private transfers than whites. Large gifts and inheritances, but not net financial support received, are related to wealth increases for African American and white families. Overall, we estimate that the African American shortfall in large gifts and inheritances accounts for 12 % of the white-black racial wealth gap.
Differences in wealth holdings by race and ethnicity are well documented (Bricker et al. 2011; Bucks et al. 2009; McKernan et al. 2013; Oliver and Shapiro 1995, among others) and persist even after controlling for income and demographic characteristics (e.g., Conley 1999). Intergenerational private transfers have been found to play an important role in overall wealth holdings (Gale and Scholz 1994; Kessler and Masson 1989; Kotlikoff and Summers 1981, 1988; Modigliani 1988). These transfers help explain but do not fully address wealth differences between whites and blacks, using historical cross-sectional data (Menchik and Jianakoplos 1997; Wilhelm 2001).
This study uses the 1999 through 2007 waves of the Panel Study of Income Dynamics (PSID) to answer the following questions: How do private transfers differ by race/ethnicity, and do such differences help explain the racial and ethnic disparity in wealth? The answers to these questions help us understand the large wealth gap between white and minority families in the United States. Although the literature is informative especially on the role of intergenerational private transfers, gaps remain in understanding the causal relationship between various types of private transfers and wealth accumulation.
This article builds upon a long-standing debate on how intergenerational private transfers account for wealth accumulation (Kotlikoff and Summers 1981, 1988; Modigliani 1988) and provides new information on the role that private transfers play in helping recipients accumulate wealth and in explaining the racial disparity in wealth. Our main contributions to the literature are as follows. First, we examine various types of private transfers (i.e., support to and from extended families and friends, large gifts, and inheritances)1 and net support received based on transfers received and given, which allow for the possibility that private transfers can not only increase wealth (when received) but also depress wealth (when given). Second, we examine disparities in transfers and how that in turn explains wealth disparity by a combination of race, ethnicity, and immigration status, rather than a dichotomous white-black or white-nonwhite gap. Third, our empirical strategy based on family-level panel data enables us to explore causal relationships between private transfers and wealth.
Our findings highlight important differences in private transfers by race and ethnicity: black non-Hispanic and Hispanic (both immigrant and nonimmigrant) families receive less in private transfers than white non-Hispanic families. Private transfers in the form of large gifts and inheritances, but not net support received, are importantly related to increases in wealth for black and white non-Hispanic families. Large gifts and inheritances account for 12 % of the white-black racial wealth gap. Our finding that net support received is not related to racial wealth disparities is new to the literature. And we take the more established inheritance literature a step further by highlighting the importance of controlling for the endogeneity of inheritances when measuring their relationship with wealth.
This section discusses existing studies on private transfers and the relationship between private transfers and wealth.
Most private transfer studies have focused on the relationship a transfer has with the recipient’s or giver’s income and have generally tried to identify the motivation for private transfers (e.g., altruism, insurance). Empirical studies have found varying results: some finding that higher-income people receive less in the way of private transfers (Altonji et al. 1997; McGarry and Schoeni 1995; Schoeni 1997, Wolff et al. 2007), and others finding that they receive more (Cox 1987; Cox and Rank 1992; Zissimopoulos 2001). Wilhelm (1986) found that parents tend to give equal bequests to their children, rather than giving larger bequests to children with lower earnings. Private transfer amounts and the likelihood of transfers are associated with other characteristics of donors or recipients, such as age, educational attainment, family composition, number of siblings, and parents living (Cox and Rank 1992; Gale and Scholz 1994; Schoeni 1997).
Studies that examine racial differences in private transfers generally have found that black and Hispanic families are less likely to receive private transfers or receive less (Cox 1987; Cox and Rank 1992; Gale and Scholz 1994; Lee and Aytac 1998; Lee and Horioka 2004; McGarry and Schoeni 1995; Schoeni 1997; Wilhelm 2001). Jayakody (1998) found that differences in needs and resources explain some of the racial differences in intergenerational private transfers.
Private Transfers and Wealth
There has been a long-standing debate on how much—quantitatively speaking—intergenerational private transfers play a role in wealth. Estimating the role of intergenerational private transfers by comparing estimated household saving (based on data on earnings and consumption) with observed aggregate wealth, Kotlikoff and Summers (1981, 1988) concluded that intergenerational private transfers account for about 80 % of aggregate capital accumulation, but Modigliani (1988) estimated no more than 20 %. Kessler and Masson (1989) reconciled some of the puzzles (including different measures and data) and pointed out that the difference in estimates is largely due to whether the returns on inheritance are counted as part of transfers or as part of savings.
