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

James Poterba, Steven Venti, David A. Wise

NBER Retirement Research Center Paper No. NB 12-08
Issued in September 2012

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 no financial assets, no home equity, and rely almost entirely on Social Security benefits for support. Whether persons reach late-life with positive non-annuity wealth depends importantly on health. Poor health is very persistent over a life-time. Persons in poor health at old age have a higherthan-average probability of having experienced low earnings while in the labor force, and thus also having low Social Security benefits in retirement. The progressivity of the Social Security benefit formula helps to provide a safety net to support low-wage workers in retirement. Still, a noticeable fraction of persons, especially those in single-person households, have income below the poverty level in their last years of life and have no assets to draw on to supplement their income. The members of this group are also disproportionately in poor health. In general, low assets and low income in old age are strongly related to poor health. We explore this nexus and, in particular, try help to understand the relationship between Social Security benefits and the exhaustion of non-annuity assets near the end of life. We seek to determine how the drawdown of assets between 1995, the first year of the AHEAD data, and the year last observed before death depends on health and on Social Security and other annuity benefits. We conclude that Social Security and defined benefit pension benefits are strongly “protective” of non-annuity assets and that poor health is an important determinant of the drawdown of non-annuity wealth.

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