| Lifetime Earnings, Social Security Benefits, and the Adequacy of Retirement Wealth Accumulation |
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WP#2004-10 AbstractThis paper provides new evidence on the adequacy of household retirement saving. We depart from much previous research on the adequacy of saving in two key ways. First, our underlying simulation model of optimal wealth accumulation allows for precautionary saving against uncertain future earnings. Second, we employ data on lifetime earnings. Using data from the 1992 Health and Retirement Study, we find that households at the median of the empirical wealth-lifetime earnings distribution are saving as much or more as the underlying model suggests is optimal, and households at the high end of the wealth distribution are saving significantly more than the model indicates. But we also find significant undersaving among the lowest 25 percent of the population. We show that reductions in Social Security benefits could have significant deleterious effects on the adequacy of saving, especially among low-income households. We also show that, controlling for lifetime earnings, households with high current earnings tend to save far more adequately than other households. For executive summary in PDF For full paper in PDF Eric M. Engen is a residential scholar at the American Enterprise Institute. William G. Gale is The Arjay and Frances Fearing Miller Chair and a Senior Fellow in Economic Studies at The Brookings Institution. Cori Uccello is a consultant for the Urban Institute. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) to the Center for Retirement Research at Boston College (CRR). The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of the SSA or any agency of the Federal Government or of the CRR. The authors would like to thank Brennan Kelly, Ben Harris, Samara Potter, and Emily Tang for research assistance and owe special thanks to Karl Scholz for providing data on lifetime earnings.
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