Fundamental Factors Affecting the Wealth and Retirement of Elderly Americans

This proposal describes five projects that promise to provide new information on fundamental factors affecting wealth accumulation and the degree to which American households are financially well-prepared for retirement. We rely on an augmented life-cycle model, modified to incorporate features that are essential to meet our project objectives. Our first project highlights the role children play in wealth accumulation. Despite a vast life-cycle literature examining wealth accumulation, surprisingly few papers focus on the role of children. Our work will address this gap. Our second project provides a comprehensive look at the adequacy of retirement wealth preparation of households in different U.S. birth cohorts. In earlier work we showed that members of the original HRS cohort, born between 1931 and 1941, overwhelmingly were on track in 1992 to having resources in retirement necessary to maintain their accustomed living standards. A critical unresolved issue, however, is the degree to which these results hold for other cohorts, particularly those born after 1941.

Our third project examines health capital and the effects of the health care safety net on wealth. Several recent contributions emphasize the role that precautionary saving for end-of-life medical expenses plays in influencing age-asset profiles of the elderly. Our project will help quantify these effects by modeling explicitly the fact that health expenditures may affect life-span. Our fourth proposed project examines the interactions of wealth and retirement (and retirement expectations). One way for some households to respond to actual or perceived shortfalls (surpluses) in retirement wealth is to defer (hasten) retirement. We will use differences between actual and “optimal” net worth to study the way retirement expectations and wealth are correlated with retirement decisions. We will also develop and estimate the parameters from a new model of retirement. Our fifth project examines the role of pensions on non-pension wealth accumulation. Past estimates of the effects of pensions on non-pension wealth accumulation are difficult to interpret if there is a mixture of credit constrained and unconstrained households in the samples used for estimation. We clarify these issues, account fully for lifetime (past and future) resources, and offer a new way of thinking about the effects of pensions on wealth accumulation.