Retirement Wealth across Cohorts: the Role of Earnings Inequality

Changes in labor markets over the past 30 years suggest upcoming changes in the distribution of wealth at retirement. Workers from the baby boom cohort have spent the majority of their working years in a labor market with substantially higher earnings inequality than previous generations. This paper investigates how changes in lifetime earnings distributions affect the distribution of retirement wealth among cohorts retiring over the next decade. I use data from the Health and Retirement Study from 1992 to 2004 to estimate the relationship between lifetime earnings, pre-retirement private wealth and Social Security wealth. I show that changes in the lower half of the male earnings distribution explain a substantial portion of changes in the distribution of pre-retirement wealth. When pensions are added to the measure of wealth, the role of earnings is even larger, reflecting a strong correlation between changes in earnings across these cohorts and changes in the values of their employer-provided pensions. The present value of wealth from future Social Security benefits, in contrast, grows in real terms throughout most of the distribution. At the bottom of the male distribution of Social Security wealth, reductions in lifetime earnings limit this growth in real benefits, while at the top of the distribution earnings growth amplifies expected growth in Social Security wealth. The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Michigan Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author and do not represent the opinions or policy of SSA or any agency of the Federal Government. Thanks to Jason Lindo and Rebecca Reed-Arthurs for outstanding research assistance.