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

In: The Determinants of National Saving and Wealth


  • Alan S. Blinder

    (Princeton University)

  • Roger H. Gordon

    (Bell Laboratories)

  • Donald E. Wise

    (Mathtech, Inc)


This paper studies the asset holdings of white American men near retirement age. Assets as conventionally 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 generalised to allow for (i) a bequest motive, proxied by the number of children; (ii) displacement of private wealth by social security wealth that is not exactly dollar-for-dollar; (iii) a level of consumption late in life that differs systematically from what the strict life cycle theory implies. The equation is estimated by non-linear 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 39¢ (with a large standard error) of private wealth; and the bequest motive, while present, is quite weak.

Suggested Citation

  • Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1983. "Social Security, Bequests and the Life Cycle Theory of Saving: Cross-sectional Tests," International Economic Association Series, in: Franco Modigliani & Richard Hemming (ed.), The Determinants of National Saving and Wealth, chapter 4, pages 89-122, Palgrave Macmillan.
  • Handle: RePEc:pal:intecp:978-1-349-17028-9_4
    DOI: 10.1007/978-1-349-17028-9_4

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    Cited by:

    1. David Blake, 2004. "The impact of wealth on consumption and retirement behaviour in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 14(8), pages 555-576.
    2. Orazio P. Attanasio & Hilary Williamson Hoynes, 2000. "Differential Mortality and Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 35(1), pages 1-29.
    3. 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.
    4. Susan Pozo & Stephen A. Woodbury, 1986. "Pensions, Social Security, and Asset Accumulation," Eastern Economic Journal, Eastern Economic Association, vol. 12(3), pages 273-281, Jul-Sep.
    5. Hamermesh, Daniel S, 1984. "Consumption during Retirement: The Missing Link in the Life Cycle," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 1-7, February.
    6. 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.
    7. 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.
    8. Paul Taubman, 1985. "Determinants of Pension Benefits," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 123-158, National Bureau of Economic Research, Inc.
    9. Mervyn A. King & Jonathan I. Leape, 1987. "Asset Accumulation, Information, and the Life Cycle," NBER Working Papers 2392, National Bureau of Economic Research, Inc.
    10. 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.
    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, 1987. "Uncertain Lifetimes, Pensions, and Individual Saving," NBER Chapters, in: Issues in Pension Economics, pages 175-210, National Bureau of Economic Research, Inc.
    13. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392, Elsevier.


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