The study of intergenerational transfers is appropriate to understand if and how social protection is provided to poorest portion of the population. In this paper we use the National Transfer Accounts methodology in order to quantify the intergenerational transfers in a middle income country with a mixed pensions system, including public, private and familiar support, such as Colombia. Transfers and intergenerational reallocations are therefore an issue because the country is currently undergoing the demographic dividend due to the fast demographic transition that started in the 1950s.
The NTA methodology study´s such transfers by analyzing the level of education of the household head. However, we propose a Multidimensional Quality of Life Index (MQLI) as an alternative approach to analyze inequality in inter-generational transfers. We argue that the MQLI, defined as a synthetic indicator that summarizes different socioeconomic characteristics that help measure poverty, provide better estimates than the NTA’s household head education approach for two reasons. First, it is now common that a household’s income is provided by two or more members. In Colombia, around 34% of households have two or more members providing income[1]. Second, the household head education approach tends to underestimate current poverty. It is true that income correlates with education but, in the short run, it may be true that even educated household heads are affected by income shortages or even unemployment. The MQLI overcomes this shortcoming because it is based on aggregate household variables that reflect structural wealth.
This strategy allows us to construct the life cycle in Colombia and, further, understand the direction of intergenerational transfers. In particular we are interested in detecting if transfers flow is, as expected, from rich to poor (or to middle-income) or worse, if it goes in the opposite direction. With our findings at hand we will discuss the potential implications on poverty reduction and inequality. We find that public transfers are mostly fed by the richest quartiles in Colombia; however they are also the main receivers of such transfers, which is led by the pension system that covers a small fraction of people in Colombia (about 25% of population). Inter-generationally speaking, we also find that most transfers are done to the elderly, and although children receive transfers too they are very small compared to transfers to the elderly. This is particularly true when comparing the health consumption of the public sector.
[1] If those currently unemployed are included (i.e. actively seeking for a job), the figure rises almost 2 extra points.