Saving for Retirement: Understanding the Importance of Heterogeneity

Retirement Is Only One Aspect Of Complex Saving Behavior

samwick By Andrew A. Samwick

Andrew A. Samwick is on the faculty of Dartmouth College and is the director of The Nelson A. Rockefeller Center there. He has served as chief economist on the staff of the President’s Council of Economic Advisers, taught at Columbia University, and consulted for the Social Security Advisory Board and other organizations. He received an A.B. summa cum laude in economics at Harvard College and a Ph.D. in economics at the Massachusetts Institute of Technology.

A large number of households spend much of their working lives not engaged in saving for retirement, in contrast to the basic proposition that motivates the lifecycle model of consumption. This article discusses the relationship between this observed savings behavior and three specific areas of heterogeneity in the household consumption problem: budget constraints, savings motives, and preferences. Using the Surveys of Consumer Finances, the article shows that saving for liquidity (precautionary motives) and saving for specific purchases (like housing and education) compete with saving for retirement and may explain why the median household approaches the last years of its working life with only a year’s worth of income in financial assets. Another part of the explanation is shown to be high discount rates or rates of time preference, which cause households to engage in “buffer-stock” saving over the earliest years of their working lives. Heterogeneity in motives and preferences for saving present a challenge to financial professionals and policy makers who hope to encourage more people to save actively for retirement.

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