The Effect of Taxation and of Fixed Costs on the Financial Difficulties Arising from the Death of a Spouse in a Single-Earner Household?

Abstract

The economic risk associated with the death of a spouse mainly affects survivors with no own income. Whether and under which conditions the survivor suffers poverty depends on how social security protects the survivor against an income loss resulting from the death of the spouse. While a person’s standard of living is determined by net income, survivor benefits are normally derived as a particular share of the deceased spouse’s gross benefits. Thus, the present paper investigates the survivor’s decline in standard of living in relation to the effect of taxation and to fixed costs such as costs of housing. In contrast to existing studies, the present analysis is based on hypothetical retiree households. This guarantees that the household’s welfare before the death of a spouse is independent of individual factors such as differences caused by retirement age or earnings history. The present research investigates those surviving the death of a spouse in Austria, Germany and the U.S.A.. The results obtained help us understand why survivors are often exposed to poverty and how the design of adequate and fair survivor protection may be achieved.