Retirement Wealth and Lifetime Earnings

36 Pages Posted: 11 Apr 2007

See all articles by Lutz Hendricks

Lutz Hendricks

UNC Chapel Hill; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

This article argues that a satisfactory theory of wealth inequality should account not only for the marginal distribution of wealth, but also for the joint distribution of wealth and earnings. The article describes the joint distribution of retirement wealth and lifetime earnings in the Panel Study of Income Dynamics. It then evaluates the ability of a stochastic life-cycle model to account for key features of this distribution. The life-cycle model fails to account for three key features of the data. (1) The correlation between lifetime earnings and retirement wealth is too high. (2) The wealth gaps between earnings rich and earnings poor households are too large. (3) Wealth inequality among households with similar lifetime earnings is too small. Models in which households differ in rates of return or time preferences account much better for the joint distribution of retirement wealth and lifetime earnings.

Suggested Citation

Hendricks, Lutz, Retirement Wealth and Lifetime Earnings. International Economic Review, Vol. 48, No. 2, pp. 421-456, May 2007, Available at SSRN: https://ssrn.com/abstract=979632 or http://dx.doi.org/10.1111/j.1468-2354.2007.00433.x

Lutz Hendricks (Contact Author)

UNC Chapel Hill ( email )

Chapel Hill, NC 27599
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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