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Study: Wealth transfers to grown children perpetuate inequality

Wednesday, November 12, 2014

LAWRENCE — It may not come as a surprise that high-income families pass on more money to their children than their low-income peers, but new research from the University of Kansas shows that these families are giving much more to their kids even after they leave home and for different purposes, perpetuating inequality.

Emily Rauscher, assistant professor of sociology and faculty director of the Wealth Transfer Project in the School of Social Welfare’s Assets and Education Initiative, has authored a policy brief in which she analyzed new data from the 2013 Panel Study of Income Dynamics. Her findings show that adult children from high-income homes are three times more likely to receive parental asset transfers than those from less economically advantaged backgrounds. The data also show the money higher-income families pass on is more often targeted toward investments in education and assets such as homes. Lower-income families cannot pass on as much money and are more likely to use such money for other purposes, such as paying off debts.

Rauscher’s research is among the first to use the newest Panel Study of Income Dynamics data and to focus on grown children. A central finding is that the money parents give to adult children plays a small but significant role in perpetuating inequality between generations.

“A lot of families give money to their young adult children, but there is little understanding of how that affects inequality. The focus tends to be on childhood and adolescence,” Rauscher said. “The ultimate goal with this project is to give disadvantaged people and families increased equality through policy informed by research.”

The American Dream holds that through hard work and education, anyone can improve their lot in life. These findings add to a growing body of research showing that dream fails to meet reality. Even with hard work and education, many people from low-income families are burdened by student debt and unable to save money, buy homes, start families, save for retirement or accumulate money they can pass on to their own children. Young adults from higher-income backgrounds enjoy a hidden advantage. Americans may not like handouts, but data show adults from higher-income backgrounds get more handouts from their parents, Rauscher said.

“People often think the advantages a person gains from their parents end when they turn 18 or leave the nest. But these advantages follow them into young adulthood,” Rauscher said.

Data show that families from the first-quartile, or lowest-income group, do pass on money, approximately $3,000 for men and $2,000 for women. Fourth-quartile families, however, averaged $20,000 for men and $23,000 for women. That pattern of inequality followed in findings showing that while 25 percent of men and 27 percent of women received some transfer from their parents, the average amount was $42,000 when removing those who did not receive any transfers.

While the findings from the study show that asset transfers to adult children can perpetuate inequality, they make it equally clear that public policy should be enacted to address such inequalities, Rauscher wrote. Economic mobility accounts with seed money or incentivized donations could help lower-income individuals accumulate assets before the critical point of transition into young adulthood. Similarly, transitioning away from reliance on borrowing to finance higher education could help many avoid the often-crippling debt young people face upon completing college. Public investments that encourage and facilitate accumulation of property and long-term wealth among the disadvantaged, such as home ownership and retirement savings, could help level the playing field as well.

“If the American Dream holds that effort and ability should determine an individual’s fate, and that a child’s future standing should not be dictated by her parents’, then equality demands government-funded transfers to low-income young adults, matching those enjoyed by their higher-income counterparts,” Rauscher said.

The full report is available online.