Social welfare of older Americans : household structure, inequality, and retirement

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2002-12

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This dissertation is an empirical study mainly concerned with the economic status of the elderly and the implications of an aging population in the United States. Specifically, the first chapter examines the role of extended family co-residence in providing social insurance to the elderly. Using data from the Consumer Expenditure Surveys (CEX), the trend analysis of average welfare and the poverty rates of the elderly conditional on their living arrangements show a systematic pattern from 1980-1995, suggesting the endogeneity of household formation decisions with respect to consumption plans. The empirical estimations account for this endogeneity using data from the Panel Study of Income Dynamics (PSID). The results provide evidence that co-residing with extended family effectively supplements the governmental Social Security programs and helps the elderly to smooth consumption in old-age. Moreover, the comparison of the instrumental variable estimates of per adult equivalent consumption with that of the ordinary least squares estimation indicates that assuming the living arrangement exogenous or endogenous makes a significant difference in terms of identifying the welfare effects of household structure. The second chapter assesses the impact of the age structure of the population on the level and the trend of inequality in the United States. Because aging of a society is an exogenous demographic change, this chapter has important policy implications about the extent to which the government can influence the distribution through taxes and transfers. The theoretical decomposition derived indicates that the life cycle effects on aggregate inequality come from two different sources. The first one is through the life cycle effects on within-age inequality and the second one is through the life cycle effects on between-age inequality. Using data from the CEX, the empirical implementation of this decomposition indicates that between-age inequality could explain on average 2- 11 % of the aggregate inequality, depending on the household equivalence scales used. The results for within-age inequality, on the other hand, yields that the age effects are not as strong as suggested by the previous studies. Almost all of the age effects on within-age component of inequality disappear once the dispersion in the distribution of household consumption that is caused by the differences in household sizes is accounted for. Finally the third chapter revisits the widely pronounced retirement-savings puzzle, which claims the existence of a sharp drop in consumption at the time of retirement. In contrast to previous work, findings of this chapter suggest that consumption of the retired households is consistent with the smoothing behavior implied by the conventional permanent income/life-cycle models. The results present evidence that the elderly actually do not reduce their standard of living around the time of retirement due to a shortage in savings or some other reasons. While the evidence does not favor a dramatic drop in consumption, the composition of consumption changes significantly as households move into the retirement period.

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