Abstract
The last three decades have been characterized by both rising wealth inequality and growing retirement income inadequacy, as a rising share of household s is expected to be unable to maintain its standard of living in retirement. At the same time, labor market risks—longer spells of unemployment and less stable earnings—and financial market risks—larger boom-and-bust cycles in the stock and housing markets—have gone up, too. And, as established in chapter 2, households have become more exposed to the potential fallout from these market risks.
How would you personally define what a secure retirement means to you?1
“I don’t believe in this world there is such a thing.” (White woman, 67 years old)
“I would like to be able to make a decent income on savings and have it completely secured.” (White woman, 74 years old)
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Notes
For a summary of the basic portfolio theoretical arguments and some evidence, see Luigi Guiso, Tullio Jappelli, and Daniele Terlizzese, “Income Risk, Borrowing Constraints, and Portfolio Choice,” The American Economic Review 86, no. 1 (1996), 158–172;
Jason S. Seligman and Jeffrey B. Wenger, “Asynchronous Risk: Retirement Savings, Equity Markets, and Unemployment,” Journal of Pension Economics and Finance 5, no. 3 (2006), 237–255, doi: 10.1017/S1474747206002630;
Giuseppe Grande and Luigi Ventura, “Labor Income and Risky Assets under Market Incompleteness: Evidence from Italian Data,” Journal of Banking and Finance 26, no. 2 (2002), 597–620, doi:10.1016/S0378–4266(01)00236–9;
Miles S. Kimball, “Standard Risk Aversion,” Econometrica: Journal of the Econometric Society 61, no. 3 (1993): 589–611.
Also models of precautionary savings suggest that higher levels of labor market income uncertainty lead to increased savings (Jim Malley and Thomas Moutos, “Unemployment and Consumption,” Oxford Economic Papers 48, no. 4 [1996], 584–600;
Martha Starr-McCluer, “Health Insurance and Precautionary Savings,” The American Economic Review 86, no. 1 [1996], 285–295).
Models consider income uncertainty generated from both unemployment risk (Eric M. Engen and Jonathan Gruber, “Unemployment Insurance and Precautionary Saving,” Journal of Monetary Economics 47, no. 3 [2001], 545–579)
and earnings volatility (Christopher D. Carroll, Karen E. Dynan, and Spencer D. Krane, “Unemployment Risk and Precautionary Wealth: Evidence from Households’ Balance Sheets,” Review of Economics and Statistics 85, no. 3 [2003], 586–604, doi:10.1162/003465303322369740) and find that households build up a buffer of savings to minimize consumption disruptions during unemployment.
See Shlomo Bernartzi and Richard Thaler, “Heuristics and Biases in Retirement Savings Behavior,” Journal of Economic Perspectives 21, no. 3 (Summer 2007), 81–104 on the heuristics households use to make financial decisions in complex retirement savings.
Richard T. Campbell and Cathie Mayes Hudson, “Synthetic Cohorts from Panel Surveys: An Approach to Studying Rare Events,” Research on Aging 7, no. 1 (March 1985), 81–93.
For a review of the relevant literature, see Stefano DellaVigna, “Psychology and Economics: Evidence from the Field,” Journal of Economic Literature 47, no. 2 (2009), 315–372, doi: 10.1257/jel.47.2.315. For the implications for household savings of systematic behavioral errors, see Bernartzi and Thaler, “Heuristics and Biases in Retirement Savings Behavior.”
Remember that the underlying argument is that lower liquidity constraints theoretically should have made it easier for households to reallocate their risky and illiquid housing assets. Instead, households increasingly borrowed to finance consumption. Atif R. Mian and Amir Sufi, “House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis,” American Economic Review 101, no. 5 (2011), 2132–2156;
David B. Gross and Nicholas S. Souleles, “Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data,” The Quarterly Journal of Economics 117, no. 1 (2002), 149–185, doi: 10.1162/003355302753399472.
Christian Weller and Derek Douglas, “One Nation Under Debt,” Challenge 50, no. 1 (February 2007), 54–74;
Christian Weller, “Need or Want: What Explains the Run-up in Consumer Debt?” Journal of Economic Issues 41, no. 2 (June 2007), 583–591.
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© 2016 Christian E. Weller
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Weller, C.E. (2016). More Risk, Greater Wealth Inequality. In: Retirement on the Rocks. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137575142_3
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DOI: https://doi.org/10.1057/9781137575142_3
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