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Effects of Pensions on Saving: Analysis with Data from the Health and Retirement Study

71 Pages Posted: 18 Sep 1998  

Alan L. Gustman

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Thomas L. Steinmeier

Texas Tech University - Department of Economics and Geography

Date Written: August 1998

Abstract

This paper examines the composition and distribution of total wealth for a cohort of 51 to 61 year olds from the Health and Retirement Study (HRS), and the role of pensions in forming retirement wealth. Pension coverage is widespread, covering two thirds of households and accounting for one quarter of accumulated wealth. Social security benefits account for another quarter of total wealth. As calculated from earnings records, the present disco value of social security benefits is less than the present value of taxes paid. Earlier than many expect, social security is already a poor investment on average for this cohort on the verge of retirement. Lifetime earnings are measured for each individual in the HRS from social security earnings records augmented by self reported earnings histories. This result is consistent with the predictions of a stripped down life cycle model. Also consistent is a finding that the ratio of wealth to lifetime earnings is no higher for those with pensions than for those without pensions. Multivariate regressions relating total wealth to pension coverage and pension value, suggest that pensions cause very limited displacement of other wealth, if any. Pensions add to total wealth by at least half the value of the pension, and in most estimates by a good deal more. These findings are not consistent with a simple life cycle explanation for savings. They also raise questions about whether pensions are fundamentally a tax avoidance device, allowing substitution of pension for nonpension savings.

Suggested Citation

Gustman, Alan L. and Steinmeier, Thomas L., Effects of Pensions on Saving: Analysis with Data from the Health and Retirement Study (August 1998). NBER Working Paper No. w6681. Available at SSRN: https://ssrn.com/abstract=123428

Alan L. Gustman (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Dartmouth College - Department of Economics ( email )

6106 Rockefeller Center
Hanover, NH 03755
United States
603-646-2641 (Phone)
603-646-2122 (Fax)

Thomas L. Steinmeier

Texas Tech University - Department of Economics and Geography ( email )

Lubbock, TX 79409-2101
United States
806-742-2201 (Phone)

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