Insurance in Extended Families

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Yves here. Color me appalled by the premise of this post. It starts from the assumption that social safety nets are bad because they crowd out “informal institutions” namely family, as the insurer of the last resort. Note it may be unfair to single out this post, since the authors are addressing an apparently conventional line of economic thinking. Nevertheless, I find this reasoning to be disingenuous since the direction of policy over the last 30 years has been to encourage people to see themselves as atomized individuals (i.e., why should I help a relative) and has demanded much more labor mobility, which weakens family ties. And this idea may stick in my craw even more than most people since I have no extended family to speak of, and harbor doubts as to how helpful my immediate family, such as my siblings, would be in a pinch. I suspect I’m not alone on either or both fronts. And even if family members are willing to help, with the middle and lower income cohorts not participating in this lackluster recovery, it is also an open question as to how much help family members can offer, beyond the desperation-level help of letting an impoverished relative move into a spare room.

By Orazio Attanasio, Professor at University College London, Costas Meghir, Head of Department, University College London, and Corina Mommaerts, PhD candidate in economics, Yale University. Originally published at VoxEU

The significance of informal sources of insurance against income risk has important consequences for the design of social insurance programs. A particular concern is that public programs simply crowd out informal institutions. This column uses US household data to investigate whether the extended family acts as such an informal institution. Although there is a large potential for the family to insure against income shocks, no such insurance occurs.

The ability of individuals and households to absorb income and resource shocks has substantial implications for their welfare and is critical to the design of policy interventions. For instance, a social safety net may be of crucial value for households that bear the full brunt of income shocks, while less necessary for households who can smooth out these shocks through other means. Understanding the available mechanisms through which households combat income risk, their efficacy, and the interactions between them, is central to the policy debates around social insurance programs.

The extended family is one such avenue through which households may share risk. Due to its ubiquity – almost everyone has a family – this informal mechanism has policy implications across many different contexts, from families in small agricultural villages in rural India to families in post-industrial Europe. In the US, where politicians and policymakers heatedly debate the merits of social programs, one common argument is that social insurance crowds out informal institutions such as the family.

Evidence from the US

Using intergenerational data from extended families in the US, economists have made headway in understanding the role of the family. Recent work by Blundell et al (2008) found that households are insulated from income risk above and beyond the impact from social programs and their own ability to smooth over shocks through savings (‘excess smoothness,’ as was first pointed out in a seminal paper by Campbell and Deaton 1989). At the same time, research by Altonji et al (1992, 1996) found that extended families do not completely insure their members against income risk.

In a new working paper, we complement both of these sets of studies by examining two new questions:

  • What is the potential for the family to insure its members?
  • To what extent does the family exploit this potential to share risk?

To answer these questions, we use over 30 years of longitudinal income and consumption data from households across the US in the Panel Study of Income Dynamics. The key feature of the data that we exploit to answer these questions is the full set of intergenerational links between parents and grown children.

Methodologically, we develop a theoretically motivated decomposition of income shocks. This method allows us to isolate income shocks that are aggregate to the family from shocks that are statistically idiosyncratic to individual households within the family. Since ‘family-aggregate’ shocks act as resource shocks to the entire family, they are by definition uninsurable by the family. In contrast, idiosyncratic shocks, which only affect the distribution of income between households but not the overall resources of the family, are insurable by the family.

When we apply this method to our data, we find that over 60% of income shocks are idiosyncratic within the extended family. This implies a large potential for the family to have a non-trivial impact on the transmission of income shocks into consumption and therefore well-being. Put another way, the family can potentially mitigate 60% of household income risk.

But does it? We answer this second question by applying a similar decomposition method to consumption changes and test whether idiosyncratic income shocks, which are potentially insurable by the family, are better insured than family-aggregate income shocks, which are not insurable by the family.

We first find that only 54% of a family-aggregate income shock translates into a consumption change, implying that other sources aside from the family – such as savings (‘self-insurance’) – play an important insurance role against income risk. We also find that 51% of an idiosyncratic income shock translates into a consumption change. The insignificant difference between these numbers implies that the family provides no detectable insurance against idiosyncratic risk.

