Retirement Savings

A recent paper (Scholz, Seshardi, and Khiatrakun, Journal of Political Economy, August 2006), cited by Tyler Cowen, finds – contrary to the conventional wisdom among economists – that most Americans are saving enough for retirement (at least assuming that Social Security, Medicare, and pensions come through as planned). Arnold Kling isn’t so sure:

…the median net worth in the data [a sample of households age 51-62] is $102,600, which does not impress me. The median "optimal" net worth as calculated by the authors is $63,116, which impresses me even less.

I admit that I’ve also been one who participates in the conventional wisdom, but as I think now about the typical life cycle, it doesn’t seem so unreasonable that people would not have saved very much by their mid-50s. Without looking at any actual statistics, I suppose a typical couple has their last child when they are in their early 30s, and their incomes continue to rise until they are in their mid-40s. Facing rising incomes and nonrecurring child care expenses, a couple in their 30s would be rational to borrow money. By their mid-40s, when their age-earnings profile starts to flatten, they will have substantially negative net worth. They continue to have nonrecurring expenses until their early 50s, when their kids graduate from college. So at best, by their mid-50s, they have just gotten past paying back the debts that they accumulated during their 30s. The real retirement savings is just beginning.

The typical couple in their mid-50s should have an income significantly above the national median, since that median includes all the young people at the bottom of the age-earnings curve. And they should be saving most of that income, now that they no longer have to pay their children’s expenses. But do people in that age range really save most of their income? My guess would be that they don’t. It would be interesting to see how sufficiency of savings correlates with age among the sample studied by Scholz et. al..

UPDATE: Brad DeLong weighs in (with some comments added by Yours truly). Brad makes the important point that income and prices have grown significantly since 1992, when the data for the study were taken, so that $63k is more like $110k today.