Some more recent studies use microdata on self-reported inheritance to estimate the role of inheritances on wealth accumulation (Chiteji and Stafford 1999; Gale and Scholz 1994; Wilhelm 2001). For example, using data from the 1983–1986 Survey of Consumer Finances (SCF), Gale and Scholz (1994) found that inheritances account for 31 % of wealth.
Private transfers in the form of inheritances help explain, but do not fully address, wealth differences by race. Avery and Rendall (1997) concluded that roughly 20 % of the racial disparity in average wealth between black and white families can be accounted for by inheritance (as cited in Wilhelm 2001). Similarly, Menchik and Jianakoplos (1997) ascribed 10 % to 20 % of wealth disparity to inheritance. Blau and Graham (1990) did not have data on private transfers but used the unexplained differential from their reduced-form models to conclude that they are important. Focusing on differences in wealth accumulation by race (rather than differences in wealth levels), Gittleman and Wolff (2004) simulated that equalizing inheritances and other private transfers would reduce the black/white wealth disparity by about 15 % (5 percentage points). In an analysis that examines how much of the increase in the racial wealth gap between 1984 and 2009 can be explained by inheritances and financial (e.g., cash, check) support from family, while accounting for homeownership, Shapiro et al. (2013) found that these private transfers account for 5 % of the increase.
Fewer studies examine how inter vivos private transfers contribute to wealth, and findings on this point are mixed. Some studies have suggested that gifts are only of minor importance, with the possible exception of the wealthiest individuals (Tomes 1988). However, other studies have found that a broader measure of private transfers that includes in-kind transfers in addition to cash transfers received by any “adult” child (even in the same household: i.e., intrahousehold) make them more important than inheritance (Cox 1987; Cox and Raines 1985). Gale and Scholz (1994) also found that inter vivos private transfers are important, accounting for at least 20 % of U.S. wealth; these authors, however, did not look at differences by race, which is the focus of this article.
Most studies on wealth and transfers are limited by the cross-sectional nature of the data and unstandardized measures of private transfers. With cross-sectional data, the potential endogeneity of private transfers is not well controlled for.2 The differences in findings in the literature could be due to differences in how private transfers are measured in the various data sets and defined by the authors (e.g., interhousehold vs. intrahousehold, cash vs. in-kind, inheritance vs. inter vivos).
Although the literature is informative, gaps remain in the understanding of how private transfers affect racial disparities in wealth. Using recent panel data, we go beyond the existing literature by examining racial disparities in various types of private transfers (i.e., large gifts and inheritances, and financial support received by and given to family and friends), how these transfers affect wealth accumulation, and the extent to which racial differences in private transfers explain the racial gap in wealth.
Private Transfer Motives
Existing studies have developed several models of private transfer motives and behavior, including altruism, exchange, and insurance (Barro 1974; Becker 1974; Bernheim et al. 1985; Cox 1987, 1990; Cox and Jappelli 1990; Kochar 1997). Findings from the literature suggest no clear motive for private transfers. Empirical evidence generally rejects pure altruism as a motive for transfers but does provide support for impure altruism (giving with some self-interest) and exchange, as well as insurance motives3 (Laferrere and Wolff 2006; McKernan et al. 2005). The goal of this article is not to test which transfer model dominates but rather to use this literature to inform our empirical specification.
Based on these theories, the needs and resources of the givers and receivers play an important role in private-transfer motives. If altruism plays a role in transfers, more dollars will be transferred to people with lower incomes (current and permanent) and greater need (e.g., people who are disabled, have more children, are single parents). Coresidence is a form of private transfer and is expected to decrease monetary interhousehold private transfers. If altruism is not a motivator and transfers are given as a form of insurance against unexpected future events, then transfers may be less likely to go to people with low permanent incomes because of their lower likelihood of providing resources when an emergency arises (i.e., providing insurance). So, although controlling for these factors is important, their expected effect on transfer behavior is ambiguous.
Many transfers occur within families (e.g., from parents to adult children and vice versa), so characteristics of the extended family—such as the number of siblings living and whether the parents are alive—are also important. Having a living parent may increase transfers received, given that transfers often go from parents to children. Having a living parent may also reduce transfers to siblings, for example, because the parent can play that role. On the other hand, having an older parent in need could increase the amount of transfers given.
Race and ethnicity may also be related to private transfers. If people reside in networks made up primarily of people of their own race or ethnicity, the current unequal distribution of income by race would have important implications for transfers by race. On average, minorities have lower incomes than nonminorities, so if transfers are related to own income and the ability of others to repay in the future (i.e., provide insurance), we would expect fewer transfers given to and received by minorities as compared with nonminorities. On the other hand, if minorities are more likely to have networks beyond their immediate families and include a broader circle of extended family and friends (Heflin and Pattillo 2002), then this broader network may result in more transfer activity. Thus, the relationship between race and transfer behavior is ambiguous. Similarly, immigrants may have smaller social networks in the United States and thus receive less transfer income than nonimmigrants. Because many immigrants, particularly those from less-developed countries, often send remittances to extended family members in their home country, they may give more transfers than similarly situated nonimmigrants.
