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Precautionary Saving Over the Lifecycle

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  • John Laitner

    (Institute for Social Research)

Abstract

This paper studies the quantitative importance of precautionary wealth accumulation relative to life—cycle saving for retirement. Section 1 examines panel data on earnings from the PSID. Using a bivariate normal model of random effects, we find that second— period—of—life earnings are strongly positively correlated with initial earnings but have a higher variance. Section 2 studies the consequences for life—cycle saving. Households know their youthful earning power as they enter the labor market, but only in midlife do they learn their actual second—period earning ability. For plausible calibrations, precautionary saving only adds 5—6% to aggregative life—cycle wealth accumulation. Nevertheless, we find that, given borrowing constraints on households’ behavior, the variety of earning profiles that our bivariate normal model generates itself stimulates more than twice as much extra wealth accumulation as precautionary saving.

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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp083.

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Length: 37 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:mrr:papers:wp083

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  1. Michael Hurd & Susann Rohwedder, 2005. "The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement," Working Papers 242, RAND Corporation Publications Department.
  2. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  3. John Laitner, 2001. "Wealth Accumulation in the U.S.: Do Inheritances and Bequests Play a Significant Role?," Working Papers wp019, University of Michigan, Michigan Retirement Research Center.
  4. Gokhale, Jagadeesh & Kotlikoff, Laurence J. & Sefton, James & Weale, Martin, 2001. "Simulating the transmission of wealth inequality via bequests," Journal of Public Economics, Elsevier, vol. 79(1), pages 93-128, January.
  5. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-88, September.
  6. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  7. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
  8. John Laitner & Dmitriy Stolyarov, 2003. "Technological Change and the Stock Market," American Economic Review, American Economic Association, vol. 93(4), pages 1240-1267, September.
  9. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  10. John Laitner, 2002. "Wealth Inequality and Altruistic Bequests," American Economic Review, American Economic Association, vol. 92(2), pages 270-273, May.
  11. John M. Abowd & David Card, 1986. "On the Covariance Structure of Earnings and Hours Changes," NBER Working Papers 1832, National Bureau of Economic Research, Inc.
  12. John Laitner, 2003. "Labor Supply Responses to Social Security," Working Papers wp050, University of Michigan, Michigan Retirement Research Center.
  13. Modigliani, Franco, 1986. "Life Cycle, Individual Thrift, and the Wealth of Nations," American Economic Review, American Economic Association, vol. 76(3), pages 297-313, June.
  14. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, vol. 91(4), pages 832-857, September.
  15. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  16. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  17. Caballero, R.J., 1988. "Consumption Puzzles And Precautionary Savings," Discussion Papers 1988_05, Columbia University, Department of Economics.
  18. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  19. Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
  20. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
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Cited by:
  1. Luc Arrondel & Hector Calvo Pardo, 2008. "Les Français sont-ils prudents ? Patrimoine et risque sur les revenus des ménages," PSE Working Papers halshs-00585994, HAL.
  2. repec:hal:wpaper:halshs-00585994 is not listed on IDEAS
  3. Arthur Kennickell & Annamaria Lusardi, 2004. "Disentangling the Importance of the Precautionary Saving Mode," NBER Working Papers 10888, National Bureau of Economic Research, Inc.

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