There are several reasons why families may not take advantage of informal insurance opportunities, such as an inability to monitor the true economic circumstances of family members, or an inability to enforce an informal ‘insurance contract’ (see theoretical contributions by Attanasio and Pavoni 2011 and Ligon et al 2002). Our work finds suggestive evidence that the ability to monitor family members may play a role, but this is an important area for future research.

Concluding Remarks

In the design of social insurance programs, policymakers often worry about how these programs could affect household behaviour, such as creating work disincentives or crowding out other sources of insurance. In the US, it is well known that public welfare programs provide incomplete insurance. Our research shows that private informal networks – in particular, the extended family – do not fill these gaps in insurance.

Thus it is not the case that extending public insurance programs necessarily would crowd out private networks. However we caution against extrapolation to the converse – our results do not speak to the crowd-in nature if social insurance programs became less generous, and we view this as an important policy question for future investigation. More broadly, our decomposition method easily generalises to any grouping of households that may share risk, such as households in small rural villages or church communities; as such, it can contribute to policy research in a variety of contexts besides families in the US.

See original post for references

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  1. jrs

    If we’re going to have informal institutions, and with the social safety net even assuming no changes to it much less advocating it be reduced, as ragged as it currently is, I think the need IS there, I think they should be working class mutual aid institutions. Define working class however you like, but relying on employment for economic survival is enough.

    But I’m not sure most people actually do see themselves as atomized individuals so much as members of nuclear families they start (if Yves is single the bias is showing). The turning to a spouse as an “informal institution” isn’t measured here I guess, but has to be very common I’d think. But what about single people or those in other less economically supportive alternative relationships? Some of the people who advocate this stuff would happily provide the neoliberal rule to them: GO DIE! Because afterall not conforming to some perceived religious ideal makes them worthy of “go die” anyway.

    As for the birth family, sometimes it’s argued one should have stocks and bonds and other assets in their portfolio because they move in opposite directions (inversely correlated). Whether or not that’s true, family instead acts as a magnifier of existing risks I’d think. If one is poor it is more likely one’s family is and vice versa. Of course the poor do tend to help each other as best they can at least, much more than those better off, but they are less able to help. And if one’s family is dysfunctional even if not poor it’s probably led one to make some decisions that put them at greater risk financially than otherwise, and it may mean the family makes very bad money decisions which mean they are poorly situated to offer help either.

    Oh and the spare room is nice …. provided the relatives house hasn’t gone into foreclosure.

    1. Yves Smith Post author

      First, the reference in the paper to “extended family” and makes no reference to immediate family suggests that they see the focus of help as households, not individuals.

      But taking your premise, did you miss how high divorce rates are in the US? The odds of divorce have been estimated at 40-50% for first marriages and over 60% for second marriages. One can hardly rely on a spouse. And the husband losing his job increases the odds of divorce, separately suggesting that marriage cannot be relied upon as an economic shelter:

    2. Stephanie

      As the VoxEU writers mention, family members may have a hard time enforcing “informal insurance contracts”. Well, yes. Certainly my diabetic, double-amputee grandmother had a hard time “enforcing” the expectation that my junkie cousin should not steal whatever cash he could get his hands on whenever she allowed him to couch surf (my phrase – most definitely not hers).

      And there’s the rub. As you mention, dysfunction can lead to poor decision making throughout extended families. My grandmother, my only aunt, and now my solitary female cousin were and are more than willing to lend a hand when one is needed, but very often the need stems from their sons’ and brothers’ (and father’s) issues of substance abuse, failure to pay child support, failure to check in with parole officers, etc. Of course my grandmother, aunt, and female cousin are, among those in my extended family with steady income, have the fewest assets, are the most stressed and in the poorest health. In fact, at least in my family, the willingness to cut oneself off completely from kin (or to move as far across the countey as possible) positively correlates with obtaining a secondary degree, maintaining sobriety, keeping a steady job, and owning a home.

