Abstract
Households hold vastly heterogeneous amounts of wealth when they reach retirement, and differences in lifetime earnings explain only part of this variation. This paper studies the role of intergenerational transmission of ability, voluntary bequest motives, and the recipiency of accidental and intended bequests (both in terms of timing and size) in generating wealth dispersion at retirement, in the context of a rich quantitative model. Modeling voluntary bequests, and realistically calibrating them, not only generates more wealth dispersion at retirement and reduces the correlation between retirement wealth and lifetime income, but also generates a skewed bequest distribution that is close to the one in the observed data.
Highlights
Why do U.S households reach retirement with vastly different wealth levels, even when we condition on realized lifetime income? Can we construct a model that explains this fact? What are the important features that help generate this heterogeneity?The answers to these questions help improve our understanding of the factors affecting savings, and help inform many kinds of policy reforms, including taxation and social insurance reforms
4.2 The Role of Bequest Motives In the benchmark model, retirement wealth inequality arises among households with similar lifetime earnings because households differ in the timing of earnings over the life cycle and in the amount and timing of inheritances received
We use an incomplete-market life-cycle model with intergenerational links of bequests and earnings ability, government-provided minimum consumption, a history-dependent Social Security system, and a defined benefit pension. We show that this model with earnings heterogeneity and inheritance heterogeneity generates a substantial amount of heterogeneity in retirement wealth for given lifetime earnings
Summary
Why do U.S households reach retirement with vastly different wealth levels, even when we condition on realized lifetime income? Can we construct a model that explains this fact? What are the important features that help generate this heterogeneity?. Besides voluntary and accidental bequests, and transmission of ability from parents to children, other factors have been shown to be important to understanding saving behavior and cross-sectional wealth inequality in the U.S we know little about the effects of these elements on wealth holdings at retirement These institutional factors include a government-provided minimum consumption (Hubbard et al (1995)), defined benefit pensions, and a more realistic modeling of Social Security rules (Scholz et al (2006)). Eliminating the realistically calibrated consumption floor from our benchmark calibration results in the income-poor households having more of an incentive to save to insure against bad income shocks; this tends to decrease wealth inequality and generates a lower average Gini coefficient, after controlling for lifetime income, of 0.49, compared with 0.53 in the benchmark model, while the correlation of wealth at retirement and permanent income barely changes.
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