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Bequests and Social Security With Uncertain Lifetimes

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  • Andrew B. Abel

Abstract

The fact that consumers do not know in advance the dates at which they will die effects their individual consumption and portfolio decisions. In general, some consumers will end up leaving bequests at death, even if they have no bequest motive, simply because they happen to die at a time when they are holding wealth to provide for their own future consumption. In the model of this paper,consumers who are otherwise identical, die (randomly) at different ages and thus leave bequests of different sizes to their heirs. Therefore, there is intra-cohort variation in wealth and consumption even if all consumers have the same labor income, taxes, and social security benefits. This paper presents explicit steady state distributions for consumption and wealth. The introduction of an actuarially fair social security system reduces steady state private wealth by more than one-for-one so that, even in a fully funded system, national wealth falls. In addition,all central moments of the steady state distributions of consumption and wealth are reduced by actuarially fair social security.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1372.

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Date of creation: Jan 1986
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Publication status: published as Abel, Andrew B. 'Precautionary Saving and Accidental Bequests," American Economic Review, Vol. 75, No. 4, September 1985, pp. 777-791.
Handle: RePEc:nbr:nberwo:1372

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  1. Pelzman, Joseph & Rousslang, Don, 1982. "A Note on Uncertain Lifetimes: A Comment," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 181-83, February.
  2. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  3. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
  4. Levhari, David & Mirman, Leonard J, 1977. "Savings and Consumption with an Uncertain Horizon," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 265-81, April.
  5. Sheshinski, Eytan & Weiss, Yoram, 1981. "Uncertainty and Optimal Social Security Systems," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 189-206, May.
  6. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-16, June.
  7. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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Cited by:
  1. Smith, J.P., 1996. "Racial and Ethnic Differences in Wealth in the Health and Retirement Study," Papers 96-12, RAND - Reprint Series.
  2. Markku Ollikainen, 1998. "Sustainable Forestry: Timber Bequests, Future Generations and Optimal Tax Policy," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(3), pages 255-273, October.
  3. Martin Feldstein, 1989. "Should Social Security Be Means Tested?," NBER Working Papers 1775, National Bureau of Economic Research, Inc.
  4. Laitner, John & Juster, F Thomas, 1996. "New Evidence on Altruism: A Study of TIAA-CREF Retirees," American Economic Review, American Economic Association, vol. 86(4), pages 893-908, September.

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