The Nexus of Social Security Benefits, Health, and Wealth at Death

27 Pages Posted: 30 Dec 2012

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Steven F. Venti

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

David A. Wise

National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: December 2012

Abstract

Social Security benefits are the most important component of the income of a large fraction of older Americans. A significant fraction of persons approach the end of life with few financial assets and no home equity, relying almost entirely on Social Security benefits for support. Whether persons reach late-life with positive non-annuity wealth depends importantly on health, which is quite persistent over the life-time. Persons in poor health in old age have a higher-than-average probability of having experienced low earnings while in the labor force, which puts them at greater risk of having low Social Security benefits in retirement. While the progressivity of the Social Security benefit formula provides a safety net to support low-wage workers in retirement, a noticeable fraction of persons, especially those in single-person households, still have income below the poverty level in their last years of life. Many of these individuals have few assets to draw on to supplement their income, and are in poor health. In general, low assets and low income in old age are strongly related to poor health. We explore this nexus and describe the relationship between Social Security benefits and the exhaustion of non-annuity assets near the end of life. We examine the relationship between the drawdown of assets between the first year an individual is observed in the AHEAD data (1995) and the last year that individual is observed before death, and that individual's health, Social Security benefits, and other annuity benefits. We conclude that Social Security and defined benefit pension benefits are strongly "protective" of non-annuity assets, with a negative relationship between these income flows and the likelihood of exhausting non-annuity assets. We note that this result may in part reflect population heterogeneity in saving propensities. We also find that poor health is an important determinant of the drawdown of non-annuity wealth.

Suggested Citation

Poterba, James M. and Venti, Steven F. and Wise, David A., The Nexus of Social Security Benefits, Health, and Wealth at Death (December 2012). NBER Working Paper No. w18658. Available at SSRN: https://ssrn.com/abstract=2194783

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Steven F. Venti

Dartmouth College - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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David A. Wise

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS)

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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