Net Intergenerational Transfers from an Increase in Social Security Benefits

When the age of death is uncertain, individuals will leave bequests even if they have no desired bequests, simply because they will hold wealth against the possibility of living longer. Bequests are accidental. Starting from a baseline level of Social Security benefits, an increase in benefits will cause consumption to increase. However, consumption may not increase by as much as the increase in Social Security, which would cause wealth to be greater than under the baseline scenario. The higher wealth levels would translate into greater bequests, even when there is no bequest motive and all bequests are accidental. Therefore, an increase in Social Security benefits may not be a complete transfer from the younger generation to the older generation: some of the increase in benefits may be bequeathed back to the younger generation. Whether this happens depends on the form of the utility function, the amount of bequeathable wealth, and whether there is a bequest motive. The objective of this chapter is to quantify how much of an increase in Social Security benefits would be bequeathed back to the younger generation. We will use an estimated life-cycle model for consumption by singles.1