The Role of Private Transfers in Wealth-Building
Private transfers are important for families because transfers both received and given can have implications for wealth-building. Transfers received can be saved and immediately added to wealth. The funds could also be invested in education or used for the purchase of a home, which are expected to facilitate future (versus current) wealth gains as benefits of the investment pay off over time (Beverly et al. 2008; Shapiro 2004).4 Private transfers can also be used to fund unexpected needs (e.g., car repair or medical bill), pay for expenses in the face of an adverse event (e.g., job loss), or fund other consumption. Although none of these uses results in an immediate increase in wealth, the availability of monetary resources in an emergency and the avoidance of hardship (e.g., eviction) can have long-term implications for family stability and asset-building.
The availability of transfer income can also lower wealth holdings. If families rely on private transfers to meet their emergency needs—rather than saving for an emergency—their savings will be lower, on average. And even though there are offsetting effects, greater private transfers are expected to increase wealth (Beverly et al. 2008).
On the other side, giving income to extended family and friends can result in a direct reduction in dollars available to save and, thus, wealth. Also, if an individual expects extended family and friends to ask for financial help if they have savings, the individual may choose to increase his or her consumption rather than save it. However, if transfers given to others come directly out of consumption, there would be no reduction in wealth. Overall, giving transfers is hypothesized to reduce wealth.
By and large, the characteristics of family and extended family that are hypothesized to affect private transfers are also hypothesized to affect wealth. We do not, however, include information about siblings and parents—the number of siblings and parents of the family head and spouse/partner who are living—because these variables are expected to affect wealth only through their effect on private transfers.
We use the longitudinal PSID data, which began in 1968 and interviewed respondents annually from 1968 to 1997 and biennially thereafter. To reflect changes in the composition of the national population over time, the PSID added a sample of 511 immigrant families in 1997 and 1999.5 This immigrant sample includes people who immigrated to the United States after 1968 and who were not married to individuals living in the United States at the time of the original sample selection in 1968. The PSID attrition rate is low, with an annual response rate between 96.9 % and 98.5 %. All analyses use the PSID longitudinal family weight, which adjusts for the sample design and attrition.
Data on wealth and private transfers have been collected at each interview since 1999, and we use all available waves of data from 1999 through 2007 (1999, 2001, 2003, 2005, and 2007).6 Families are not required to be in the sample all five years, so we have an unbalanced panel. All dollar values for our analysis are in real 2007 U.S. dollars.
Our analysis includes 33,947 family-year observations. We exclude observations with missing values for the dependent or explanatory variables and also trim the data to exclude the top and bottom 0.25 % of the private transfer and wealth dependent variables. This leads us to drop roughly 4,500 family-year observations. A comparison of the characteristics of the full PSID sample with our analysis sample shows that the means are nearly identical (Table 3 in the appendix).
Beyond wealth and private-transfer income given and received, the PSID survey collects a host of information on individuals and families, including total income and components of income, family composition and size, educational attainment, whether in school, disability status, age, gender, immigrant status, and race/ethnicity.7 The PSID also provides information on parents and siblings, including number of siblings who are living and number of parents who are living (in 2007).8 All family household composition and demographic variables are collected at the time of the interview, as is wealth. Family income (and thus private transfers) is collected for the year prior to the interview year. We provide additional information on our key measures—private transfer income and wealth—in turn in the next subsections.
