Social Security Reform and the Exchange of Bequests for Elder Care

Abstract

The majority of elderly Americans who receive long-term care outside of institutions are cared for in part by their children. We have little evidence, however, on the financial and social mechanisms securing the supply of elder care. In recent data on older U.S. families, I find that children rarely receive direct payment for their help. Further, inter-vivos transfers from unmarried parents to their adult children do not favor caregivers. Given the lack of evidence of any spotmarket for family care, the central question of this study is whether end-of-life transfers act as compensation for caregiving children. An empirical study of parents' division of bequests and life insurance among their children shows a positive association between children's transfer shares and both current and predicted caregiver status. In order to investigate the dependence of family care outcomes on children's time costs and parents' wealth and care needs, I present a dynamic model of the asset choices of an elderly parent who wishes to elicit care from her children. Model estimates indicate that children respond to parents' care needs and bequeathable wealth in the decision to provide care, and that children with greater time costs provide care only at higher levels of bequeathable wealth. Finally, a policy simulation based on model estimates predicts that a 5 to 6 percentage point increase in the rate at which unmarried elderly parents receive family care would result from reforms in which the expected present values of both public and private pensions were included in parents' bequests. However, a more modest change in public retirement benefits, designed to mimic the broad-brush characteristics of an existing proposal for Social Security reform, is predicted to have a negligible effect on care rates.