University of St. Gallen, SwitzerlandSpousal Death and Survivor’s Financial Response
Spousal death represents one of the most severe financial shocks that an individual may face during their life-cycle. Besides potential effects on mental well-being, the survivors are faced with a multitude of financial challenges. Understanding to what extent individuals are insured against financial risks accompanying the death of their spouse is a key question in the design of old-age support policies. In this paper, we examine implications of a spousal mortality shock on survivors' consumption and portfolio allocation in the U.S., using data from the Health and Retirement Study and the Consumption and Activities Mail Survey. Apart from strong negative effects on household income, we find that durable household consumption decreases sharply soon after the shock while non-durable spending is largely unaffected across the wealth distribution. In addition, we find that widows decrease their stock market participation and the amount of wealth held in stocks. Our results support the notion that wealthier households use their financial wealth to insure their consumption against mortality shocks.