Private Transfer Income
At each interview, data on family income, including transfer income given and received, are collected. One series of transfer income questions is aimed at capturing money given and received to support or help friends and relatives. We use this information to construct net support received in the prior calendar year.9 The focus of these support questions suggests that the values reported do not include gifts. For transfer income given, we construct a measure that captures the amount of money family members gave toward the support of people not living with them, excluding required payments such as child support and alimony.10 For transfer income received, we construct a measure that captures the amount of money the family head and spouse/partner received in help from friends and relatives. One difference between these measures is that “transfers given” captures all transfers by family members, but “transfers received” are those received by the family head and his or her spouse/partner.11
The PSID also captures whether anyone in the family received a large gift or inheritance over $10,000 in each year since the last interview. The value of each gift/inheritance (if there are multiple) and the year each was received are captured. The questionnaire does not allow us to separately identify large gifts from inheritances. One weakness is that the PSID does not capture whether family members received gifts or inheritances of less than $10,000. Another is that the PSID does not allow us to identify loans from family or friends that are never repaid (e.g., for home purchase)—in effect, “loans” that end up being gifts. Our inability to capture these “loans that convert to gifts” could lead to either an underestimate or overestimate of the effect of large gifts and inheritances on wealth, depending on whether these gifts are positively or negatively correlated with our measure of large gifts and inheritances.12
Because of the different size and nature of the private transfers (support vs. large gifts and inheritances), we examine large gifts and inheritances separately from private transfers in the form of support. Based on the PSID data available, our empirical analyses focus on four private transfer outcome variables measured at the family level:
Dollar value of support received (i.e., help from friends/relatives not living with family)
Dollar value of support given (i.e., support to people not living with family)
Dollar value of net support received (i.e., support received minus support given)
Dollar value of large gifts and inheritances received
The PSID provides information on the value of wealth holdings at the time of the interview, not the prior calendar year (as with the income and transfer variables). Our analysis uses family wealth, which is defined as assets minus liabilities. The PSID has relatively few asset and liability questions (compared with the SCF and the Survey of Income and Program Participation, for example), but generally provides a good accounting for the major components of wealth. Analyses do, however, suggest that the PSID does a better job capturing the wealth of low-wealth families as compared with higher-wealth families (i.e., the top 5 % to 10 % of the wealth distribution) (Ratcliffe et al. 2008).
Consistent with the literature (Carasso and McKernan 2008; Shapiro 2004; Wolff 2001), we find large differences in wealth holdings by race and ethnicity. Median wealth (across the 1999–2007 period) for black non-Hispanic and Hispanic families is less than one-sixth and one-fourth (respectively) the median wealth of white non-Hispanic families ($18,181 for black non-Hispanics, $33,619 for Hispanics, and $122,927 for white non-Hispanics).13 These large wealth disparities cannot be explained solely by income disparities and are the motivation for this article.14
Our empirical analyses examine (1) private transfers by race and ethnicity, (2) how private transfers influence wealth holdings, and (3) private transfers’ role in the racial wealth gap. The first analysis answers the question of whether private transfers differ by race/ethnicity. The second and third analyses are used together to determine whether differences in private transfers explain the racial and ethnic disparity in wealth. All models are estimated in Stata with robust standard errors clustered by family, and they are weighted using longitudinal family weights.
Private Transfers by Race and Ethnicity
The explanatory variables are drawn from the conceptual framework described earlier. Rf is a vector of variables that represents family race/ethnicity (white non-Hispanic, black non-Hispanic, Hispanic, and other) and immigrant status (immigrant vs. nonimmigrant). Ift represents family nonprivate transfer income in year t. Xft represents other family economic and demographic factors in year t, including family head’s age and educational attainment, family composition and size, whether the family head is in school, whether the family head or spouse/partner is disabled, and whether extended family or adult children live with the family. In this model, Xft also includes information about the family head and spouse/partner’s siblings and parents (number of siblings that are living and number of parents that are living).
Our analysis of net support received uses a weighted least squares (WLS) model, with the dependent variable ranging from −$160,785 (dollars received is less than dollars given) to $112,062 (dollars received is greater than dollars given). For our analyses of the other three transfer measures (i.e., transfers given, transfers received, and large gifts and inheritances received), we use a Tobit model, which takes account of the large proportion of families that do not give or receive money in a given year (90.8 %, 86.6 %, and 96.5 %, respectively).
How Private Transfers Influence Wealth
In the second model, we examine how private transfers influence wealth. If private-transfer income received (in net) increases wealth holdings, lower receipt of transfers by minorities could partially explain differences in wealth holdings by race. We separately examine private transfers in the form of net support received and large gifts/inheritances because the propensity to spend versus save and invest these private transfers may differ.
Our empirical approach uses panel data and a family-level fixed-effect model to control for the endogeneity of private transfers. When estimating the effect of private transfers on wealth, endogeneity concerns arise because people who give/receive private transfers may differ from people who do not give/receive transfers in unobserved ways, such as in their propensity to save. For example, families that are “savers” (i.e., are able to delay gratification) are expected to have higher wealth holdings and be more able to provide private transfers, all else equal. In this case, providing transfers would be positively associated with wealth, but giving transfers is not causing wealth to increase. Our family-level fixed-effect model eliminates time-invariant unobserved differences between families.
