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Bequests and Social Security With Uncertain Lifetimes

  • Andrew B. Abel

The fact that consumers do not know in advance the dates at which they will die effects their individual consumption and portfolio decisions. In general, some consumers will end up leaving bequests at death, even if they have no bequest motive, simply because they happen to die at a time when they are holding wealth to provide for their own future consumption. In the model of this paper,consumers who are otherwise identical, die (randomly) at different ages and thus leave bequests of different sizes to their heirs. Therefore, there is intra-cohort variation in wealth and consumption even if all consumers have the same labor income, taxes, and social security benefits. This paper presents explicit steady state distributions for consumption and wealth. The introduction of an actuarially fair social security system reduces steady state private wealth by more than one-for-one so that, even in a fully funded system, national wealth falls. In addition,all central moments of the steady state distributions of consumption and wealth are reduced by actuarially fair social security.

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File URL: http://www.nber.org/papers/w1372.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1372.

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Date of creation: Jan 1986
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Publication status: published as Abel, Andrew B. 'Precautionary Saving and Accidental Bequests," American Economic Review, Vol. 75, No. 4, September 1985, pp. 777-791.
Handle: RePEc:nbr:nberwo:1372
Note: EFG
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  1. E. Sheshinski & Y. Wiess, 1978. "Uncertainty and Optimal Social Security Systems," Working papers 225, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  4. Pelzman, Joseph & Rousslang, Don, 1982. "A Note on Uncertain Lifetimes: A Comment," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 181-83, February.
  5. Levhari, David & Mirman, Leonard J, 1977. "Savings and Consumption with an Uncertain Horizon," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 265-81, April.
  6. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-16, June.
  7. Eckstein, Zvi & Eichenbaum, Martin & Peled, Dan, 1985. "Uncertain lifetimes and the welfare enhancing properties of annuity markets and social security," Journal of Public Economics, Elsevier, vol. 26(3), pages 303-326, April.
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