Less Of A Thrill From Dad's WillMike Mcnamee
That bumper sticker you see in Florida or Arizona--"I'm Spending My Children's Inheritance"--may be truer than you suspect. A shift since the 1960s in the way the elderly manage their resources has resulted in greater security and spending for older people but skimpier savings for the U.S. economy. As senior citizens depend more and more on annuities--income flows that last only as long as the owner survives--they're collecting less in assets that can be left to their heirs as bequests. And that has taken a big bite out of national savings, according to a recent study by Alan J. Auerbach of the University of California at Berkeley and other economists.
Common examples of annuities are Social Security benefits and pensions, which pay off during beneficiaries' lifetimes (with limited survivors' benefits in some cases). Pension benefits grew from 1.7% of gross domestic product in 1960 to 5.4% in 1990. But federal health programs may have done the most to accelerate the trend, say the economists. Medicare and Medicaid lifted federal transfers to the elderly from less than 1% of GDP in the mid-'50s to more than 9% today.
With more of their resources in the form of annuities, seniors can spend more (chart). "Annuities take away the risk that you'll outlive your accumulated wealth," explains Laurence J. Kotlikoff of Boston University, one of the study's authors. While the average 70-year-old in 1960 spent only about two-thirds as much as a 30-year-old did, by 1990 a man of 70 was spending one-quarter more than his 30-year-old grandson's contemporaries. Elderly women also boosted their consumption, though not so dramatically.
The downside? "We used to be able to count on unintended bequests--wealth left over at the end of life--to boost national savings," Kotlikoff says. Indeed, bequests might have been $136.3 billion, or 65.6%, greater in 1990 had the share of annuitized benefits remained at its 1960 level. The missing bequests would have almost doubled net national savings in 1990, the authors note. For those baby boomers counting on inheritances to make up for their own lax savings, the message of the bumper sticker is a warning.