Time-varying characteristics, such as a change in economic circumstances, can also affect both private transfers and wealth holdings. The onset of an economic emergency could result in an increase in private transfers received and reduce wealth, but the private transfers received are not causing wealth to decline. Our model controls for some important time-varying characteristics, including family income and disability status of the head/spouse, but may omit other relevant time-varying characteristics. Under the assumption that time-varying unobservable characteristics do not influence both private transfers and wealth, our model captures the effect of private transfers on wealth. If there are time-varying unobservable characteristics that influence both private transfers and wealth, the family-level fixed-effect model captures the relationship between private transfers and wealth holdings. Our analysis of large gifts and inheritances may suffer less from omitted variable bias because the transfer of a large gift or inheritance (versus net support) is less likely to be influenced by current family economic circumstances (i.e., more likely to be exogenous).
In this model, is the family-level fixed effect. By including the family-level fixed effect, time-invariant characteristics are controlled for by the fixed effects and drop out of the model. Ift represents family nonprivate transfer income.17Xft represents family economic and demographic factors as specified earlier, but the extended-family variables are excluded from the wealth model because they should affect wealth only through their effect on net support received and gifts/inheritances.
Under the assumption that time-varying unobservable characteristics do not influence both private transfers and wealth, the coefficient measures the effect of net support received on wealth holdings, and measures the effect of large gifts and inheritances on wealth holdings. We estimate this model for the full sample and by race: white non-Hispanics, black non-Hispanics, and Hispanics.
For comparison, we also estimate a model that excludes the family-level fixed effect. This model does not control for unobserved time-invariant family-level characteristics and is more similar to the approach taken in the prior literature. Because the amount of transfers that a family receives can be related to their wealth holdings, this model also includes a lagged value of wealth (wealth at t – 2). We interpret these models as capturing the relationship between private transfers and wealth holdings.
Private Transfers’ Role in the Racial Wealth Gap
Private Transfers by Race and Ethnicity
Descriptively, there are large differences in private transfers by race and ethnicity (Figs. 1 and 2). Compared with white non-Hispanic families, black non-Hispanic families are more likely to receive support (although the actual dollar amounts are much less, conditional on receiving), and Hispanic families are less likely to receive support (and the dollar amounts are less, conditional on receiving).18 On net, Hispanic families receive less financial support than white non-Hispanic families. In fact, Hispanic families have negative net support received because they give more than they receive. Descriptively, there is no statistically significant difference between whites and blacks in net support received; the difference between whites and blacks emerges in the regression analysis, after income and other factors are controlled for.
White non-Hispanic families are about five times more likely to receive large gifts and inheritances than both Hispanic and black non-Hispanic families. These findings are largely consistent with Wilhelm’s (2001) findings that black families in 1987 received substantially lower amounts of inter vivos transfers (conditional on receiving) and were substantially less likely to ever inherit and to inherit less when they did inherit than did white families. Interestingly, we find that Hispanic families are more likely to give support (although the actual dollar amounts are less, conditional on giving) than white non-Hispanic families. This likely results because Hispanics are more than five times as likely as white non-Hispanics to support their parents (9.6 % vs. 1.7 %, not shown).
The regression estimates suggest that private transfers differ importantly by race and ethnicity after controlling for family economic and demographic factors. Differences by race and ethnicity are found for all four of our private transfer variables, with the overall result being that minority families receive less in private transfers than white families.
Hispanic immigrant, Hispanic nonimmigrant, and black (non-Hispanic, nonimmigrant) families receive an average of $278 to $589 less per year in net support than white (non-Hispanic, nonimmigrant) families (Table 1, column 1) because all three minority groups receive less in support, and Hispanic families give more in support than white families. Compared with white families, Hispanic immigrant and nonimmigrant families receive $208 and $126 less per year in support and give $1,078 and $363 more per year in support, respectively (Table 1, columns 2 and 3).19 Black families receive $365 less in support and give $520 less in support than white families.
Turning from support to large gifts and inheritances, the differences get substantially larger (Table 1). Hispanic immigrant and non-Hispanic immigrant families receive $2,123 and $1,772 less in large gifts and inheritances, on average, than white (non-Hispanic, nonimmigrant) families (Table 1, column 4). Black (non-Hispanic, nonimmigrant) families receive an astounding $5,013 less in large gifts and inheritances, on average, than white families. These average differences in large gifts and inheritances, which are measured over a two-year period, add up to substantial amounts over time and, as we later discuss, play an important role in wealth disparity.
Family Economic and Demographic Characteristics
We find evidence that private transfers in the form of support go to people with greater need, with a few exceptions (Table 1). Families that have lower (nonprivate transfer) income and are unmarried, disabled, younger, or in school (as measured by the head or spouse’s status), receive more support than their counterparts (Table 1, column 2). Notable exceptions are that families with a less-educated head are less likely to receive support and families with more children are no more likely to receive support than their counterparts. Higher-income families, on the other hand, receive more in large gifts/inheritances than lower-income families, as do families with higher educational achievement. As expected, living with extended family or adult children (which is a form of nonmonetary intrahousehold private transfers) reduces monetary private transfers (support received, support given, and large gifts/inheritances).
