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Explaining the wealth holdings of different cohorts: Productivity growth and Social Security

  • Kapteyn, Arie
  • Alessie, Rob
  • Lusardi, Annamaria

It is well-known that individuals born in different periods of time (cohorts) exhibit different wealth accumulation paths. While previous studies have used cohort dummies to proxy for this fact, research in this area suffers from a serious identification problem, i.e., how to disentangle age, time, and cohort effects from a simple cross-section or a time series of cross-sections. In this paper we propose to go beyond the simple use of cohort dummies to capture the differences in wealth accumulation across individuals born in different time periods. We introduce two indicators of the economic conditions under which households accumulate wealth. The first one represents productivity differences across cohorts: the aggregate level of GNP per capita when the head of the household entered the labor market. The second measure summarizes the changes in Social Security during the head of household’s working life. The use of these indicators also gets around the identification problem. We estimate the model using panel data from the Netherlands. This is a country whose historical conditions are ideal to study the effects of productivity growth and Social Security. The Netherlands experienced a steady growth after World War II. At the same time, it also built up a very extensive welfare system. Our empirical findings show that productivity growth goes a long way in explaining differences in income across cohorts. Productivity growth and Social Security can explain most, if not all, of the differences in wealth holdings of different cohorts. In comparison with the cohorts that lived without Social Security for a portion of their working life, the cohorts that had Social Security throughout their working life have less than half the accumulation rate of older cohorts.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 49 (2005)
Issue (Month): 5 (July)
Pages: 1361-1391

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Handle: RePEc:eee:eecrev:v:49:y:2005:i:5:p:1361-1391
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