Working Paper: NBER ID: w10260
Authors: John Karl Scholz; Ananth Seshadri; Surachai Khitatrakun
Abstract: This paper examines the degree to which Americans are saving optimally for retirement. Our standard for assessing optimality comes from a life-cycle model that incorporates uncertain lifetimes, uninsurable earnings and medical expenses, progressive taxation, government transfers, and pension and social security benefit functions derived from rich household data. We solve every household''s decision problem from death to starting age and then use the decision rules in conjunction with earnings histories to make predictions about wealth in 1992. Ours is the first study to compare, household by household, wealth predictions that arise from a life-cycle model that incorporates earnings histories for a nationally representative sample. The results, based on data from the Health and Retirement Study, are striking we find that the model is capable of accounting for more than 80 percent of the 1992 cross-sectional variation in wealth. Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are undersaving is generally small.
Keywords: retirement savings; lifecycle model; wealth accumulation
JEL Codes: H31; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household characteristics (R20) | wealth accumulation (E21) |
| lifecycle model (O41) | household wealth predictions (G51) |
| earnings histories (J31) | wealth accumulation (E21) |
| wealth deficits (H62) | low-income or low-education households (I24) |