  2. John Merryman

    The irony here is that the monetary system itself is a form of social contract that has come to crowd out much of the organic obligations and reciprocity by which societies function.
    Necessarily it is designed as a form of rent extraction and that is not a problem, so long as it creates more value than it extracts, but it has metastasized far beyond that point. When the bubble does pop, we will have to go back to local voucher systems, with the implicit understanding that it is a form of public utility, much like a road system and anyone seeking to game it would be punished accordingly.

    1. skippy

      That’s what a JG is all about, removing the centralization which encourages so much bottle neck extraction due to its specific regional out look at the basic level.

      1. John Merryman

        And what powers it is public debt.
        If, in the coming crisis, the legislature could actually be convinced to budget. Say by breaking bills into their individual items, having each legislator assign a percentage value to each one, reassemble them in order of preference and have the president draw the line, (The buck stops here), it would start to reduce the size of the Federal government, but more effectively, shrink the ability to create money based on the debt. This would leave the space for alternative forms of exchange to grow and revitalize local economies, with value being put back into communities and the environment and not just siphoned out to send to Washington and New York.

      2. washunate

        Removing centralization? I’m curious what definition of centralization you are using.

        JG further entrenches the management philosophy that planning and decision-making activities should be decided by the deciders. JG doesn’t get rid of the chain of command. It makes it bigger.

        If you want to decentralize public policy, implement universal health insurance and universal unemployment insurance. That’s what replaces bureaucracy with individual decision-making for how to allocate time and currency units.

        1. jrs

          Well Lamberts proposal that jobs are voted on locally was at least going in the right direction as at least then we’d have power collectively (ask almost any non-unionized worker if they have any power whatsoever over their working conditions now – ha – except for the power to look for another job, not necessarily to find one).

          Such decentralized power would never happen in the existing system, a system where we can’t even get federal funding for education, which I understand to be a small part of education budgets anyway, without having “no child left” crammed up our behinds, because with funding comes ridiculous mandates. But in a better system, or maybe come the revolution, because really it doesn’t seem we can get a darn thing in the existing system anyway.

          1. washunate

            Voting to make jobs is democratic, absolutely. My point is that it is also centralized – citizens get money if they show up to work and do what they are told to do.

            The decision on what work to do is not made by the recipient of the currency units. The employer-employee relationship is inherently centralized. A decentralized employee makes no sense. That’s not an employee.

            Don’t take my word for it. Here are the Feds themselves on the topic:

            If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.


  3. Torsten

    I’m confused. The authors conclude:

    In the US, it is well known that public welfare programs provide incomplete insurance. Our research shows that private informal networks – in particular, the extended family – do not fill these gaps in insurance.

    Is this not an argument for not “relying on the extended family” and instead filling “the gaps in [social] insurance”?

    1. diptherio

      Yeah, that was my read as well. Extended families do not cover gaps in social safety nets, so there is no reason to expect gov’t welfare programs to “crowd out” informal insurance mechanisms. Also, their statement that we should not expect extended family arrangements to “crowd in” to fill in gaps left by decreased social insurance spending seems to argue for maintaining or increasing social provisioned welfare programs.

      While I find the overly academic writing style rather annoying, I believe that the overall conclusion is one that I would generally tend to agree with. Yves may have read this one wrong…or maybe we’re not picking up on some subtlety….

    2. flora

      An aside:

      “… these gaps in insurance.”
      Ok, that gap “arguement” made me laugh, too. Deniers love gaps. The supposed scientific refuting of evolution rests in large part on a ‘gap argument.’

      ” …First of all, the lack of a case for evolution is clear from the fact that no one has ever seen it happen. If it were a real process, evolution should still be occurring, and there should be many “transitional” forms that we could observe. What we see instead, of course, is an array of distinct “kinds” of plants and animals with many varieties within each kind, but with very clear and — apparently — unbridgeable gaps between the kinds. ”

      1. LucyLulu

        I have webbed second and third toes. They run in my family. Perhaps I’m not fully human but the end of a species in transition, or the beginning of another? What an intriguing idea! Perhaps this theory is more attractive than it appears at first glance.

