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 one-third 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.