Wealth Accumulation in the U.S.: Do Inheritances and Bequests Play a Significant Role?

Abstract

This paper formulates an overlapping generations model with both life-cycle saving and altruistic bequests. For a given distribution of earning abilities, the model generates a stationary steady-state capital-to-labor ratio for the economy as a whole and a stationary distribution of net worth among households. We calibrate the model, using the 1995 Survey of Consumer Finances to fix the distribution of earning abilities, and using total 1995 U.S. wealth and Federal estate tax revenues to fix other key parameters. The analysis specifies its version of the Federal estate tax in detail, estimating the empirical degree of tax avoidance. Simulations show that the model can reproduce the high degree of wealth concentration evident in U.S. data. Most surprisingly, the analysis also suggests that the U.S. economy’s steady-state capital-to-output ratio will be insensitive to changes in the national debt and social security.