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Social Security, Bequests, and the Life Cycle Theory of Saving: Cross-Sectional Tests


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  • Alan S. Blinder
  • Roger H. Gordon
  • Donald E. Wise


This paper studies the asset holdings of white American men near retirement age. Assets as conventional defined show no tendency to decline with age, in apparent contradiction of the life-cycle theory of saving. However, a broadened concept of assets which includes expected future pension benefits (both public and private) and expected future earnings ("human wealth") does decline more or less as predicted by the theory. No matter how they are defined, assets are a decreasing function of the number of children--which casts doubt on the strength of the bequest motive. Finally, financial assets and social security wealth fail to exhibit the inverse relationship suggested by Feldstein's displacement hypothesis. To investigate these issues econometrically, an equation for assets is developed from the strict life-cycle theory. The specification is generalized to allow for (a) a bequest motive, proxied by the number of children; (b) displacement of private wealth by social security wealth that is not exactly dollar-for-dollar; (c) a level of consumption late in life that differs systematically from what the strict life-cycle theory implies. The equation is estimated by nonlinear least squares on a rich cross- sectional data set containing over 4300 observations. The results show that the life-cycle model has little ability to explain cross-sectional variability in asset holdings. The model's key parameters are poorly identified, despite the large sample size and considerable cross-sectional variation in most variables. According to the estimates, consumption late in Life is on average only about half of what the strict life-cycle theory predicts; each dollar of social security wealth displaces about 3% (with a large standard error) of private wealth; and the bequest motive, while present, is quite weak.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0619.

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Date of creation: Jan 1981
Date of revision:
Publication status: published as Blinder, Alan S., Roger H. Gordon and Donald E. Wise. "Social Security, Bequests, and the Life Cycle Theory of Savings Cross Sectional Tests." Determinants of National Savings and Wealth, edited by Franio Modigliani and Richard Hemming, International Economic Association, 1983.
Handle: RePEc:nbr:nberwo:0619

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Cited by:
  1. David Blake, 2002. "The impact of wealth on consumption and retirement behaviour in the UK," LSE Research Online Documents on Economics 24949, London School of Economics and Political Science, LSE Library.
  2. Susan Pozo & Stephen A. Woodbury, . "Pensions, Social Security, and Asset Accumulation," Upjohn Working Papers and Journal Articles spsaw1986, W.E. Upjohn Institute for Employment Research.
  3. Mervyn A. King & Jonathan I. Leape, 1987. "Asset Accumulation, Information, and the Life Cycle," NBER Working Papers 2392, National Bureau of Economic Research, Inc.
  4. Alan B. Krueger & Bruce D. Meyer, 2002. "Labor Supply Effects of Social Insurance," NBER Working Papers 9014, National Bureau of Economic Research, Inc.
  5. Michael J. Boskin, 1987. "Concepts and Measures of Federal Deficits and Debt and Their Impact on Economic Activity," NBER Working Papers 2332, National Bureau of Economic Research, Inc.
  6. Daniel S. Hamermesh, 1982. "Consumption During Retirement: The Missing Link in the Life Cycle," NBER Working Papers 0930, National Bureau of Economic Research, Inc.
  7. Marc Robinson, 1983. "Social Security and Physical Capital: An Interpretation of the Evidence, Lessons and Outlook," UCLA Economics Working Papers 307, UCLA Department of Economics.
  8. R. Glenn Hubbard & Kenneth L. Judd, 1985. "Social Security and Individual Welfare: Precautionary Saving, LiquidityConstraints, and the Payroll Tax," NBER Working Papers 1736, National Bureau of Economic Research, Inc.
  9. Orazio P. Attanasio & Hilary W. Hoynes, 1995. "Differential Mortality and Wealth Accumulation," NBER Working Papers 5126, National Bureau of Economic Research, Inc.
  10. Michael D. Hurd, 1993. "The Effect of Labor Market Rigidities on the Labor Force Behavior of Older Workers," NBER Working Papers 4462, National Bureau of Economic Research, Inc.
  11. R. Glenn Hubbard, 1984. "'Precautionary' Saving Revisited: Social Security, Individual Welfare, and the Capital Stock," NBER Working Papers 1430, National Bureau of Economic Research, Inc.
  12. R. Glenn Hubbard, 1988. "Uncertain Lifetimes, Pensions, and Individual Saving," NBER Working Papers 1363, National Bureau of Economic Research, Inc.


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