Pension Income and the Well-being of Children and Grandchildren: New Evidence from South Africa

PWP-CCPR-2005-043

Abstract

In the early 1990s, the South African Old Age Pension was expanded to cover most black South Africans above a gender-specific age cut-off. This expansion resulted in a substantial and arguably exogenous increase in the income of older South Africans. A series of very creative studies have exploited this source of variation in income to shed light on the ways in which familes and households allocate resources among their members. A key assumption underlying these studies is that pension income has no impact on unmeasured characteristics of those people who co-reside with pension recipients. This paper provides empirical evidence on the importance of this assumption. Pensioneligible adults are more likely to co-reside with other adults who have lower levels of human capital as measured by height and education. Since height and education are fixed for adults, this cannot be an effect of the pension income but rather reflects the selection of adults who co-reside with older adults when they become eligible for the pension. The paper proceeds to explore the importance of treating living arrangements as endogenous for re- interpretation of results on the impact of the pension in the literature. The evidence highlights the potential value of moving beyond theory and data which are bound by the confines of a spatially determined definition of the household.