Section 2
Concepts

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Loans and repayments
Regular versus irregular
Voluntary versus Involuntary
Family member versus any person
Inside country versus outside country
Deduction of inter-household transfers from donor's disposable income
In-kind payments and expenditure transfers

Inter-household transfers, which have captured the attention of academics and economists from various domains, can serve a number of purposes for donor and recipient households. In macroeconomic terms, international remittance flow is substantial relative to the gross domestic product (GDP) of some countries (Economist 2010).¹ The study of international remittance flow is essential to the World Bank, International Monetary Fund (IMF) and several remittance-dependant developing countries: it helps them understand the institutional characteristics of these cash transfers (Houle and Schellenberg 2008). In microeconomic terms, some inter-household transfers meant to transfer one's life-accumulated wealth (as inheritance or inter-vivo trusts) can have an impact on inequality and economic growth (Kotlikoff and Summers 1981, Schoeni 1997, Mason et al. 2006). For some households, though, inter-household transfers are a substantial income source that improve their economic well-being (Smeeding and Weinburg, 2001) and increase their ability to pay medical and housing expenses (Jennings and Bennefield 1992) and tuition (Ouellette 2006).

Inter-household transfers redistribute available economic resources between households, and the redistribution affects household consumption and standards of living and income; therefore, micro-analysts should include inter-household transfers when measuring household economic well-being. It is crucial that they consider the effect of inter-household transfers on the distribution of household income, consumption and wealth, as suggested in the Report by the Commission on the Measurement of Economic Performance and Social Progress (Stiglitz, Sen and Fitoussi 2009).

Inter-household transfers have a long history. They were responsible for a major flow of economic resources between households before the introduction of government programs and financial systems (Lampman and Smeeding 1983). They are measured by at least 20 national statistical agencies, according to the final report prepared by the International Expert Group on Household Income Statistics (Canberra Group 2001²). In the United States, the US Census Bureau has investigated the financial networks between households twice (Jennings and Bennefield 1992, and Masumura 2002), using data from its Survey of Income and Program Participation (SIPP). In addition to looking at income transfers, the Federal Reserve Board has included questions on inheritance and wealth transfers in its Survey of Consumer Finance (Federal Reserve Board 2007). In comparison, little is known about inter-household transfers in Canada, as methods to measure them have not yet been fully developed.

No uniform measurement of inter-household transfers exists across different statistical agencies, and transfers remain one of the most difficult aspects of the measurement of household income (Canberra Group 2001). What should or should not be included in the definition of income involves judgements about various dimensions of the transfers. While some statistical agencies such as Eurostat (Eurostat 2007) and the Australian Bureau of Statistics (Australian Bureau of Statistics 2006) closely follow the recommendations from the Canberra Group (Canberra Group 2001), others apply recommendations to suit their own country's need. The rest of this section discusses some key concepts in measuring inter-household transfers.

Loans and repayments

One of the defining characteristics of an inter-household transfer is that is given with no expectation of repayment—in other words, a one-way street. The International Conference of Labour Statisticians thus recommends that loan repayments be excluded from the definition of inter-household transfers. The intuition is that a loan and subsequent repayment would result in no net transfer from one household to another (International Labour Organization 2004).

Regular versus irregular

This characteristic of a transfer relates to a recipient's likely use of the funds. If they are spent on goods and services for immediate or near term use, it is an addition to income. If they are saved or invested in capital, it is an addition to wealth. The Canberra Group suggests that current transfers should be amounts that are comparatively small, often made regularly and relied upon by the recipients (Canberra Group 2001). Meanwhile it considers large, unexpected and one-time irregular transfers as capital transfers; the money is more likely to be saved than spent. However, it can be argued that some irregular or somewhat large conform to the definition of current transfer, as long as the funds are used for final consumption, within the same period. For example, households can provide non-periodic financial support to non-household members in need, such as the temporarily unemployed. Thus it is very difficult in practice to use rules of thumb on the regularity and amount of transfers to determine whether they are capital or wealth transfers. It would be preferable to ask respondents directly whether the transfer was used for current consumption.

