This paper examines the degree to which Americans are saving optimally for retirement. Our standard for assessing optimality comes from a life-cycle model that incorporates uncertain lifetimes, uninsurable earnings and medical expenses, progressive taxation, government transfers, and pension and social security benefit functions derived from rich household data. We solve every household''s decision problem from death to starting age and then use the decision rules in conjunction with earnings histories to make predictions about wealth in 1992. Ours is the first study to compare, household by household, wealth predictions that arise from a life-cycle model that incorporates earnings histories for a nationally representative sample. The results, based on data from the Health and Retirement Study, are striking we find that the model is capable of accounting 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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
10260.
Length: Date of creation: Feb 2004 Date of revision: Publication status: published as Scholz, John Karl, Ananth Seshadri and Surachai Khitatrakun. "Are Americans Saving 'Optimally' For Retirement?," Journal of Political Economy, 2006, v114(4,Aug), 607-643. Handle: RePEc:nbr:nberwo:10260
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Laurence J. Kotlikoff & Lawrence H. Summers, 1983.
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Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002.
"Consumption Over the Life Cycle,"
Econometrica,
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.