Retirement Wealth Across Cohorts: The Role of Earnings Inequality and Pension Changes

Published: 2008


Changes in labor markets over the past 30 years suggest upcoming changes in the distribution of wealth at retirement. Baby boom cohorts have spent the majority of their prime earnings years in a labor market with increased earnings inequality. This paper investigates how changes in lifetime earnings distributions affect the distribution of retirement wealth among cohorts retiring over the next decade. I use data from the Health and Retirement Study from 1992 to 2004 to
estimate the relationship between lifetime earnings, pre-retirement private wealth and Social Security wealth. I show that changes in the lower half of the male earnings distribution explain a substantial portion of changes in the distribution of pre-retirement wealth. Growth in women’s earnings across the cohorts do not offset these declines in wealth associated with male earnings.

When pensions are added to the measure of wealth, the role of earnings is even larger, reflecting a strong correlation between changes in earnings across these cohorts and changes in the values of their employer-provided pensions. These pension changes do not appear to operate via changes in pension structures (defined benefit versus defined contribution). The present value of wealth from future Social Security benefits, in contrast, grows in real terms throughout most of the distribution. At the bottom of the male distribution of Social Security wealth, reductions in lifetime earnings limit this growth in real benefits, while at the top of the distribution earnings growth amplifies expected growth in Social Security wealth.

Key Findings

    • Reduced earnings over several decades, particularly at the bottom of the wealth distribution, have produced sizeable changes in accumulated wealth.
    • In contrast to the findings for private, pre-retirement wealth, Social Security benefits are not predicted to decline over time, even for those groups who have faced significant deterioration in their real earnings.
    • For those groups whose lifetime earnings were lower than previous cohorts, the role of Social Security in their overall wealth portfolio may be larger than for earlier cohorts.