Abstract
Some households have experienced sharp wealth gains, and many others have seen no or only small wealth increases over the past few decades as rising household risk exposure has impeded savings. But, this growing wealth gap by itself does not tell the whole story. Wealth is a store of future income that people can rely on when they no longer have income from work, for instance, when they retire. Rising wealth inequality then means that a growing share of households will likely not be able to maintain their standard of living in retirement and hence will have to make substantial spending cuts or significantly delay retirement.
How would you personally define what a secure retirement means to you?1
“Live at the same standard while I worked and not have to take another job.” (White man, 69 years old)
“Not living under a bridge.” (White man, 66 years old)
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Notes
Christian Weller and David Madland, “Keep Calm and Muddle Through” (Washington, DC: Center for American Progress, 2014).
For a recent example, see Charles Ellis, Alicia Munnell, and Andrew Eschtruth, Falling Short: The Coming Retirement Crisis and What to Do about It (New York, NY: Oxford University Press, 2014).
The relevant literature comprising both approaches includes John Ameriks and Stephen P. Utkus, “Vanguard Retirement Outlook 2006” (Malvern, PA: Vanguard Center for Retirement Research, 2006);
Barbara Butrica, Daniel Murphy, and Sheila Zedlewski, “How Many Struggle to Get by in Retirement?” The Gerontologist 50, no. 4 (2010), 482–494, doi: 10.1093/geront/gnp158;
Center for Retirement Research at Boston College, “Retirements at Risk: A New National Retirement Risk Index” (Boston: Center for Retirement Research at Boston College, 2006);
Robert Haveman, Karen Holden, Barbara Wolfe, and Andrei Romanov, “Assessing the Maintenance of Savings Sufficiency over the First Decade of Retirement,” Working Paper No. 1567 (Munich, Germany: CESIfo, 2005);
David Love, Paul Smith, and Lucy McNair, “A New Look at the Wealth Adequacy of Older U.S. Households,” Review of Income and Wealth 54, no. 4 (2008), 616–642;
Annamaria Lusardi and Olivia S. Mitchell, “Financial Literacy and Planning: Implications for Retirement Wellbeing” (Hanover, NH: Dartmouth College, 2006), http://www.dartmouth.edu/-alusardi/Papers/FinancialLiteracy.pdf ;
John Karl Scholz, Ananth Seshadri, and Surachai Khitatakrun, “Are Americans Saving ‘Optimally’ for Retirement?” Journal of Political Economy 114, no. 4 (2006), 607–643;
Mark Warshawsky and John Ameriks, “How Prepared Are Americans for Retirement?” in Olivia S. Mitchell, P. Brett Hammond, and Anna M. Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth (Philadelphia, PA: University of Pennsylvania Press, 2000), 33–67;
Christian Weller and Edward Wolff, Retirement Security: The Particular Role of Social Security (Washington, DC: Economic Policy Institute, 2005). For a discussion of what it means for households, government, and the economy when a large share of households fall short of meeting their needs in retirement, see Weller and Madland, “Keep Calm and Muddle Through.”
This approach is anchored in a neoclassical economic theory known as life cycle hypothesis, whereby people smooth their consumption over their life cycle. That implies that they maintain their preretirement consumption in retirement and that their total lifetime consumption relates to their total lifetime income. Recent applications of the life cycle hypothesis to the question of retirement income adequacy include Eric M. Engen, William G. Gale, and Cori E. Uccello, “The Adequacy of Household Saving,” Brookings Papers on Economic Activity 1999, no. 2 (1999), 65–165,
and John Karl Scholz, Ananth Seshadri, and Surachai Khitatakrun, “Are Americans Saving ‘Optimally’ for Retirement?” Journal of Political Economy 114, no. 4 (2006), 607–643.
See, for instance, Ameriks and Utkus, “Vanguard Retirement Outlook 2006”; B. Douglas Bernheim, “The Adequacy of Personal Retirement Saving” in David A. Wise, ed., Facing the Age Wave (St anford, CA: Hoover Instit ute Press, 1997); Ellisetal., Falling Short ; Alan L. Gustman and Thomas L. Steinmeier, “Effects of Pensions on Savings: Analysis with Data from the Health and Retirement Study,” Carnegie-Rochester Conference Series on Public Policy 50, no. 1 (1999), 271–324;
Peter Henle, “Recent Trends in Retirement Benefits Related to Earnings,” Monthly Labor Review 95, no. 6 (1972), 12–20; Engen et al., “The Adequacy of Household Saving”; Lusardi and Mitchell, “Financial Literacy and Planning”;
James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Saving Adequacy” in Olivia S. Mitchell, P. Brett Hammond, and Anna M. Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth (Philadelphia, PA: University of Pennsylvania Press, 2000);
Alicia H. Munnell, Francesca Golub-Sass, and Anthony Webb, “What Moves the National Retirement Risk Index? A Look Back and an Update,” Issue Brief No. 7–1 (Boston, MA: Center for Retirement Research at Boston College, 2007);
RETIRE Project, “2001 RETIRE Project Report” (Atlanta, GA: Georgia State University, 2001);
Nari Rhee, “The Retirement Savings Crisis: Is It Worse than We Think?” (Washington, DC: National Institute on Retirement Security, 2013); Warshawsky and Ameriks, “How Prepared Are Americans for Retirement?”;
Jack VanDerhei, “Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model,” EBRI Issue Brief No. 410 (Washington, DC: Employee Benefits Research Institute, 2015); Weller and Wolff, Retirement Security: The Particular Role of Social Security .” The re pl acement— retirement income to preretirement income—is less than 100 percent since the income needs of retirees are likely to be lower than those of workers since they no longer need to save for retirement, pay fewer taxes, have no work-related expenses, have smaller families, and do not have a mortgage.
For a summary of the basic theoretical literature on consumption and saving, see Martin Browning and Annamaria Lusardi, “Household Saving: Micro Theories and Macro Facts,” Journal of Economic Literature 34, no. 4 (1996), 1797–1855.
Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass, “The National Retirement Risk Index: An Update,” Issue Brief No. 12–20 (Boston, MA: Center for Retirement Research at Boston College, 2012).
John Karl Scholz, Ananth Seshadri, and Surachai Khitatakrun, “Are Americans Saving ‘Optimally’ for Retirement?” Journal of Political Economy 114, no. 4 (2006), 607–643.
William G. Gale, John Karl Scholz, and Ananth Seshadri, “Are All Americans Saving ‘Optimally’ for Retirement?” Working Paper (Washington, DC: The Brookings Institution, and Madison, WI: University of Wisconsin-Madison, 2009).
See Christian Weller, “How Well Were Retirees Prepared for Retirement before the Great Recession?” Journal of Aging & Social Policy 22, no. 2 (2010), 95–98, doi: 10.1080/08959421003621986 for one example of risk-adjusted retirement income calculations for retirees.
For a study that assumes substantial and systematic consumption cuts, see Scholz et al., “Are Americans Saving ‘Optimally’ for Retirement?” Also Jonathan Skinner, “Are You Sure You’re Saving Enough for Retirement?” The Journal of Economic Perspectives 21, no. 3 (2007), 59–80, provides a discussion of the factors that determine differences in retirement income adequacy findings, including consumption cuts.
For a discussion of the costs of longevity risk, see Beth Almeida and William B. Fornia, “A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans” (Washington, DC: National Institute on Retirement Security, 2008).
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© 2016 Christian E. Weller
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Weller, C.E. (2016). The Looming Retirement Shipwreck. In: Retirement on the Rocks. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137575142_4
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