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, September 2008

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

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 €)

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

Survivor pension rules (French pension system) Scheme of the deceased spouse Survivor pension rate Means-testing Civil servant 50%No Private sector Basic scheme54%Yes (own pension + survivor pension < 1392 € / month) Complementary schemes 60%No

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 (N 2 / N 1 ) : 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

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

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

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

Changes in the living standard : an empirical analysis (1)  Data used Perfect data : panel data on income with reliable income dynamics Income Tax Surveys, 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

Changes in the living standard : an empirical analysis (2) Marital status Average living standardMedian living standard €/cu per yearIndex€/cu per yearIndex Women and men, aged 65 and over (ref) (ref) Women, aged 65 and over, living alone Widowed Divorced Single Men aged 65 and over, living alone Widowed Divorced Single Source : Income Tax Surveys

Changes in the living standard : an empirical analysis - longitudinal (3) t : date of spouse’s deathMenWomen Disposable Income (t+1) / Disposable Income (t-1) Q10,690,61 Q20,790,65 Q30,870,71 Mean0,77 (0,04)0,65 (0,02) Living standard (t+1) / Living standard (t-1) Q11,040,92 Q21,180,98 Q31,311,06 Mean1,17 (0,05)0,97 (0,03) Sample45102 Source : Income Tax Surveys

Changes in the living standard : an empirical analysis - longitudinal (4) VariablesParameters Constant1.279*** (0.446) Deceased spouse’s status Public sector employee (0.505) Private sector employeeRef. Self-employed-0.862* (0.521) Share of wife’s pension in the total household pension (t-1) ** (1.296) Sample size102 Probability to experience a decrease in the living standard after the spouse’s death Logit regression Source : Income Tax Surveys

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

 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 Discussion and conclusion (1)

 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 Discussion and conclusion (2)

 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 ? Discussion and conclusion (3)

 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 Discussion and conclusion (4)

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