Voluntary versus Involuntary

While some inter-household transfers are mandatory—that is, the result of legally binding agreement— others are voluntary. For survey operations purposes, the Canberra Group suggests legally binding inter-household transfers, such as receipts of alimony and child support payment, should be considered regular and predictable, as there are legal consequences to senders who fail to remit these payments. In comparison, voluntary inter-household transfers can be regular or irregular, subject to whether the inter-household transfers are made regularly and can be relied upon by the recipients (Canberra Group 2001).

To track involuntary transfers, like alimony and child support payments under court orders or written agreements, Statistics Canada has been using tax data (in T1 Family File and Survey of Labour and Income Dynamics (SLID)), and these receipts have been accounted for in the recipient's total income. In addition, several studies have been conducted on the payment characteristics and benefit to the recipients (Galarneau 1992 and Robinson 2009). In comparison, the voluntary transfers people received were not measured until questions of inter-household transfers were introduced by SLID in reference year 2006.

Family member versus any person

One would expect that most inter-household transfers are received by donors' family members and so SLID and Survey of Financial Security (SFS) ask respondents questions on inter-household transfers between family members. However, non-family members would also benefit from inter-household transfers with an increased ability to consume. Surveys should measure inter-household transfers not only between family members, but between any persons not living with the respondent. This would align Statistics Canada's practices with international definitions.

Inside country versus outside country

Some households send inter-household transfers to families and relatives outside Canada. Since these transfers represent a significant source of foreign revenue for those in developing countries, tracking remittances is essential in order to understand the macro-economies of these countries (Houle and Schellenberg 2008). It may also be useful for survey managers to measure the amount of inter-household transfers sent within the country, to balance the dollar amounts sent and received. However, the origin and destination of inter-household transfers are less important for microanalysts when measuring the economic well-being of Canadian households.

Deduction of inter-household transfers from donor's disposable income

At least three alternate views exist regarding how to treat the deduction of inter-household transfers from donor's disposable income.  First, to avoid double-counting at the aggregate level, the Canberra Group recommends that that the donor deduct the transfer from their disposable income (Canberra Group 2001). Alternately Becker (1974) suggests the relevant characteristics of a person's social environment,³ such as the welfare of a family member, can be important to a person's utility function, and to some extent the person's economic well-being. This view holds that sending inter-household transfers to improve the economic well-being of a recipient can provide a positive utility to the donor. Therefore, one might suggest not deducting the amount of inter-household transfers sent from the donor's disposable income, as it provides positive utility to the donor as would spending the amount otherwise. A third opinion differentiates between compulsory and voluntary transfers, and suggests only deducting the amount of inter-household transfers with compulsory or quasi-compulsory nature. This was adopted in a resolution of the Seventeenth International Conference of Labour Statisticians (International Labour Organization 2004). However, what qualifies as quasi-compulsory inter-household transfer remains subject to debate.

In-kind payments and expenditure transfers

In-kind payments in the form of gifts and services provide economic benefits to recipients and, in theory, should be included as income. However, unlike monetary transfers, there is no consistent and accurate method of valuation in measuring in-kind payments. The International Conference of Labour Statisticians states that most operational definitions of income exclude such transfers, until widely accepted methods for valuing them are available (International Labour Organization 2004). Currently, most in-kind payments are excluded from Statistics Canada surveys.

This paper focuses on voluntary components of inter-household transfers. A voluntary inter-household transfer is defined as not legally enforced, direct cash payments between households. The amount of inter-household transfer sent by donors is not deducted from the donors' income in this analysis of economic well-being and household income. The analysis is also restricted by existing data limitations, in particular, none of Statistics Canada's surveys collect detailed information on both consumption and the amount of inter-household transfers received, and no data exist on inter-household transfers received from non-family members.

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Notes

1. Remittance made up 50% of Tajikistan's gross domestic product (GDP) in 2008 (Economist 2010).
2. The Canberra Group was an international group of experts on household income statistics and economic well-being from various national statistical agencies and international organizations.
3. As suggested in his concept of 'social income', defined as the sum of a person's own income and the monetary value to him of the relevant characteristics of others (Becker 1974).