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Assets and Wealth


What are the primary motives for wealth accumulation and savings that produce such large diversity in wealth holdings among older households? The most widely known model is the life-cycle model, which emphasizes savings (and dissavings) to deal with timing issues surrounding noncoincidence in income and consumption (see Browning and Lusardi). In this theory, individuals will tend to want to "smooth" consumption so that they will save when income is high and dissave when income is low. Since income is relatively low during the postretirement years, households should accumulate assets during working lives after which older adults should run down their assets at the end of life.

The evidence about whether households will eventually dissave during the postretirement period has been in dispute in part due to very small samples available for older American households. Table 3 lists mean and median household wealth by age of the respondent. Within this AHEAD sample, both mean and median household wealth decline sharply with age. However, one cannot deduce from this pattern alone a pure life-cycle reduction in assets during old age. Other contaminating factors including across-cohort increases in wealth, which will tilt the cross-sectional age-wealth profiles downward, and differential mortality by wealth have made it difficult to test this hypothesis. Since cross-sectional data cannot control for these contaminating factors, the panel nature of surveys such as AHEAD must be used. At this time, there are too few waves of this panel to answer this question conclusively.

Another motive for saving involves bequests (Hurd). Three motives are thought to be important: altruistic, strategic, and accidental. As the label implies, "altruistic" bequests exist because individuals care about future generations, particularly their children and grandchildren (Becker). Altruistic bequests should rise with the income of the donors and fall with the income of recipients so that altruism implies that the largest bequests should go to the least well-off children.

The strategic motive sees bequests as the out-come of an implicit contract between the generations. For example, parents may use the prospect of future bequests to induce their children to provide assistance to them when they are old. If such services are not rendered, the implicit threat is to reduce or even eliminate the future Table 3 Mean Net Worth by Age (Households age 70 and over, July 2000, in dollars) SOURCE: Author bequest. The sharp distinction between altruistic and strategic motives comes from for whom the bequest recipients are likely to be (Cox; Bernheim, Shleifer, and Summers), with the altruistic model implying that the least well off children should be the recipients.

One difficulty in testing for the importance of bequest motives relates to the distinct possibility that some considerable amounts of bequests are "accidents" (Yaari). Since they cannot foresee with certainty the time of their deaths, individuals may run the risk of dying too late, having run out of resources to finance their consumption. They will accumulate wealth to guard against this uncertain date of death—those who die early will leave bequests even though they do not have any bequest motive per se. As a practical empirical matter, it has proven difficult to distinguish between altruistic and accidental bequests.

One test of the bequest motive involves variation in rate of wealth decumulation at older ages as a function of variables that should be correlated with the strength of a bequest motive. A strong bequest motive should diminish rates of wealth decumulation. An obvious test involves comparisons of rates of wealth decline at old age among those households with children and those without children. A consistent finding is that there appears to be little difference in rates of wealth decline across these types of families (Hurd).

Another test of the bequest motive as well as the life-cycle hypothesis can be derived from questions asked about the intended bequests individuals plans to make when they die. Hurd and Smith report that current wealth holdings of older households significantly exceed their average desired bequest. Since they plan to leave bequests much less than their current wealth, the strong implication is that individuals must on average anticipate significant dissaving before they die.

A related aspect of bequests involves the extent to which past inheritances can explain the diversity in current wealth holdings by households. It turns out that financial inheritances represent but a fraction of total net worth so that levels and distributions of wealth would be largely the same even if the maximum contribution of financial inheritances are taken into account. For example, very few of the households in the AHEAD sample received any significant financial inheritances (Smith, 1997).

Besides household income, life-cycle factors, and bequests, why is there so much diversity in wealth holdings among older Americans? This question is on the frontier of current research, and a full consensus on which explanations rank highest in importance has not been reached. The reasons lie in very different savings rates across households as well as different ex post rates of return on those savings. Differences in realized rates of return will produce wide differences in wealth holdings over time as households increasingly differentiate themselves based on their good fortune.

