The Elderly Keep Accumulating Assets

Contrary to what financial theory predicts, new research from Europe shows that the elderly accumulate assets later in life than expected, likely because they want to leave bequests, are receiving pensions, or are reluctant to part with assets such as their homes.

The central tenet of the life-cycle hypothesis of Modigliani and Brumberg is that when people are young, they work, earn income and save (accumulate wealth) in order to prepare for living expenses during retirement. When people are old, they retire and finance their living expenses by dissaving (decumulating their previously accumulated wealth). However, bequest motives and precautionary saving arising from longevity risk and uncertain future medical and long-term care expenses impact actual spending – uncertainty means that even in the absence of bequeath motives, we cannot precisely exhaust wealth at the time of death.

Examining whether the retired elderly decumulate their wealth and whether their wealth accumulation (saving) behavior is influenced by bequest motives, precautionary saving and public pension arrangements are tests of the validity of the life-cycle hypothesis. Charles Yuji Horioka and Luigi Ventura, authors of the September 2022 study, “Do the Retired Elderly in Europe Decumulate Their Wealth? The Importance of Bequest Motives, Precautionary Savings, Public Pensions, and Homeownership,” used microdata on a large number of European countries from the Survey of Health, Ageing and Retirement in Europe (SHARE) to examine the wealth accumulation (saving) behavior of the retired elderly. They confined their sample to only single-person or couple households in which both the husband and wife were 60 or older and retired because the authors wanted to avoid the problem of having to allocate saving, wealth, etc., to cohabiting household members and because the life-cycle hypothesis predicts not that all elderly will decumulate their wealth, only that the retired elderly will. They also confined their sample to households with at least one non-cohabiting child because they were interested in looking at the impact of bequest intentions on wealth accumulation (saving) behavior – respondents with no living children are likely to have a weaker bequest motive, driven by different motivations.