Income sources and intergenerational transfers in different regimes

Abstract

1. IntroductionAs individuals age and progress through various life stages, the relative importance of specific income sources changes. People are initially dependent on transfers, and then work to support themselves. In most western welfare states, individuals can look forward to receiving a public pension when they reach older ages. However, as the living and family arrangements of individuals vary, people may have different preferences regarding how their income is used. For example, some people may want to use their income to finance their own consumption, to save their income, or transfer it to others. We study these issues within the natural-experiment setting of Germany before and after reunification. During this period, eastern Germany underwent a structural break that changed societal arrangements and influenced almost all areas of life. The Berlin Wall fell unexpectedly in 1989, after four decades of separation. Just half a year later, eastern Germans were integrated into the western German welfare state. From 1990 onward, money was channeled to the east through the social security system and in the form of direct subsidies to raise the living standards of easterners to equal those of westerners (Wagner 2001).Earlier research has shown that case studies from countries in which clear structural breaks have occurred are very valuable for helping us gain a better understanding of the impact sudden political changes have on the lives of individuals. The end of the Apartheid regime in South Africa is an important example. Case and Deaton (1998) showed that when elderly black South Africans were granted access to the country's pension system, their living conditions changed. The study also found that having a higher income was beneficial not only for the health and material circumstances of the individuals who received these pension benefits, but also for the health and well-being of their families. Downward transfers from the elderly were equally beneficial for young women in these extended families (Duflo 2003).Our case study on eastern Germany contributes to this research. We focus on a structural break, and describe two emerging patterns. First, we document how the income patterns of eastern Germans changed after reunification. We show that the relative importance of different income sources and the relative magnitude of labor income and public pension transfers for different age groups changed after reunification. Second, we study how elderly people in eastern Germany used their increased pension income. In relative terms, eastern German pensioners and individuals close to pension age experienced the biggest gains in income, as they benefited from the generous western German pension system. Meanwhile, a large percentage of younger individuals suffered from unemployment. Our study suggests that the wealth gained by the elderly was shared within families across generations.Using data from the only income and expenditure survey that was carried out in eastern Germany prior to reunification, we are able to calculate, for the first time, income profiles for eastern Germans before and after the dissolution of the GDR. Using the National Transfer Account methodology, we are able to make these combined preand post-reunification data internationally comparable. Thus, we show, for the first time, the rapid transformation of a country as it transitioned from having a socialist economy to having a market economy. Especially as the population ages, studies that focus on how individuals support themselves as they age offer important insights (Lee and Mason 2011). By comparing the years before and after reunification, we are able to describe how eastern Germans supported themselves while living in the GDR, and how these patterns changed as they were integrated into the economic, political, and social system of the Federal Republic of Germany (FRG).2. Data and methodsTo address the question of how patterns of income and of public and private transfers among eastern Germans changed after reunification, we use the National Transfer Account (NTA) methodology. …