The bulk of the dispersion in wealth at retirement age is attributable to differences in the percentage of income that households choose to save.
Why do some households have substantial wealth at retirement and others have very little? NBER Research Associates Steven Venti and David Wise look at data from the Health and Retirement Survey (HRS) and observe that no matter what the level of lifetime earnings, there is a large dispersion of accumulated wealth of families nearing retirement. Some families with low levels of lifetime earnings may accumulate substantial assets by retirement, while other families with high lifetime incomes may have very few financial assets.
In Choice, Chance, and Wealth Dispersion at Retirement (NBER Working Paper No. 7521), the authors find that life events outside the control of individuals, such as medical bills or inheritances, explain very little of this dispersion. Similarly, investment choices, from conservative to risky, have little effect on the wide dispersion of assets at retirement. Instead, the bulk of the dispersion in wealth at retirement age is attributable to differences in the percentage of income that households choose to save. In other words, given similar lifetime earnings, differences in saving choices by families lead to major differences in levels of asset accumulation at retirement.
The authors also develop as a benchmark the assets that HRS respondents would have accumulated had they saved 10 percent of their earnings and earned the average of S&P 500 returns since 1926. This saving approach would have resulted in assets at retirement much greater than asset levels actually realized by HRS respondents.
The authors point out that their findings have implications for government tax policy, which currently penalizes people who save over their lifetimes. For example, among persons with the same lifetime earnings, savers with significant accumulated assets pay higher Social Security taxes than do those who have saved little and consumed more when younger. Such government policies seem to be based on the presumption that chance events have a much greater effect on accumulated wealth than is supported by the evidence. As a result, the authors suggest that such post-accumulation taxing of assets may have more serious consequences for saving than previously believed.
-- Lester A. Picker