How Will the Rise in 4 ( K ) Plans Affect Bequests ?

This brief explores how the shift from defined benefit to defined contribution pension plans might affect bequests and thereby consumption and saving. Bequests can occur under two different types of circumstances: (1) individuals plan to leave an inheritance for their heirs (an intended bequest); or (2) individuals have no specific inheritance plans, but die before consuming all of their assets (an unintended bequest). This brief concludes that both types of bequests will increase as retirees receive more of their pension benefits as lump-sum amounts rather than as annuity payments, which provide a lifetime stream of income. A key reason underlying the likely increase in bequests is that many people are reluctant to spend accumulated wealth. This reluctance is evident in four different ways: (1) the small size of the U.S. annuity market; (2) the aversion of older homeowners to reverse mortgages; (3) the holdings of life insurance by retirees; and (4) the limited dissaving in retirement. In the past, any reluctance to turn assets into income streams was mitigated by the fact that most retirement wealth — Social Security and private pensions — came in the form of annuity payments. Today, the story is different because more and more private sector pension plans provide lump-sum benefits. The effect of pensions on bequests is potentially large and significant. First, in 1998, bequeathable wealth in the hands of decedents was $15 billion (3.2 percent) higher as a