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Bequest Motives and the Social Security Notch

Siha Lee and Kegon Tan

No 2019-061, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: Bequests may be a key driver of late life savings behavior and more broadly, a determinant of intergenerational inequality. However, distinguishing bequest motives from precautionary savings is challenging. Using data from the Health and Retirement Study, we exploit an unanticipated change in Social Security benefits, commonly called the Social Security Notch, as an instrument to identify the effect of benefits on bequests. We show that an increase in benefits leads to a sizable increase in bequest amounts. We combine our instrumental variable estimates with a model of late life savings behavior that accounts for mortality risk and unobserved expenditure shocks to identify bequest motives. The model is used to analyze two counterfactuals. The results demonstrates the importance of bequest motives as a driver of late life savings by comparing asset profiles with and without utility from bequests. We find that roughly one-third of accumulated assets and bequests are attributable to bequest motives among retirees. Our second counterfactual features a more progressive Social Security benefits schedule that reduces benefits for the richest retirees. We show that although wealth declines, consumption remains largely unchanged since wealth generated by bequest motives acts as a cushion against benefit reduction.

Keywords: bequests; late life savings; assets; social security (search for similar items in EconPapers)
JEL-codes: D30 D91 H55 J14 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-age
Note: MIP
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