The Adequacy of Household Saving

Posted: 7 Feb 2000

See all articles by Eric M. Engen

Eric M. Engen

Federal Reserve Board

William G. Gale

Brookings Institution

Cori E. Uccello

American Academy of Actuaries

Multiple version iconThere are 3 versions of this paper

Abstract

This paper provides a new examination of the adequacy of households? saving for retirement. We develop a stochastic, life-cycle simulation model in which people save both for retirement and as a precaution against uncertain future earnings and uncertain lifespan. The model shows that, even among observationally-equivalent households, there will be a distribution of optimal wealth-to-earnings ratios,rather than a single target level. The existence of this distribution fundamentally changes the interpretation of data on wealth accumulation because it implies that even low levels of wealth can be consistent with optimizing behavior.

Using data from the HRS and the SCF, we find that more than half of married households where the husband works full-time have observed wealth-earnings ratios that exceed the median simulated health-earnings target for households with the same characteristics, and that the model understates wealth accumulation among households with high wealth-earnings ratios. Both results suggest wealth accumulation is adequate for a majority of households. However, among households with low wealth relative to earnings, there is mixed evidence of undersaving at the 5th and 25th percentile of the wealth-earnings distribution. We also examine differences between households with high and low wealth-earnings ratios, the evolution of the adequacy of saving between 1983 and 1995, and the sensitivity of the results to numerous factors.

Our central conclusion is that the characterization of any undersaving problem depends crucially on the specification of the null hypothesis that describes optimal, or benchmark, saving behavior. In addition,we interpret our findings as consistent with the view that inadequate saving is not as serious a problem as has been touted in the past. We also show that most previous studies that have been interpreted as showing inadequate household saving can be reconciled with our findings.

JEL Classification: D12, D91, H30, H55

Suggested Citation

Engen, Eric M. and Gale, William G. and Uccello, Cori E., The Adequacy of Household Saving. Brookings Papers on Economic Activity, 1999:2. Available at SSRN: https://ssrn.com/abstract=204770

Eric M. Engen

Federal Reserve Board ( email )

20th St. and Constitution Ave., NW
Washington, DC 20551
United States

William G. Gale (Contact Author)

Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States
202-797-6148 (Phone)
202-797-6181 (Fax)

Cori E. Uccello

American Academy of Actuaries ( email )

1850 M Street, NW
Suite 300
Washington, DC 20036
United States

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