    3. Yves Smith Post author

      You missed the point of my introduction, or perhaps I did not draft it clearly enough. I was not attacking the paper. I’m stunned at the premise that the paper investigated, that the idea that social insurance crowds out “informal institutions” is a widely held enough belief among economists so as to merit being studied in an academic article.

      1. John Zelnicker

        I think it was the drafting because I had the same misconception as Torsten. However, I, too, am stunned that the premise is worthy of research. It is, perhaps, another example of the degree to which the economics academy is so detached from and unaware of the realities of the real world in which we actually live. At least, they falsified the original premise.

  4. YankeeFrank

    This piece amply displays how thoroughly out to lunch mainstream economics is. As others have pointed out, it can’t even get its own argument straight: does govt safety net crowd out family “insurance” or not? Since 85% plus of Americans don’t barely have a pot to piss in, where is all that “insurance” money supposed to come from that’s being “crowded out” by medicare, etc?

    We should re-purpose (there’s a word economists might grok) all mainstream economists as a religious sect to argue for all the burning questions never answered such as how many angels can dance on the head of a pin. That way they can’t get up to any more mischief in the real world. Or better yet they should be employed at minimum wage doing humiliating work so they can learn what real life is like for actual humans.

    1. Ulysses

      “Or better yet they should be employed at minimum wage doing humiliating work so they can learn what real life is like for actual humans.”

      Now there’s a proposal I can support!

      Here in the U.S. the extended family means many different things to different groups of people. In the poverty belt of rural Appalachia, for example, people rely heavily on their kinfolk for survival. Very recent foreign immigrants to large urban areas do the same. Yet, as Yves points out, the dominant MSM supported culture promotes atomization and dispersal of families throughout this vast continent.

      I have worked with many homeless people in NYC, who, despite the degradation and misery of their daily experience here, have no desire at all to return to their “hometown” in Ohio, South Carolina, etc. Their families have turned their back on them, casting them out– as if their poverty was a form of leprosy that must be kept far away so as not to spread contagion.

  5. Kronosaurus

    This study is inherently difficult die to the diversity of family structures in the US and in the world in general. Yves makes a good point in that our economic policies, aside from social spending, already drive people toward atomization. Thus, it would be wrong to pin too much blame on social spending. I grant all that and yet, there is still something to all of this. If we look at other cultures outside of the US we see that in some cultures there is a heavy dependence on extended family structures and forms of communal insurance. A statewide social welfare system would be at odds with these cultural systems. In fact, one could argue that they could be designed to destroy cultures. Money is a form of power and so by giving money via the state instead of through local community power brokers the state displaces local power structures.

    But is that pattern relevant in the US? I am doubtful. It may be that we have long since gone past a tipping point where there is no longer extended families or local communal structures that can be crowded out. And where they do exist I am skeptical whether they are worth maintaining. Some examples are mafias, organized crime syndicates, religious institutions. All of these systems provide social insurance. But are they better than a state-sponsored system? And even if families are providing insurance for each other it is highly questionable whether that is a good thing. Let’s face it, some families are better poised than others to provide. And there are many tales from poor communities of difficulties “making it” because family members drag them down with requests for loans and bailouts.

    1. Lune

      I disagree. The empirical evidence shows that there is no link (or a very weak one) between social safety nets and extended family networks. In Europe, Mediterranean countries (e.g. Spain, Italy, Greece) have wide extended families and extensive cross-generational ties. On the flip side, northern European countries (e.g. Scandinavia, UK) have less extensive ties. This despite the fact that broadly-speaking, all of these European countries have fairly extensive welfare states.

