Economic Well-Being after Spouse's Death: Are Survivor Pensions Enough?

1. Changes in the economic well-being following the death of a spouse : Are public survivor pensions sufficient ? Some evidence for France Carole Bonnet (INED) Jean-Michel Hourriez (Crest, INSEE) CERP, 18-19 September 2008

2. Background (1) • The loss of a spouse is a shock that could jeopardize financial security during retirement • High poverty rates of widows during the 60’s and 70’s, in a context of high poverty rates of the elderly •  increase in the rate of the survivor pension (a part of the pension of the (married) deceased spouse provided to the surviving one) : • From 50 % to 52 % in 1982 and to 54 % in 1995 • It has been decided this year to increase this rate to 60 % in 2011

3. Background (2) • And yet, poverty has sharply decreased among the elderly including widows. • Even if their living standard is still lower than those of married couples (by 16 %) • So, some questions are raised : • Does this less well-off situation of widows result from a not generous enough survivor pension? Or from structural effects ? • In a general context of budgetary pressures, do we need to increase the generosity of survivor benefit ? • Survivor pensions represent 14 % of the total pension expenditures in 2006 (ie 30 billions €)

4. Outline • In spite of these questions and the financial importance of survivor pensions, no work has been made on this topic, at least in France • Two approaches to study the changes in the economic well-being following the death of the spouse • A theoretical perpective : some calculation on simple representative individuals • An empirical analysis : data used and results

5. Survivor pension rules (French pension system)

6. Changes in the living standard : a theoretical perspective (1) Situation : Married retired couple. Pensions are the only ressources • Living standard before the spouse’s death : • Living standard after the spouse’s death: • Change in the living standard (N2/ N1) :and x=Ps/Pd Pd : pension of the deceased spouse Ps : pension of the surviving spouse Cu : consumption unit (OECD-modified scale) N : living standards Rate : survivor pension rate

7. Changes in the living standard : a theoretical perspective (2) No means-test – (Civil servant pension scheme – rate = 50%)

8. Changes in the living standard : a theoretical perspective (3) Introduction of a means-test – Private worker scheme Threshold of the means-test : 1392 € / month

9. Changes in the living standard : a theoretical perspective (4)

10. Changes in the living standard : an empirical analysis (1) Data used Perfect data : panel data on income with reliable income dynamics Income Tax Surveys, 1996-2001 Result of the matching of the Labour Force Surveys and Income tax : The Labour Force Survey is a rotating panel survey (one third of the sample is replaced each year)  two waves of three years panel data Two different approaches : longitudinal and cross-sectional

11. Changes in the living standard : an empirical analysis (2) Source : Income Tax Surveys 1999-2001

12. Changes in the living standard : an empirical analysis - longitudinal (3) Source : Income Tax Surveys 1998-2001

13. Changes in the living standard : an empirical analysis - longitudinal (4) Probability to experience a decrease in the living standard after the spouse’s death Logit regression Source : Income Tax Surveys 1998-2001

14. Women Av. : 0,84 = Med : 0,86 = Men Av. : 1,06 = Med : 1,05 = Women Av. : 0,84 = Med : 0,86 = Men Av. : 1,06 = Med : 1,05 = 0,97 0,94 1,00  0,95 0,90  1,02 0,87  0,98 0,92 0,91 1,151,23 0,92 0,91 1,151,23 Changes in the living standard : an empirical analysis– cross-sectional (5) 0,97 0,94 1,00  0,95 0,90  1,02 0,87  0,98

15. Discussion and conclusion (1) • Changes in the living standard following a spouse’s death : • Decrease for women : between – 8 and –2 % (on av. and median) • Increase for men : between + 15 and + 23 % (on av. and median) • French survivor pension system nearly succeed in maintaining the living standard of women following the spouse’s death. • Only on average. Some women experience a drop in their living standard, especially those without an own pension. • For men, the living standard is almost always higher after the spouse’s death. • Different rules for civil servants and private workers achieve the same results on the maintain of living standard

16. Discussion and conclusion (2) • One element not discussed today but in the paper (and important) Does OECD-modified equivalence scale fits to widows ? • Consumption structure of elderly people is different • In general, widows do not adjust their housing consumption after the death of a spouse  The income needed by the surviving spouse to maintain her living standard could be higher • Increased needs of the surviving spouse : deteriorated health status for example • It could take some time to the surviving spouse to adapt to the new situation

17. Discussion and conclusion (3) • Some further investigations : • “Theoretical” investigations : • What kind of formula could be used to compute the survivor benefit to maintain the living standard for all the situations ? • Increase in the survivor pension rate but modification of the means-test • Empirical resultats : • Increase the sample size : Income Tax Surveys from 2002 to 2006 • Who falls below the poverty threshold after the spouse’s death ?

18. Discussion and conclusion (4) • Role of wealth : do households for whom the death of a spouse means a decrease in the living standard of the surviving spouse hold more wealth or different type of assets than the others ? • Financial wealth in Income Tax Surveys is not well reported : only taxable wealth. For example, not life insurance. • Use Wealth survey

19. Thank you for your attention