Saving for Retirement: Wage Growth and Unexpected Events

38 Pages Posted: 10 Feb 2008

See all articles by Michael D. Hurd

Michael D. Hurd

RAND Corporation; State University of New York at Stony Brook - College of Arts and Science - Department of Economics; National Bureau of Economic Research (NBER)

Julie M. Zissimopoulos

University of Southern California - Sol Price School of Public Policy; The RAND Corporation; University of Southern California - Schaeffer Center for Health Policy and Economics

Date Written: April 2003

Abstract

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.

Suggested Citation

Hurd, Michael D. and Zissimopoulos, Julie M., Saving for Retirement: Wage Growth and Unexpected Events (April 2003). Michigan Retirement Research Center Research Paper No. WP 2003-045, Available at SSRN: https://ssrn.com/abstract=1090900 or http://dx.doi.org/10.2139/ssrn.1090900

Michael D. Hurd (Contact Author)

RAND Corporation ( email )

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State University of New York at Stony Brook - College of Arts and Science - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Julie M. Zissimopoulos

University of Southern California - Sol Price School of Public Policy ( email )

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The RAND Corporation ( email )

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University of Southern California - Schaeffer Center for Health Policy and Economics ( email )

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