      Similarly, in the U.S., different ethnic groups have different levels of “informal safety nets” despite everyone living within the same public safety net. This is true regardless even of income levels (which I take as a proxy for economic insecurity which is ostensibly the “economic” driving force for maintaining extended family ties). That is, minority groups with lower (than average) median incomes such as Hispanics have more extensive extended family ties, but the same is also true of higher median income minorities such as Asians.

      So I assert that economic factors, such as publicly available programs and / or the level of economic insecurity faced, have very little influence on the strength of informal safety networks.

  6. NonI Mausa

    “…As others have pointed out, it can’t even get its own argument straight: does govt safety net crowd out family “insurance” or not? Since 85% plus of Americans don’t barely have a pot to piss in, where is all that “insurance” money supposed to come from that’s being “crowded out” by medicare, etc?”

    Indeed. The neo-liberals (n: “not a liberal”) scold the poor for not saving and investing, when their financial shocks are of such a magnitude that even if they lived in a cardboard box and ate from dumpsters, and saved their whole earnings, two or three years savings could be wiped out by one hospitalization.

    Effectively, government safety net programs ARE the savings of the poor. Also, it would be nuts for poor people to save money except in the traditional jam jar or mattress, because formal savings are vulnerable savings. Ask my brother, whose 11 years of 401k retirement savings, $44,000, vanished back in ’08. Ask mom, whose whole savings and assets had to be spent down to nothing before she could enter an extended care nursing home. Before then, she wasn’t poor, but they made sure she was destitute before they would take her in.


  7. Cat Burgular

    Cost shifting!

    Why pay pesky taxes for social insurance when we haven’t yet researched the extent to which informal institutions — like your cousins — are willing to pick up the tab? Let’s see if we can get them to pony up! The authors nowhere define what they consider an “extended family” to be; it may mean something very different in the US compared to Italy or Ireland.

    This post is an perfect instance of the way economic thinking searches for non-economic values to vampirize — drawing the life out of any form of society, and replacing it with money as the supreme value and organizing principle. “…an important policy question for future investigation…”

    Maybe you can sell your cat to pay your medical bills!

  8. afisher

    A quick observation: aren’t they really just trying to come up with a mechanism to eliminate non-family programs. The 2 issues they say they want to assess sure sounds like a way to implement “means-testing” of the “family” and if the family can afford to support then gov’t agencies need not be concerned. And please ignore the fact that the family that they are discussing is fictional.

    1. LucyLulu

      Medicaid already is a program with means-testing on the individual level for those of poor or moderate means. Those from the upper crust have attorneys create things like spendthrift or special needs trusts that hold can own assets without affecting eligibility for public benefits such as Medicaid, and includes protection from creditors, mandate payment of any income earned by the trust to the beneficiary (and reasonable income stream production is a fiduciary responsibility of trustee), and allow the use of trust principal for expenses deemed necessary for health, education, maintenance, and welfare. One gets the best of both worlds. For example, Medicaid pays the posh nursing home at their reimbursement rate, perhaps half rate charged, while private funds can pay the other half. Anything remaining after death passes on to heirs, out of reach of Medicaid or any other creditors (estate taxes must be paid). The only hitch is the loss of control from the restriction that bars beneficiaries from serving as trustees. Not everyone should have one of these trusts. Perhaps avoiding high taxes on one’s estate that exceeds $5.5M/$11M is more important. They are only one of many options, and choosing the right vehicles for each situation is best assisted by a skillful team of estate and tax attorneys and accountants. The life of the rich and famous is not so simple and easy.

      Surely if family means-testing were implemented, there would be similar accommodations, but the rich would be required to shoulder further complicated decisions. When oh when would they ever have time to visit Grandma Walton? /s

      1. jrs

        There’s a lot of financial people who suspect things are heading more and more in the direction of making family responsible for debts of say their parents at the end of life. Not even just limited to going after inheritance (which Medicare will) but even with the possibility of going after assets the children have independently acquired. Scary and dystopian stuff.

  9. LucyLulu

    I couldn’t determine from the article if the extended families were living in the same household or not. In the US, that isn’t the norm. I don’t know any numbers, but I know a whole lot of people where that isn’t and never will be an option, for one reason or another.

