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The Economics of Bequests in Pensions and Social Security

In: The Distributional Aspects of Social Security and Social Security Reform

  • Martin S. Feldstein
  • Elena Ranguelova

Experience in private pension plans and recent policy discussions about investment-based reforms of Social Security suggest that some form of bequest is likely to be part of any such reform that is enacted. This paper provides a first examination of the potential magnitudes of such bequests and of their effect on retirement annuities and asset accumulation. The most likely form of bequest, the preretirement bequest' made when employees die before normal retirement age, reduces the funds available for post-retirement annuities by about 16 percent or, equivalently, requires a one-sixth increase in the Personal Retirement Account saving rate to maintain the same level of post-retirement annuities. We also analyze a variety of post-retirement bequest options. The least costly option that we consider is adding a ten-year-certain' feature to the life annuity, thereby providing a bequest whenever the retiree dies before age 77. This would reduce annuities, relative to providing only preretirement bequests, by about 6 percent. The most costly option that we consider would provide a bequest equal to the remaining actuarial value of the PRA annuity at the time of death and would require reducing all annuities by about 23 percent unless the PRA saving rate is raised. We analyze the size distribution of bequests that would result under different bequest rules and consider the implications for aggregate capital accumulation.

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This chapter was published in:
  • Martin Feldstein & Jeffrey B. Liebman, 2002. "The Distributional Aspects of Social Security and Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number feld02-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 9755.
    Handle: RePEc:nbr:nberch:9755
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
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    1. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
    2. Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1985. "The Strategic Bequest Motive," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1045-76, December.
    3. Martin Feldstein, 1998. "Privatizing Social Security," NBER Books, National Bureau of Economic Research, Inc, number feld98-1, August.
    4. Feldstein, Martin (ed.), 1998. "Privatizing Social Security," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226241012.
    5. Laurence J. Kotlikoff, 1998. "Simulating the Privatization of Social Security in General Equilibrium," NBER Chapters, in: Privatizing Social Security, pages 265-311 National Bureau of Economic Research, Inc.
    6. Martin Feldstein & Andrew Samwick, 1998. "The Transition Path in Privatizing Social Security," NBER Chapters, in: Privatizing Social Security, pages 215-264 National Bureau of Economic Research, Inc.
    7. James Levinsohn & Amil Petrin, 1999. "When Industries Become More Productive, Do Firms?," NBER Working Papers 6893, National Bureau of Economic Research, Inc.
    8. Martin Feldstein & Andrew Samwick, 1997. "The Economics of Prefunding Social Security and Medicare Benefits," NBER Working Papers 6055, National Bureau of Economic Research, Inc.
    9. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
      • 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.
    10. B. Douglas Bernheim & Sergei Severinov, 2003. "Bequests as Signals: An Explanation for the Equal Division Puzzle," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 733-764, August.
    11. Ronald Lee & Jonathan Skinner, 1999. "Will Aging Baby Boomers Bust the Federal Budget?," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 117-140, Winter.
    12. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
    13. Martin Feldstein & Elena Ranguelova & Andrew Samwick, 1999. "The Transition to Investment-Based Social Security when Portfolio Returns and Capital Profitability are Uncertain," NBER Working Papers 7016, National Bureau of Economic Research, Inc.
    14. B. Douglas Bernheim & Lorenzo Forni & Jagadeesh Gokhale & Laurence J. Kotlikoff, 1999. "The adequacy of life insurance: evidence from the health and retirement survey," Working Paper 9914, Federal Reserve Bank of Cleveland.
    15. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
    16. John Y. Campbell & Martin Feldstein, 2001. "Risk Aspects of Investment-Based Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number camp01-1, August.
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