The Intergenerational Wealth Effects of the Social Security Notch ∗

This paper investigates the role of parental retirement wealth in determining offspring wealth. We examine a prominent policy change to Social Security benefit determination, the Notch, in which a handful of birth cohorts received higher benefits relative to neighboring cohorts. Using multiple datasets, we find that the effect of the policy change on the wealth distribution of the children of affected retirees is significant. We further investigate two possible mechanisms at work – intervivos gifts and bequests. Our estimates suggest that the change in retirement benefits led to parents increasing financial transfer amounts to children (intensive margin), rather than encouraging more parents to make transfers (extensive margin). Both intervivos gifts and bequests combined can account for some of retirement wealth effect on child wealth, but not all. Our findings are important given the notable effects that wealth has on a wide variety of outcomes, ranging from human capital investment to health. ∗We thank Steven Durlauf, Jesse Gregory, John Karl Scholz, Ananth Seshadri, Chris Taber, and the UW-Madison Public Economics Group for helpful discussions and comments. Support from the Human Capital and Economic Opportunity Working Group is gratefully acknowledged by Kegon Tan. †Dept. of Economics, UW-Madison, Email: [email protected] ‡Dept. of Economics, UW-Madison, Email: [email protected] §Dept. of Economics, UW-Madison, Email: [email protected] ¶Dept. of Economics, UW-Madison, Email: [email protected]