One of the most important economic decisions facing the elderly, and their families, is whether to live independently. A number of previous studies suggest that widows are fairly responsive to Social Security benefits in deciding whether to live independently. But these previous studies have either generally relied on differences in benefits across families or cohorts, which are potentially correlated with other determinants of living arrangements, or have used data from the distant past. We propose a new approach that relies on the large exogenous shifts in benefits generosity for cohorts born in the 1910-1921 period, and we study the impact of this change in living arrangements in the 1980s and 1990s. In this period, benefits rose quickly, due to double-indexing of the benefit formula, and then fell dramatically, as this double-indexing was corrected over a five-year period. Using these legislative changes in benefits that the living arrangements of widows are much more sensitive to Social Security income than implied by previous studies. We also find that the living arrangements of divorcees, the fastest growing group of elderly, are even more sensitive to benefit levels. Overall, our findings suggest that living arrangements are elastically demanded by non-married elderly, privacy is a normal good, and that reductions in Social Security benefits would significantly alter the living arrangements of the elderly. Our estimates imply that a 10% cut in Social Security benefits would lead more than 600,000 independent elderly households to move into shared living arrangements.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8911.
Length: Date of creation: Apr 2002 Date of revision: Handle: RePEc:nbr:nberwo:8911
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Find related papers by JEL classification: H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents J1 - Labor and Demographic Economics - - Demographic Economics
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Dora L. Costa, 1998.
"The Evolution of Retirement,"
NBER Chapters,
in: The Evolution of Retirement: An American Economic History, 1880-1990, pages 6-31
National Bureau of Economic Research, Inc.
[Downloadable!]
Martin Feldstein & Jeffrey B. Liebman, 2001.
"Social Security,"
NBER Working Papers
8451, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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Feldstein, Martin & Liebman, Jeffrey B., 2002.
"Social security,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324
Elsevier.
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