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The impact of inheritances on the retirement behavior of older Europeans

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Abstract

The aim of this paper is to study how wealth affects retirement behavior. I use data from the 2004–2012 Survey of Health, Ageing and Retirement in Europe, covering 10 European countries. Inheritances are used as an exogenous change in wealth to estimate the causal effect of wealth/inheritance receipt on retirement. I apply binary choice models for a sample of persons working in 2004/05 to estimate the effect of inheritance receipt during 2005–2011 on the probability of retirement in 2011/12. By comparing data on expected retirement age at the beginning of the sample period with actual retirement age I am able to control for unobserved factors that might be correlated with wealth and affect retirement decisions. The main findings are: (1) Inheritance receipt is quite common for individuals nearing retirement age (50+). About 20 % of the sample aged 50 and older in 2011/12 live in households that received at least one inheritance between 2005 and 2011. (2) Inheritance receipt significantly increases the probability of retirement and the effect increases with the size of the inheritance. (3) In contrast to what life-cycle theory suggests I do not find any evidence that expected and unexpected inheritances affect adjustments of planned retirement age differently. These results are important for assessing the effect of policies that induce changes in wealth, such as pension reforms, tax reforms or reforms of Social Security, on retirement behavior.

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Notes

  1. Kopczuk (2013) reviews the empirical and theoretical literature on taxation of intergenerational transfers and wealth. His survey also contains a section focusing on the behavioral responses to transfer taxation, such as wealth accumulation, labor supply, entrepreneurship and tax avoidance.

  2. For example Piketty (2011) finds that in France the annual flow of inheritance was less than 5 % of national income in 1950, reached about 15 % of national income in 2010 and will keep increasing until 2050, probably reaching 20–25 % of national income.

  3. Children of decedents in most European countries are entitled to a minimum share of the estate as legally prescribed. Beckert (2007) provides a detailed discussion of the development of inheritance law in France, Germany and the US. A detailed description of the inheritance law in 45 European countries is available in Süß (2007).

  4. Evidence suggests that many individuals receive inheritances when nearing retirement age. For example Brown et al. (2010) find that among older households in the 2004 Survey of Consumer Finances who report ever having received an inheritance, more than half received one at ages 50–65.

  5. It is worth mentioning, that some studies investigate the effect of inheritance receipt on labor supply of entrepreneurs, entrepreneurship and survival of existing businesses. For example Faria and Wu (2012) study the effect of inheritance receipt on hours worked of entrepreneurs in the UK and find a concave effect. For the effect on entrepreneurship and survival of existing businesses see, e.g., Holtz-Eakin et al. (1994a) and Holtz-Eakin et al. (1994b).

  6. Using a CRRA utility function allowing for more general degrees of relative risk aversion does not change the main results. Individuals with higher degrees of relative risk aversion consume less in each period and retire earlier compared to individuals who exhibit lower degrees of relative risk aversion.

  7. Joulfaian and Wilhelm (1994) find small effects on family consumption after an inheritance is received. Weil (1994) finds that inheritance receipt and expecting inheritances is associated with higher household consumption levels.

  8. About 80 % of inheritances come from parents or parents in law.

  9. See for example Debrand and Sirven (2009) studying the determinants of retirement decisions.

  10. For a detailed discussion of the imputation procedure in the SHARE see Christelis (2011).

  11. All Appendices are available as supplementary material in Online Resource 1 in PDF format.

  12. When calculating the marginal effects of a variable, all other variables are held constant at their means. As far it concerns non-linear functions in Xβ [inverse hyperbolic sine transformation of household income, household net wealth, inheritance value, inheritance value divided by household income, and a quadratic in arsinh(hh_income)] I plug the averages into the non-linear functions, rather than average the non-linear functions.

  13. Retired persons and house makers are considered as leaving the labor force. Employed, self-employed, unemployed and permanently sick or disabled are considered as part of the labor force.

  14. Summary statistics for all variables used in specification 2 are available for this sample (N = 1446) in Appendix 2 (Online Resource 1)—from now on this sample is called “minimum sample”.

  15. Previous estimates of the effect of inheritance on retirement are provided by Joulfaian and Wilhelm (1994) and Brown et al. (2010), all for the US.

  16. The previous literature on the effect of inheritance on labor supply is surveyed in Sect. 2 of this paper.

  17. See Piketty (2011) for France, Schinke (2012) for Germany and Atkinson (2013) for the UK.

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Acknowledgments

This paper uses data from the SHARE wave 4 release 1.1.1, as of March 28th or SHARE wave 1 and 2 release 2.5.0, as of May 24th 2011 or SHARELIFE release 1, as of November 24th 2010. The SHARE data collection has been primarily funded by the European Commission through the 5th Framework Programme (Project QLK6-CT-2001-00360 in the thematic program Quality of Life), through the 6th Framework Programme (Projects SHARE-I3, RII-CT-2006-062193, COMPARE, CIT5-CT-2005-028857, and SHARELIFE, CIT4-CT-2006-028812) and through the 7th Framework Programme (SHARE-PREP, No. 211909, SHARE-LEAP, No. 227822 and SHARE M4, No. 261982). Additional funding from the U.S. National Institute on Aging (U01 AG09740-13S2, P01 AG005842, P01 AG08291, P30 AG12815, R21 AG025169, Y1-AG-4553-01, IAG BSR06-11 and OGHA 04-064) and the German Ministry of Education and Research as well as from various national sources is gratefully acknowledged (see www.share-project.org for a full list of funding institutions). I am also grateful to Robert Kunst and Wolfgang Koller for useful comments. This work is based on my master thesis written at the University of Vienna during 2013–2014.

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  1. Vienna University of Economics and Business, Welthandelsplatz 1, 1020, Vienna, Austria

    Andreas Eder

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Eder, A. The impact of inheritances on the retirement behavior of older Europeans. Empirica 43, 299–331 (2016). https://doi.org/10.1007/s10663-016-9331-9

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