Working Paper: NBER ID: w25586
Authors: Itzik Fadlon; Shanthi P. Ramnath; Patricia K. Tong
Abstract: We study the effects of the Social Security survivors benefits program on household labor supply and the efficiency implications for insurance and credit markets. We use U.S. population tax records and exploit a sharp age discontinuity in benefit eligibility for identification. We find that eligibility induces considerable reductions in labor supply both among newly-widowed households in the immediate post-shock periods and among already-widowed households whose benefit receipt is entirely predictable. The evidence points to liquidity constraints, rather than myopia, as a leading operative mechanism underlying household responses to anticipated benefits. Our findings identify important inefficiencies in the life insurance market and in the allocation of credit. Our results further highlight the protective insurance role of the social program and the importance of liquidity provided by the government, and they suggest potential gains from expanding and smoothing the program’s benefit schedule.
Keywords: Labor Supply; Social Security; Survivors Benefits; Market Inefficiency; Household Behavior
JEL Codes: D1; D61; G22; H0; H55; I1; I38; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Eligibility for survivors benefits (H55) | Labor supply reductions among newly-widowed households (J22) |
| Eligibility for survivors benefits (H55) | Household net income (G59) |
| Eligibility for survivors benefits (H55) | Greater leisure consumption (D12) |
| Predictable benefit receipt (H55) | Labor supply declines among already-widowed households (J26) |
| Liquidity constraints (E51) | Labor supply reductions in response to anticipated benefits (J32) |
| Dollar of benefits (J32) | Valuation by newly-widowed households (G59) |