Characteristics of the extended family are also important determinants of private transfers in much the way expected. Private transfers, in the form of both support and large gifts/inheritances, decrease with the number of siblings of the head and spouse who are living, suggesting that they share the support of their parents. Support received is higher when a parent is living, but large gifts/inheritances are lower.
How Private Transfers Influence Wealth
Our hypothesis is that overall private transfer income in the form of net support received, large gifts, and inheritances help families accumulate wealth. Our finding that black non-Hispanic and Hispanic families receive less in private transfers (i.e., financial support and large gifts/inheritances) than white non-Hispanic families suggests that private transfers may indeed help explain racial wealth disparities, if transfers increase wealth. How then do private transfers influence wealth, and to what extent do private transfers explain the racial wealth gap? Our results suggest that private transfers in the form of large gifts and inheritances, but not net support received, increase wealth. Overall, we find that large gifts and inheritances explain 12 % of the white-black wealth gap.20
The non-fixed-effect specification estimates that $1,000 in large gifts and inheritances in the past two years is associated with a 0.40 % (p = .00) increase in wealth this year (Table 2, column 1). Evaluating this percentage increase at the median of wealth for the sample ($83,360) suggests that the additional $1,000 in private transfers is associated with an additional $331 in wealth.21 Net support received is marginally negatively related to wealth in this specification (p = .09). Separating net support received into support received and support given provides some insight into the counterintuitive negative relationship between net support received and wealth in the non-fixed-effect specification: giving support is associated with higher wealth (coefficient = 0.01, p = .04; not shown). This finding suggests that wealthier people are more likely to provide support and highlights the importance of controlling for the endogeneity of private transfers—especially support given. This counterintuitive relationship becomes smaller in magnitude and statistically insignificant in our primary specification.
Results from our primary fixed-effect specification suggest that large gifts and inheritances increase wealth (Table 2). The magnitude of the relationship is one-third smaller than the non-fixed-effect specification: a $1,000 increase in large gifts and inheritances results in a 0.25 %, or $209, increase in wealth (evaluated at median wealth; Table 2, column 2). Net support received does not influence wealth.22
Large gifts and inheritances are especially important in accumulating wealth for black non-Hispanics (Table 2, columns 3–5). A $1,000 increase in large gifts and inheritances results in a $691 increase in wealth for black non-Hispanics and $295 for white non-Hispanics. The estimated effect for Hispanics is small in magnitude and is not statistically significantly different from zero.
Private Transfers’ Role in the Racial Wealth Gap
Using the Oaxaca decomposition described earlier, we find that 12 % of the difference in wealth between white non-Hispanic and black non-Hispanic families can be explained by the difference in their average large gifts and inheritances received during the past 10 years.23 Our estimate, which is based on the family-level fixed-effect model that controls for time-invariant differences between families, is smaller than or at the lower bound of estimates from other studies. Avery and Rendall (1997) found that roughly 20 % of the wealth disparity between black and white families can be accounted for by inheritance, but Menchik and Jianakoplos (1997) found that racial differences in inheritance explain about 10 % to 20 % of the average racial difference in wealth. We do not find evidence that disparity in average wealth between Hispanic and white non-Hispanic families can be accounted for by large gifts and inheritances.
Conclusions and Policy Implications
Motivated by racial differences in wealth, this study fills gaps in knowledge about how private transfers differ by race and relate to wealth. Using PSID data from 1999 through 2007, we present new findings on the differences in private transfers by race and ethnicity, and on the effect of private transfers on wealth controlling for time-invariant differences across families.
We find that minority families receive less in private transfers (financial support and large gifts/inheritances) than white families. Controlling for income and other factors, Hispanic and black non-Hispanic families receive $278 to $589 less per year in net support than white non-Hispanic families. Both minority groups receive less in support, and Hispanic families—especially immigrant Hispanic families—give more in support than white non-Hispanic families.
Turning from support to large gifts and inheritances, the shortfalls in private transfers for minorities (vs. nonminorities) move from hundreds of dollars to thousands of dollars. Immigrant families receive about $2,000 less in large gifts and inheritances, on average, than white (non-Hispanic, nonimmigrant) families. Black (non-Hispanic, nonimmigrant) families receive about $5,000 less.24 These average differences in large gifts and inheritances, which are measured over a two-year period, add up to substantial amounts over time and play an important role in wealth accumulation.
