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Are Americans Saving 'Optimally' for Retirement?

Posted: 1 Nov 2006  

John Karl Scholz

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Ananth Seshadri

University of Wisconsin - Madison - Department of Economics

Surachai Khitatrakun

Tax Policy Center

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Abstract

We solve each household's optimal saving decisions using a life cycle model that incorporates uncertain lifetimes, uninsurable earnings and medical expenses, progressive taxation, government transfers, and pension and social security benefits. With optimal decision rules, we compare, household by household, wealth predictions from the life cycle model using a nationally representative sample. We find, making use of household-specific earnings histories, that the model accounts for more than 80 percent of the 1992 cross-sectional variation in wealth. Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are undersaving is generally small.

Suggested Citation

Scholz, John Karl and Seshadri, Ananth and Khitatrakun, Surachai, Are Americans Saving 'Optimally' for Retirement?. Journal of Political Economy, Vol. 114, pp. 607-643, August 2006. Available at SSRN: https://ssrn.com/abstract=941137

John Karl Scholz (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-5380 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ananth Seshadri

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-6196 (Phone)
608-263-3876 (Fax)

Surachai Khitatrakun

Tax Policy Center ( email )

Urban Institute
2100 M Street NW
Washington, DC 20009
United States

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