The Effect of Social Security on Lifetime Wealth Accumulation and Bequests

Abstract

This paper is an empirical study of the effects of security on lifetime wealth accumulation and bequests. Using a sample of Wisconsin males, we have matched lifetime earnings records from income tax returns with their security account records and their bequests obtained from probate court records. Since the cohort of males was born between 1890 and 1899, they represent a cohort that saw a great change in the size and coverage by occupation of the system. Hence, there is substantial within-cohort variation in security wealth from which effects can be estimated. For nearly 30 years, the theory of savings has enjoyed an enormous amount of academic support. In the no-bequest variant, individuals save with the sole intention of consuming their savings in later years. The economy-wide stock of capital can therefore be generated by this pattern without any reliance on bequests (Modigliani, 1966). Such a model will lead to rather strong predictions about the effect of a pay-as-you-go public pension, hereafter social security, on private savings. As Feldstein (1974) points out, security should displace private savings, as well as reduce macro-saving, since the programme is unfunded. This result follows from the assumption that each household will consume all of its during its own lifetime. Some recent research, however, has been at odds with the no-bequest variant of the model (see Kurz, 1984, and included references). Darby (1979) claims that life-cycle assets (savings consumed later in the life cycle) constitute only 13-29 per cent of total assets.' Kotlikoff and Summers (1981) report that the major share, nearly 80 per cent, of capital stock in the United States is due to intergenerational transfers.2 Indeed, these authors write: Life-cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers (p. 706). In addition, recent empirical work suggests that people tend to accumulate, or fail to significantly decumulate, wealth, wealth in old age, a finding at odds with the strict model.3 Given the potentially large role of bequests in the process of capital accumulation, it is important to know how bequests are affected by the large public programme that security has become. Even if security depresses private savings among those near or at retirement, if people bequeath, it is conceivable that saving during retirement is augmented by the programme.4 Aside from the issue of savings effects, the response of people's bequests to their old age benefits might allow one to assess the target efficiency of the security system. Since the original objective of the system was to ensure adequate levels of consumption among the elderly, a finding that benefits

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