Rethinking survivor benefits

This paper provides a framework for analyzing the efficiency and equity of survivor benefit programs. These programs were originally designed to support families when the main wage-earner died, in an era where women rarely worked, fertility rates were high, and widows were unable to support themselves and their children. Yet, voluntary saving and insurance were often insufficient due to myopia. Mandatory survivor benefits helped to achieve lifetime consumption smoothing for the family and to prevent poverty among elderly widows the group where old age poverty is concentrated. The question is these programs still needed in an era when most women work and fertility rates have fallen and, if so, how should they be designed? The author argues that, even in a world of perfect gender equality, mandatory family co-insurance may still be justified because couples are unlikely to plan adequately for household economies of scale. This leads the cost of living of a widow(er) to be much more than half that of a couple. In addition, some disparity in work and wage patterns of men and women remains in every country. While such programs may benefit both spouses, women are the greatest recipients because they outlive their husbands. However, as currently designed, many survivor benefit programs entail work disincentives and perverse redistributions from women who work in the market to those who do not, from singles and dual career couples to single-earner couples and sometimes from low- to high-earning families. These cross-subsidies penalize women who work in the market and therefore may discourage such work, decrease their income and increase their old-age poverty rates. The insurance goal can be achieved without these negative incentives and redistributions by internalizing the cost within the family rather than passing it on to the common pool and by allowing widow(ers) to keep their own pensions in addition to the survivor benefits.