Lifetime Earnings Variability and Retirement Wealth

This paper explores how earnings variability is related to retirement wealth. Past research has demonstrated that the average American household on the verge of retirement would need to save substantially more, in order to preserve consumption flows in old age. While several socioeconomic factors have been examined that might explain such problems, prior studies have not assessed the role of earnings variability over the lifetime as a potential explanation for poor retirement prospects. Thus two workers having identical levels of average lifetime earnings might have had very different patterns of earnings variability over their lifetimes. Such differences could translate into quite different retirement wealth outcomes. This paper evaluates the effect of earnings variability on retirement wealth using information supplied by respondents to the Health and Retirement Study (HRS). This is a rich and nationally representative dataset on Americans on the verge of retirement, with responses linked to administrative records from the Social Security Administration. Our research illuminates the key links between lifetime earnings variability and retirement wealth. Authors’ Acknowledgements JEL Codes: J26 Retirement and Retirement Policies; H55 Social Security and Public Pensions This research was conducted with support from the Social Security Administration via the Michigan Retirement Research Center at the University of Michigan, under subcontract to the University of Pennsylvania. Additional support was provided by the Pension Research Council at the Wharton School and the Huebner Foundation. This research is part of the NBER programs on Aging and Labor Economics. Opinions are solely those of the authors and not of the institutions with which the authors are affiliated. ©2003 Mitchell, Phillips, Au and McCarthy. All Rights Reserved. Lifetime Earnings Variability and Retirement Wealth Olivia S. Mitchell, John W. R. Phillips, Andrew Au, and David McCarthy