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Choice, Chance, and Wealth Dispersion at Retirement

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  • Steven F. Venti
  • David A. Wise

Abstract

People earn just enough to get by' is a phrase often used to explain the low personal saving rate in the United States. The implicit presumption is that households simply do not earn enough to pay for current needs' and to save. We show in this paper that at all levels of lifetime earnings there is an enormous dispersion in the accumulated wealth of families approaching retirement. It is not only households with low incomes that save little; a significant proportion of high income households also saves little. And, a substantial proportion of low income households save a great deal. We then consider the extent to which differences in household lifetime financial resources explain the wide dispersion in wealth, given lifetime earnings. We find that very little of this dispersion can be explained by chance differences in individual circumstances largely outside the control of individuals' that might limit the resources from which saving might plausibly be made. We also consider how much of the dispersion in wealth might be accounted for by different investment choices of savers some more risky, some less risky given lifetime earnings. We find that investment choice is not a major determinant of the dispersion in asset accumulation. It matters about as much as chance events that limit the available resources of households with the same lifetime earnings. We conclude that the bulk of the dispersion must be attributed to differences to in the amount that households choose to save. The differences in saving choices among households with similar lifetime earnings lead to vastly different levels of asset accumulation by the time retirement age approaches.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7521.

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Date of creation: Feb 2000
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Publication status: published as Choice, Chance, and Wealth Dispersion at Retirement , Steven F. Venti, David A. Wise. in Aging Issues in the United States and Japan , Ogura, Tachibanaki, and Wise. 2001
Handle: RePEc:nbr:nberwo:7521

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  1. Attanasio, Orazio P, et al, 1999. "Humps and Bumps in Lifetime Consumption," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 22-35, January.
  2. Smith, James D., 1980. "Modeling the Distribution and Intergenerational Transmission of Wealth," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226764542.
  3. Olivia Mitchell & Jan Olson & Thomas Steinmeier, 1996. "Construction of the Earnings and Benefits File (EBF) for Use With the Health and Retirement Survey," NBER Working Papers 5707, National Bureau of Economic Research, Inc.
  4. James D. Smith, 1980. "Modeling the Distribution and Intergenerational Transmission of Wealth," NBER Books, National Bureau of Economic Research, Inc, number smit80-1.
  5. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-99, April.
  6. John B. Shoven & David A. Wise, 1996. "The Taxation of Pensions: A Shelter can Become a Trap," NBER Working Papers 5815, National Bureau of Economic Research, Inc.
  7. James M. Poterba & Steven F. Venti & David A. Wise, 1999. "Implications of Rising Personal Retirement Saving," NBER Working Papers 6295, National Bureau of Economic Research, Inc.
  8. Steven F. Venti & David A. Wise, 1987. "Have IRAs Increased U.S. Saving?: Evidence from Consumer Expenditure Surveys," NBER Working Papers 2217, National Bureau of Economic Research, Inc.
  9. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 609-43, October.
  10. Andrew A. Samwick, 1997. "Discount Rate Heterogeneity and Social Security Reform," NBER Working Papers 6219, National Bureau of Economic Research, Inc.
  11. James P. Smith, 2004. "Racial and Ethnic Differences in Wealth in the Health and Retirement Study," Labor and Demography 0408011, EconWPA.
  12. F. Thomas Juster & James P. Smith & Frank Stafford, 2004. "The Measurement and Structure of Household Wealth," Labor and Demography 0402009, EconWPA.
  13. Milton Friedman, 1953. "Choice, Chance, and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 61, pages 277.
  14. Davies, James B, 1982. "The Relative Impact of Inheritance and Other Factors on Economic Inequality," The Quarterly Journal of Economics, MIT Press, vol. 97(3), pages 471-98, August.
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