Social Security Notch Research Articles

Bequest motives and the Social Security Notch

Bequests may be a key driver of late life savings behavior and more broadly, a determinant of intergenerational inequality. However, distinguishing bequest motives from precautionary savings is challenging. Using data from the Health and Retirement Study, we exploit an unanticipated change in Social Security benefits, commonly called the Social Security Notch, as an instrument to identify the effect of benefits on bequests. We match data moments generated by the Notch with a model of late life savings behavior that accounts for mortality risk and unobserved expenditure shocks to identify bequest motives. The model is used to decompose the importance of bequest motives as a driver of late life savings by comparing asset profiles with and without utility from bequests. We find that roughly 40% of accumulated assets and bequests are attributable to bequest motives among retirees. Our policy counterfactual features a more progressive Social Security benefits schedule that reduces benefits for the richest retirees. We show that although wealth declines, consumption remains largely unchanged since wealth generated by bequest motives acts as a cushion against benefit reduction.

Intergenerational Altruism and Retirement Transfers: Evidence from the Social Security Notch

I contribute new evidence on altruistic preferences in intergenerational transfers using variation in Social Security benefits induced by an inflation-indexing mistake. The instrument is most relevant for those with low education, so I focus on this group. I find support for pure altruism because individuals who received additional Social Security benefits passed on 15.4 percent to children via inter vivos transfers without receiving any additional care in return. On the contrary, children reduce caregiving monotonically with increases in parental Social Security benefits. Adult female children appear to be the most affected as they both receive monetary transfers and reduce caregiving.

Social Security Income and Health Care Spending: Evidence from the Social Security Notch.

The paper exploits Social Security legislation changes to identify the causal effect of Social Security income on out-of-pocket medical expenditures of the elderly. Using the 1986-1994 Consumer Expenditure Survey and an instrumental variables strategy, the empirical results show that health care expenditures are responsive to changes in Social Security income for elderly individuals with less than a high school education. The estimated income elasticities are between 1.41 and 3.47 depending on the outcome measures and are statistically significant at conventional levels. The findings are in contrast to existing studies that find a small income elasticity at the individual/household level.

Social security income and the utilization of home care: Evidence from the social security notch

This paper exploits Social Security law changes to identify the effect of Social Security income on the use of formal and informal home care by the elderly. Results from an instrumental variables estimation strategy show that as retirement income increases, elderly individuals increase their use of formal home care and become less likely to rely on informal home care provided to them by their children. This negative effect on informal home care is most likely driven by male children withdrawing from their caregiving roles. The empirical results also suggest that higher Social Security benefits would encourage the use of formal home care by those who would not have otherwise used any type of home care and would also encourage the use of both types of home care services among elderly individuals.

Reconsidering the Social Security Notch and retirement: Wealth and incentive effects

Using the Health and Retirement Study, we show that studies using the Social Security Notch cannot separately identify the effects of retirement wealth and forward-looking incentives on retirement because the Notch natural experiment changed both factors in offsetting ways.

Is Health Care an Individual Necessity? Evidence from Social Security Notch

This paper exploits Social Security legislation changes to identify the causal effect of Social Security income on out-of-pocket medical expenditures of the elderly. Using the householdlevel consumption data from the 1986-1994 Consumer Expenditure Survey and an instrumental variables strategy, the empirical results show that the estimated income elasticities of out-ofpocket total medical costs, medical service expenses, and prescription drug expenses are about 0.89, 1.03, and 0.91, respectively. The estimated elasticities increase substantially and are statistically significant for elderly individuals with less than a high school education. The corresponding income elasticities are 2.40, 3.46, and 1.41, respectively. These findings are in sharp contrast to existing studies and provide empirical evidence that health care expenditures are highly income sensitive among the low education elderly.

Social Security Income and the Well-Being of the Elderly: Evidence from the Social Security Notch

This paper exploits Social Security law changes to identify the effect of Social Security income on the use of formal and informal home care by the elderly. Results from an instrumental variables estimation strategy show that as retirement income increases, elderly individuals increase their use of formal home care and become less likely to rely on informal home care provided to them by their children. This negative effect on informal home care is most likely driven by male children withdrawing from their caregiving roles. The empirical results also suggest that higher Social Security benefits would encourage the use of formal home care by those who would not have otherwise used any type of home care and would also encourage the use of both types of home care services among elderly individuals.

What can the Social Security Notch tell us about the impact of additional income in retirement?

Forresearchersinterestedintheimpactofincomeonlifeoutcomes, the‘SocialSecurityNotch’provides a rare source of variation in incomes not caused by these same life outcomes. This paper addresses the usefulness of this variation to researchers. First, it demonstrates that simulated benefit levels by cohort are very significant predictors of reported benefits and total incomes for the affected cohorts in large data sources, such as the Current Population Survey. Second, it examines whether these are large enough to disentangle the impact of changes in income from underlying cohort variability in outcomes. It shows that the cohorts with higher benefits due to law changes are also observed to have higher earned incomes in retirement. Furthermore, the difference in mortality rates between affected cohorts is similar in magnitude to the gaps between other successive cohorts. These results imply that cohort variability overshadows the effects of this potential instrument.

The Effect of Income on Mortality: Evidence from the Social Security Notch

Legislation in the 1970s created a Notch in social security payments, with those born after January 1, 1917, receiving sharply lower benefits. Using restricted-use versions of the National Mortality Detail File combined with Census data, we use this quasi experiment to examine the income mortality link in an elderly population. Estimates from difference-in-difference and regression discontinuity models show the higher-income group has a statistically significantly higher mortality rate, contradicting the previous literature. We also found that younger cohorts responded to lower incomes by increasing postretirement work effort, suggesting that moderate employment has beneficial health effects for the elderly.

Social Security and Elderly Living Arrangements

Previous studies of the effect of Social Security on elderly living arrangements generally have relied on data from the distant past or differences in benefits across families or cohorts that potentially were correlated with other determinants of living arrangements. Using data from the 1980–99 Current Population Surveys, we attempt to isolate the causal effect of Social Security on living arrangements with an instrumental-variable approach that relies on the large shifts in benefits for cohorts born from 1910–21, the socalled Social Security notch. Over all elderly households, the estimated elasticity of living with others with respect to Social Security income is -0.4, with elasticities of -1.3 and -1.4 for the widowed and divorced, respectively; most of the effects on living arrangements appear to be concentrated among the lesser educated as well. Our estimated elasticities are substantially larger than those from previous studies and suggest that reductions in current benefits would alter living arrangements significantly.