We find that large gifts and inheritances are importantly related to increases in wealth for non-Hispanic blacks and for non-Hispanic whites, but not for Hispanics. The relationship between large gifts/inheritances and wealth appears to be stronger for non-Hispanic blacks than for non-Hispanic whites: a $10,000 large gift or inheritance is associated with more than twice the increase in wealth for black as for white families ($6,910 vs. $2,950). Given the lower initial wealth of African Americans, the percentage increase in wealth associated with a large gift or inheritance is even greater than the dollar increase. Further investigation into why this racial difference exists is an important area for future research.
Overall, we estimate that private transfers in the form of large gifts and inheritances increase wealth and explain 12 % of the white-black wealth gap. Increases in large gifts and inheritances for white non-Hispanic families over time suggest a worsening of the white-black wealth gap in years to come.25
Private transfers made to support families have no statistically significant effect on wealth. Because these transfers are likely being consumed, not saved or invested, they may be important in alleviating immediate economic hardship. They may also have long-term implications for family stability and wealth-building.
More than income-based policies are needed to close the racial wealth gap. Programs that provide additional income to low-income families (such as cash welfare benefits or the earned income tax credit) will help minorities who are disproportionately poor to meet basic needs but will not close the wealth gap. Even with differences in income controlled for, minorities receive fewer private transfers, and the shortfall in large gifts and inheritances is associated with less wealth accumulation. Policies that focus explicitly on wealth-building are necessary to reduce wealth inequities.
Large gifts are often used to finance higher education or make a down payment for a home. Education scholarships and homeownership assistance targeted at low-wealth individuals and minorities move beyond income and thus could help close the racial wealth gap. Wealth in the form of a home is usually the largest single asset families own. A recent study estimated that white families are able to purchase homes at least eight years earlier than African American families (Shapiro et al. 2013). This advantage means that wealth accumulation for African American families is much delayed.
Policies that create or extend matched savings accounts, such as Individual Development Accounts (IDAs) or Child Development Accounts (CDAs), can also play a role in offsetting disparities in private transfers and reducing the racial wealth gap. IDAs, first proposed in 1991 (Sherraden 1991), are personal savings accounts targeted at low-income households that encourage them to save for specific investments (e.g., postsecondary educational advancement, a home, or a business) by matching earned income deposits and providing other program supports. Currently, however, IDA programs are only operating as a national demonstration. As envisioned, CDAs are subsidized accounts provided to children at birth with an initial government deposit and a government match (often targeted at low-income families) for money saved in the account. CDA programs are operating in selected areas (e.g., San Francisco’s kindergarten to college program), but there is no national demonstration or program.
Other policy options to reduce racial wealth disparities might focus on areas of the tax code that favor the accumulation of wealth for those at the upper end of the income and wealth ladders, such as the federal estate tax. The estate tax currently touches few families and so does little to close disparities.26 In addition, the home mortgage interest deduction currently provides significantly larger tax breaks for people with higher income and more expensive homes. As a result, those with more tend to retain it and pass on more to their children. The larger intergenerational transfers that the Baby Boom generation is going to provide may exacerbate racial differences.
This research was funded by the Ford Foundation and the Annie E. Casey Foundation. We thank them for their support and acknowledge that the findings and conclusions presented are those of the authors alone and do not necessarily reflect the opinions of the foundations, the Urban Institute, its board of trustees, or its sponsors. The authors are grateful to three anonymous referees, Ngina Chiteji, Donald Cox, Trina Shanks, and Mauricio Soto for their helpful comments and suggestions. In addition, we value the input of audience participants at the 2012 annual meeting of the Population Association of America, the Urban Institute Opportunity & Ownership seminar, and the Race & Ethnicity seminar.
We define private transfers as (1) financial (e.g., cash, checks) support given and received and (2) large gifts or inheritances received. These transfers may be inter vivos (made during the giver’s lifetime) or inherited (takes effect upon the giver’s death). Both transfer types can be intergenerational (between different generations) or intragenerational (within a generation). Data used for this analysis capture interhousehold transfers (between households), not intrahousehold transfers (within a household), although our models control for family coresidence.
For example, Cox (1987) used the President’s Commission on Pension Policy survey from 1979, Wilhelm (2001) used the 1989 wave of the PSID, Avery and Rendall (1997) used the 1989 SCF, and Menchik and Jianakoplos (1997) used the 1989 SCF and 1976 wave of the National Longitudinal Survey of Mature Men.
For instance, a person gives money to his unemployed relative (or friend) as insurance for receiving similar help in the future when he faces a financial emergency.
There are fixed costs associated with the purchase of a home, so the benefits of the home purchase would be observed over time.