    Whatever the cause, our society has increasingly moved towards holding self-reliance as a badge of honor. Needing others is a sign of dependency and shameful. There isn’t any recognition that this is a societal decision, not a universal moralism. If you got sick in Venezuela (at least in past years), your care in the hospital was superior to what you’d receive here, per my neighbor, a retired prominent Venezuelan physician. However, he says you’ll receive better care in the US after discharge. It’s assumed families will provide any care needed and they usually do. He himself had a sister with polio, and he and his wife took over dialysis for his wife’s sister after arriving here, an intensive time commitment. Families are expected to take care of each other in his native culture, and instead of dependency being shameful, its morally reprehensible for a family to “abandon” their old and infirmed members. They have made a different societal decision, and are hardly unique. On the other hand, I’d venture to say Americans don’t have much company in their degree of self-providing orientation.

    The proposal in the article is just one of similar I hear from Tea Party types. More commonly I hear them say that the US should return to allowing churches, charities, public hospitals, etc., to provide the safety net. They say that the reduction in taxes, and knowledge that they weren’t already paying taxes for these services, would free people to make larger donations to their churches and pet charities. Of course, the churches and charities can use the money more efficiently than the government, thus providing more and better services to more people. They must have done a lot of drugs in college if they believe that piece of fantasy. Social Security/Disability and Medicare were enacted BECAUSE of high rates of poverty and homelessness among the sick and disabled, and proven to be dramatically effective.

  10. Barmitt O'Bamney

    Mainstream economists suppose that if one -like 85% of us- has no pot to piss in, one can happily substitute one’s own hands, with equal utility.

  11. Chauncey Gardiner

    LOL… Government social insurance programs “crowding out family support.” Reminds me of the old “US government borrowing is crowding out private borrowers” BS.

    There is a special place reserved for these people and their sponsors.

  12. vegasmike

    There are many subtle ways that having a large extended can be helpful.
    1. If there’s an emergency, one of your relative will baby sit.
    2. If you’re older and just released from the hospital, a family member can provide household assistance.
    3. If you’re single, ma, grandma, and sometimes grandpa will cook you a nice dinner. It beats eating at McDonald’s
    4. Family members will often lend you or give you a few hundred bucks, if you need money for rent, a car repair, and even sometimes bail.
    On the downside, family can often be too critical and too intrusive.

  13. Phil

    Sadly, it looks like “one for all and all for one” has always been a fable, and/or went out with the Three Musketeers!

  14. Rosario

    Conflating a macro scale problem with a micro scale problem doesn’t really help the case they are arguing. Also, the “informal” means of insuring against risks have always been there. When did we stop having friends and family? The issues are the macro structures in economic policy and politics that undermine not only the capacity to support “formally” (i.e. social safety nets and the like) but also “informally” (enough surplus income per most individuals to prop up those in need within an individual’s social network). When will we realize we don’t do such a great job performing as rational actors on a macro scale, even with the best intentions? That is the point of social welfare and regulation.

  15. participant-observer-observed

    This goes part and partial with TPP/TISA/TIPP and the banana-republic watch. That this is being spoon-fed the masses is a harbinger of the poverty plan on the way! It is a cute way of saying there is a status quo consensus of no intention to pay out social security funds for much longer. Consider it a gift from the Tories in the City with a special bow placed on it by Jamie Dimon & friends.

    This “informal insurance” is precisely the “insurance” of Afghanistan and all the developing countries, and is most characterized by women bred as unpaid and uneducated caregivers, FGM, femicide, and eldest son by birth responsible for funding the parental retirement in house with wife as caregiver. But, at least in the 2/3 world, there is a culture in place for this feudal system of “insurance” to function.

    Wake up people!

  16. Jim in SC

    I think that many people don’t have particularly good relationships with their families, and don’t have many friends, either. It may be a function of capitalism, that people become cogs in the great wheel of commerce, rather than developing meaningful relationships.

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