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Do the rich save more?

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Author Info

  • Karen E. Dynan
  • Jonathan Skinner
  • Stephen P. Zeldes

Abstract

The issue of whether higher lifetime income households save a larger fraction of their income is an important factor in the evaluation of tax and macroeconomic policy. Despite an outpouring of research on this topic in the 1950s and 1960s, the question remains unresolved and has since received little attention. This paper revisits the issue, using new empirical methods and the Panel Study on Income Dynamics, the Survey of Consumer Finances, and the Consumer Expenditure Survey. We first consider the various ways in which life cycle models can be altered to generate differences in saving rates by income groups: differences in Social Security benefits, different time preference rates, non-homothetic preferences, bequest motives, uncertainty, and consumption floors. Using a variety of instruments for lifetime income, we find a strong positive relationship between personal saving rates and lifetime income. The data do not support theories relying on time preference rates, non-homothetic preferences, or variations in Social Security benefits. Instead, the evidence is consistent with models in which precautionary saving and bequest motives drive variations in saving rates across income groups. Finally, we illustrate how models that assume a constant rate of saving across income groups can yield erroneous predictions.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2000-52.

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Date of creation: 2000
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Handle: RePEc:fip:fedgfe:2000-52

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Keywords: Income ; Saving and investment;

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References

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  1. Michael D. Hurd & James P. Smith, 1999. "Anticipated and Actual Bequests," NBER Working Papers 7380, National Bureau of Economic Research, Inc.
  2. Venti, Steven F & Wise, David A, 1998. "The Cause of Wealth Dispersion at Retirement: Choice or Chance?," American Economic Review, American Economic Association, vol. 88(2), pages 185-91, May.
  3. Schmidt-Hebbel, Klaus & Serven, Luis, 2000. "Does income inequality raise aggregate saving?," Journal of Development Economics, Elsevier, vol. 61(2), pages 417-446, April.
  4. Smith, J-P, 1997. "Inheritances and Bequests," Papers 97-04, RAND - Labor and Population Program.
  5. Christopher D. Carroll, 1998. "Why Do the Rich Save So Much?," NBER Working Papers 6549, National Bureau of Economic Research, Inc.
  6. Arulampalam, W. & Robin A. Naylor & Jeremy P. Smith, 2002. "University of Warwick," Royal Economic Society Annual Conference 2002 9, Royal Economic Society.
  7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  8. Jeffrey B Liebman, 2002. "Redistribution in the Current U.S. Social Security System," Working Papers 02-09, Center for Economic Studies, U.S. Census Bureau.
  9. Thaler, Richard H, 1994. "Psychology and Savings Policies," American Economic Review, American Economic Association, vol. 84(2), pages 186-92, May.
  10. Nelson, J.A., 1993. "On Testing for Full Insurance Using Consumer Expenditures Survey Data," Papers 93-02, California Davis - Institute of Governmental Affairs.
  11. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  12. William Vickrey, 1947. "Part IV: Resource Distribution Patterns and the Classification of Families," NBER Chapters, in: Studies in Income and Wealth, pages 266-297 National Bureau of Economic Research, Inc.
  13. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
  14. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
  15. Menchik, Paul L & David, Martin, 1983. "Income Distribution, Lifetime Savings, and Bequests," American Economic Review, American Economic Association, vol. 73(4), pages 672-90, September.
  16. Sabelhaus, John, 1993. "What is the Distributional Burden of Taxing Consumption?," National Tax Journal, National Tax Association, vol. 46(3), pages 331-44, September.
  17. Michael D. Hurd & David A. Wise, 1989. "The Wealth and Poverty of Widows: Assets Before and After the Husband's Death," NBER Working Papers 2325, National Bureau of Economic Research, Inc.
  18. Gilbert E. Metcalf, 2006. "Value-Added Tax," Discussion Papers Series, Department of Economics, Tufts University 0608, Department of Economics, Tufts University.
  19. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  20. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  21. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
  22. Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-95, August.
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  1. "Inequality, Leverage and Crises"
    by Mark Thoma in Economist's View on 2011-02-04 00:50:00
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