Saving for Retirement: Wage Growth and Unexpected Events
We found that there is a perception of ‘under-saving’ for retirement among many individuals. Individuals who perceive they have saved inadequately attribute this mainly to having insufficient income. Under a lifecycle model of consumption with a known income path this is not a reasonable answer. Those with low income today who fail to save will have even lower consumption levels in the future and could increase lifetime utility by reallocating consumption from pre-retirement to post-retirement. Unexpected outcomes in earnings, however, may cause households that planned to reach retirement with adequate savings, not to realize their plans. The decline in real wages that began in 1973 suggests a compelling explanation for low wealth levels: individuals were surprised by low earnings growth and thus under-saved relative to their lifetime incomes. We find that the hypothesis fits the data for those with extreme outcomes but does not explain large wealth differences for individuals on average.
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Paper IDWP 2003-045