The PSID added 441 immigrant families in 1997 and 70 families in 1999.
Prior to 1999, wealth information was collected in 1984, 1989, and 1994.
Our analysis by race and ethnicity is based on the race and ethnicity of the head of the household; interracial marriage is relatively rare in the PSID sample.
We have information only on number of parents living as reported in 2007, so this variable is not time-varying in our empirical models.
When the PSID shifted to biennial interviewing, it began collecting many, but not all, data items for each of the two prior years. Although income support received from two years ago is collected, income support given is collected only from the past year, not two years ago. Thus, we are not able to construct a measure of net support received two years ago.
Our measure does not include loans or charitable contributions to organizations.
The PSID does not provide information that allows us to separate transfers given by the family head and spouse/partner from those given by other family members.
Whether omitting loans that convert to gifts results in an underestimate or overestimate can be understood in an omitted variable bias framework. If people who receive loans that convert to gifts are less likely to receive a large gift or inheritance, then we underestimate the relationship between large gifts/inheritances and wealth. If, on the other hand, people who receive loans that convert to gifts are more likely to receive a large gift or inheritance, then we overstate the relationship. If the two are uncorrelated, bias is not an issue.
These differences in wealth stem from lower asset holdings for minorities, not from higher debt.
The wealth differences by race and ethnicity remain large and statistically significant when measured with means instead of medians. For example, mean wealth for black non-Hispanics, Hispanics, and white non-Hispanics was $75,571, $129,686, and $311,214, respectively, during the 1999–2007 period.
Recall that although transfer income received at t – 2 is collected, transfer income given at t – 2 is not collected.
The dependent variable is set to zero for the 5.5 % of families that have zero wealth and the 11.4 % of families that have negative wealth because the natural log is not defined for zero or negative values. The model produces similar results if we drop these observations instead of setting them to zero. To further understand the implications of how we treat these negative and zero wealth values, we estimated three additional sets of models using wealth (vs. the natural log of wealth) as the dependent variable. The three model scenarios are (1) models estimated on the full sample (all negative and zero wealth values are included), (2) models estimated on the full sample, but negative wealth values are replaced with zeros, and (3) all observations with zero or negative wealth dropped. The estimated effect of large gifts and inheritances on wealth is nearly identical across the three models (overall and by race), suggesting that how negative and zero wealth values are treated does not affect the results.
We test whether our results are sensitive to using a measure of permanent family income (average income from 1998 to 2006) rather than family income last year. They are not.
Given the potentially important role of immigrant status in private transfer differences, we examine differences in private transfers by immigrant status, as well as race and ethnicity, in our upcoming regression results.
The “support received” coefficients less the “support given” coefficients do not equal the net “support received” coefficients exactly because net transfers received are estimated using WLS regression, whereas support received and given are estimated using Tobit regressions. The estimated coefficients do sum exactly when WLS is used for all three regressions, in part because the black “support given” coefficient becomes positive and insignificant.
We include home equity in our wealth definition because of the important role that private transfers can play in down payments. Excluding home equity from wealth cuts our estimate of the contribution of racial differences in private transfers to the wealth gap in half, from 12 % to 6 %.
We calculate the dollar change in wealth as (exp(0.004) – 1) × 83,360, where 83,360 is the weighted median of wealth.
This lack of relationship between financial support and wealth continues to hold when support received and support given enter this specification individually, rather than as net support received (p = .30 and p = .40, respectively; not shown).
This finding is based on estimates of Eq. (5), where the weighted average of log wealth is 10.4 for white non-Hispanics and 7.2 for black non-Hispanics. The weighted averages of large gifts and inheritances accumulated between 1997 and 2007 are $21,320 for white non-Hispanics and $2,914 for black non-Hispanics. Because large gifts and inheritances are a rare event, we use their accumulated value over the past 10 years (between 1997 and 2007) to measure their cumulative effect on the racial wealth gap.
Important caveats are that the PSID does not capture gifts or inheritances of less than $10,000, nor does it capture loans from family or friends that are never repaid (which, in essence, convert to gifts). As a result, we are unable to measure differences in smaller gifts/inheritances or unpaid loans by race/ethnicity or their role in the racial wealth gap.
The likelihood of receiving a large gift or inheritance did not change over the study period, although the dollar amount increased for white non-Hispanic families. The average real dollar value of large gifts and inheritances increased from $66,000 for white non-Hispanic families (conditional on receiving) in 1999 and 2001 to $83,000 in 2005 and 2007. Black non-Hispanic and Hispanic families saw no statistically significant increase.
Provisions in the American Taxpayer Relief Act of 2012 exempt estates less than $5.25 million, an amount that will be inflation-adjusted over time.