Wealth and savings differences across older households also result from substantial taste differences operating through time and risk preferences, the onset of bad health shocks, high old age income replacement rates through social insurance and pension programs, more extensive family support networks, and asset tests in means-tested social insurance programs that discourage asset possession.

Poor health is a pervasive risk that may limit the ability of older households to hold onto their previously accumulated wealth. In middle and at older ages, there are pronounced effects of new health events on household income and wealth (Smith, 1999). While additional medical expenses are part of the reason for this depletion in economic resources, they by no means accounts for the bulk of it. In middle age, reductions in household income associated with health effects on labor supply are equally important. At both middle and older ages, new health shocks appear to reduce individuals' expectations about their life expectancy and their desire or ability to leave bequests to their heirs.

Another factor that may affect wealth accumulation of older people involves the high retirement income replacement rates from pensions and Social Security that exist for some older households. These replacement rates represent the fraction of household income that will be replaced by pensions and Social Security at the time these households are expected to retire. On an after-tax basis, for example, most households in the lower quarter of the income distribution currently appear to enjoy almost full income replacement when they retire. At least for retirement purposes, the incentive to save for these low income households is almost nil.

The importance of pension and social security annuities also argues that household wealth as conventionally measured above ignores critical components of wealth that can loom large, especially for households nearing and in retirement. Virtually all households anticipate a flow of Social Security benefits when they retire. More than half of them are also counting on the income from their pensions. When discounted to the present, these expected income flows translate into considerable amounts of wealth. For example, combined Social Security and pension wealth are as important as household wealth for the average family in their fifties. This distortion caused by the conventional wealth concept is much larger among low income and minority families. Among black and Hispanic households, conventional household wealth is less than one-third of their total wealth. For these minority households, social security wealth is especially critical and represents by far the largest part of their wealth. Wealth is an important but complex economic resource and new methods have been developed to obtain better measurement. We should anticipate that our knowledge about how wealth is distributed among older Americans will be increasing quite rapidly in the next few decades.



BECKER, G. S. A Treatise on the Family. Cambridge, Mass.: Harvard University Press, 1981.

BERNHEIM, B. D.; SHLEIFER, A.; and SUMMERS, L. H. "The Strategic Bequest Motive." Journal of Political Economy 93, no. 6 (1985): 1045–1076.

BROWNING, M., and LUSARDI, A. "Household Saving: Micro Theories and Micro Facts." Journal of Economic Literature 34 (December 1996): 1797–1855.

COX, D. "Motives for Private Income Transfers." Journal of Political Economy 95 (1987): 508–546.

HURD, M. D. "Savings of the Elderly and Desired Bequests." American Economic Review 77 (1987): 298–311.

HURD, M. D., and SMITH, J. P. "Anticipated and Actual Bequests." In The Economics of Aging. Edited by David Wise. Chicago, University of Chicago Press, 2001.

JUSTER, F. T., and SMITH, J. P. "Improving the Quality of Economic Data: Lessons from HRS and AHEAD." Journal of the American Statistical Association 92, no. 440 (1997): 1268–1278.

LUPTON, J. , and SMITH, J. P. "Marriage, Assets, and Savings." In Marriage and the Economy. Edited by Shoshana Grossbard-Shecht. Cambridge University Press, 2000.

SMITH, J. P. "Wealth Inequality among Older Americans." Journal of Gerontology 52B (May 1997): 74–81.

SMITH, J. P. "Healthy Bodies and Thick Wallets." Journal of Economic Perspectives 13, no. 2 (Spring 1999).

SMITH, J. P. "Inheritances and Bequests." In Wealth, Work, and Health: Innovations in Measurement in the Social Sciences. Edited by James P. Smith and Robert Willis. Ann Arbor: University of Michigan Press, 1999.

YAARI, M. E. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer." Review of Economic Studies 32 (1965): 137–150.

Additional topics

Medicine EncyclopediaAging Healthy - Part 1Assets and Wealth - Data Sources, The Distribution Of Wealth Among Older Americans, Theory