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Household Responses to Transfers and Liquidity: Evidence from Social Security's Survivors Benefits

Itzik Fadlon, Shanthi P. Ramnath, Patricia K. Tong

NBER Working Paper No. 25586
Issued in February 2019
NBER Program(s):Aging, Labor Studies, Public Economics

We use administrative tax data that cover the U.S. population to identify the causal effects of Social Security’s survivors benefit receipt on American families’ behavior and financial well-being. We analyze over a quarter of a million widowed households in which the husband died between 2002-2007, and we exploit a sharp age discontinuity in benefit eligibility to study the responses of financially vulnerable households to government transfers. We first study how households respond to unanticipated benefit receipt in the immediate periods following a large financial shock to investigate the protective role of transfers. We find significant impacts of the program on newly-widowed families’ net income and labor supply behavior, which points to considerable allocative inefficiencies in the life insurance market and to a high valuation of survivors benefits in protecting Americans against mortality shocks. Second, to investigate the particular role of liquidity and benefit timing, we then study how already-widowed women’s labor supply responds to anticipated survivors benefit receipt. We find considerable responses to cash-on-hand via benefit availability that underscore allocative inefficiencies in the credit market and the value of liquidity itself provided by government transfers. These responses and their heterogeneity highlight mechanisms that underlie the labor supply behavior of older vulnerable households, and they point to liquidity constraints, rather than myopia or benefit-schedule misperceptions, as the likely operative channel. Our results have implications for survivors benefits in the U.S., and, more generally, for retirement behavior and response mechanisms to transfers among older vulnerable populations.

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Document Object Identifier (DOI): 10.3386/w25586

 
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