Working Paper: NBER ID: w25556
Authors: Jason Scott; John B. Shoven; Sita Slavov; John G. Watson
Abstract: We examine the implications of persistent low real interest rates and wage growth rates on individuals nearing retirement. We begin by reviewing the concept of r star – the long-term real, safe interest rate that is neither expansionary nor contractionary – and presenting recent estimates suggesting that this value has declined. We then examine the implications of low returns and low wage growth for individuals currently aged 45 and 55. We find that low returns and low wage growth have substantial welfare effects, with compensating variations that are often in the hundreds of thousands of dollars. Low returns increase optimal Social Security claiming ages and the marginal benefit of working longer, while low wage growth decreases the marginal benefit of working longer. Low economy-wide wage growth has a much larger welfare effect than low individual wage growth due to wage indexation of the initial benefit and the progressivity of the Social Security benefit formula. When individual wage growth alone is low, wage indexation is unchanged, and the progressivity of the benefit formula provides insurance. When economy-wide wage growth is low, wage indexation is less generous and there is no insurance benefit from progressivity as average wages fall along with individual wages.
Keywords: retirement; low wage growth; low real interest rates; social security; life cycle model
JEL Codes: D14; H55; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low returns (G19) | optimal social security claiming ages (H55) |
| low wage growth (J31) | marginal benefit of working longer (J29) |
| low economywide wage growth (J39) | welfare effect (D69) |
| low returns (G19) | marginal benefit of additional work (J29) |
| low returns (G19) | greater relative impact from working longer than from saving more (J26) |