Working Paper: NBER ID: w17203
Authors: Michael D. Hurd; Susann Rohwedder
Abstract: We define and estimate measures of economic preparation for retirement based on a complete inventory of economic resources while taking into account the risk of living to advanced old age and the risk of high out-of-pocket spending for health care services. We ask whether, in a sample of 66-69 year-olds, observed economic resources could support with high probability a life-cycle consumption path anchored at the initial level of consumption until the end of life. We account for taxes, widowing, differential mortality and out-of-pocket health spending risk. We find that 71% of persons in our target age group are adequately prepared according to our definitions, but there is substantial variation by observable characteristics: 80% of married persons are adequately prepared compared with just 55% of single persons. We estimate that a reduction in Social Security benefits of 30 percent would reduce the fraction adequately prepared by 7.8 percentage points among married persons and by as much as 10.7 percentage points among single persons.
Keywords: retirement; economic preparation; consumption paths; social security
JEL Codes: E21; J14; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic resources (Q21) | preparedness (H12) |
| social security benefits (H55) | preparedness (H12) |
| 30% reduction in social security benefits (H55) | preparedness (H12) |
| observable characteristics (such as education and marital status) (J79) | preparedness (H12) |
| wealth (D14) | consumption path (E21) |
| mortality risk (J17) | consumption path (E21) |
| out-of-pocket health spending (H51) | consumption path (E21) |