Social Security, Marriage, and Old-Age Poverty

by Petra Persson, Columbia University

Poverty in old age is highly correlated with marital status. While absolute poverty among the elderly declined substantially from 1950 to 2000, the decline was concentrated among married elders. This has crucial implications for women, most of whom will outlive their husband, by about seven years on average. Indeed, widowhood is one of the most important risk factors for transition into poverty; in the U.S., one in four widows over 65 is poor or near poor. Yet, and crucially, divorcees fare even worse in old age.

To ascertain financial security in retirement, it is thus crucial to plan far ahead. An extensive body of research on how individuals plan for long-term financial security has focused on savings behavior. In this project, I ask whether another type of decisions – those concerning marriage and divorce – are influenced by a desire to insure against poverty decades ahead, in retirement.

To answer this question, I exploit a reform of Sweden’s Social Security benefits that drastically reduced the insurance against old-age poverty that was tied to marriage. First, I develop a simple theoretical framework, based on assumptions that bear resemblance to the context I analyze. Second, I test the predictions of this model using a panel data set that tracks the entire population of ever married individuals in Sweden over four decades. For identification, I exploit the fact that grandfathering rules induced essentially random variation in exposure to the reform.

Social Security is one of the main determinants of a household’s retirement income, especially among the poor, which implies that the incentives inherent in the design of these benefits may have far-reaching implications. This project explores how the design of Social Security benefits influences marital decisions, and sheds lights on an under-studied mechanism to plan for financial security in old age.

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