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Reconsidering the role of choice and chance for predicting retirement wealth

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  • Haider, Steven
  • Jun, Dajung

Abstract

Why do many households accumulate substantial wealth by retirement, while many other households accumulate very little? Venti and Wise (1999, 2001) directly examine this question by utilizing data that were superior to that available to previous researchers and conclude that “the bulk of the dispersion must be attributed to differences in the amount that households choose to save.” In this paper, we examine the extent that a remaining problem in their data affected their results: Their measure of lifetime earnings that was used to capture a household’s ability to save, despite being based on administrative data, was subject to topcoding in each year. Using a data set that was not subject to the same problem, we find that the ability to save (measured by lifetime earnings) played a much larger role. Our findings suggest that the correlation between lifetime earnings and savings was about 50 percent greater than what is found when using censored data.

Suggested Citation

  • Haider, Steven & Jun, Dajung, 2020. "Reconsidering the role of choice and chance for predicting retirement wealth," Economics Letters, Elsevier, vol. 194(C).
  • Handle: RePEc:eee:ecolet:v:194:y:2020:i:c:s0165176520302408
    DOI: 10.1016/j.econlet.2020.109382
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    References listed on IDEAS

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    1. Jess Benhabib & Alberto Bisin, 2018. "Skewed Wealth Distributions: Theory and Empirics," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1261-1291, December.
    2. Steven Haider & Gary Solon, 2006. "Life-Cycle Variation in the Association between Current and Lifetime Earnings," American Economic Review, American Economic Association, vol. 96(4), pages 1308-1320, September.
    3. Bound, John & Brown, Charles & Mathiowetz, Nancy, 2001. "Measurement error in survey data," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.),Handbook of Econometrics, edition 1, volume 5, chapter 59, pages 3705-3843, Elsevier.
    4. Karen E. Dynan & Jonathan Skinner & Stephen P. Zeldes, 2004. "Do the Rich Save More?," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 397-444, April.
    5. Annamaria Lusardi & Pierre-Carl Michaud & Olivia S. Mitchell, 2017. "Optimal Financial Knowledge and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 125(2), pages 431-477.
    6. Steven F. Venti & David A. Wise, 2001. "Choice, Chance, and Wealth Dispersion at Retirement," NBER Chapters, in: Aging Issues in the United States and Japan, pages 25-64, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Savings; Retirement; Measurement error;

    JEL classification:

    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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