Economics Seminar Series

Kegon Tan, University of Rochester

Bequest Motives and the Social Security Notch

Kegon Tan.

Prof. Kegon Tan

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 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 sizeable 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 first 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 two-fifths 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 wealth declines, acting as a cushion against benefit reduction so that consumption remains largely unchanged.

Friday, February 16, 2018
3:30pm – 5:00pm
Fronczak 444