Can Low Retirement Savings Be Rationalized? / Jason S. Scott, John B. Shoven, Sita N. Slavov, John G. Watson.

Format:

Book

Author/Creator:

Scott, Jason S.

Contributor:

National Bureau of Economic Research.

Shoven, John B.

Slavov, Sita N.

Watson, John G.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26784.

NBER working paper series no. w26784

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

Simple presentations of the life cycle model often suggest a constant level of real consumption in retirement. Similarly, financial planners commonly suggest that people save for retirement in such a way as to enable them to maintain a level retirement standard of living equal to their standard of living while working. However, constant consumption with age is only optimal under the precise and unlikely condition that the subjective rate of time preference is equal to the real interest rate. Most people exhibit a positive rate of pure time preference and additionally discount the future by both mortality and morbidity risks. In comparison, the real interest rate is roughly zero percent and the term structure of interest rates suggests that this condition is likely to persist. These considerations suggest that optimal consumption in the life cycle model declines with age. This finding has major implications for optimal retirement saving. For instance, we find that for many, perhaps most, people in the bottom half of the lifetime earnings distribution, it is optimal to spend out their retirement wealth well before death and to live on Social Security alone after that. Very low earners may find it optimal to not engage in retirement saving at all.

Notes:

Print version record

February 2020.