This 1995 grant helped produce the paper, "Do the Rich Save More?" Co-authored with Karen Dynan of Johns Hopkins University and the Federal Reserve Board, and Jonathan Skinner of Dartmouth College and the National Bureau of Economic Research. (Stephen P. Zeldes is also a winner, along with John Geanakoplos of Yale and Olivia S. Mitchell of the Wharton School at the University of Pennsylvania, of the 1999 Paul A. Samuelson Award.)
The issue of whether higher lifetime income households save a larger fraction of their income is an important factor in the evaluation of economic policy, and in particular, tax policy. Despite an outpouring of research on this topic in the 1950s and 1960s, the question remains unresolved and has received little attention in the past two decades. This paper revisits the issue, using new empirical methods and the Panel Study on Income Dynamics (PSID), the Survey of Consumer Finances (SCF), and the Consumer Expenditure Survey (CES), and other data sources.
The researchers first consider the various ways in which life cycle models can be altered to allow for differences in saving rates, variations in social security benefits, time preference rates, subsistence parameters, substitution elasticities, and bequest motives. Using a variety of instruments for lifetime income, they find a strong positive relationship between personal saving rates and lifetime income. The researchers found a strong positive relationship between current income and savings rates across all income groups. Estimated saving rates range from less than five percent among the bottom quintile of the income distribution to more than 40% among the top 5 percent of the income distribution. This positive correlation was strengthened by inclusion of imputed Social Security saving and pension contributions. The researchers concluded that this pattern of saving throughout the life cycle was consistent with income elastic bequests, possibly due to greater precautionary saving along with accidental bequests for the middle class, and an operative bequest motive for the very highest income groups.
The researchers use of the PSID, the SCF, and CES allowed the measurement of saving in different ways, and ensured that their conclusions were robust across data sources. In the PSID they used the change in wealth both inclusive and exclusive of capital gains, and inclusive and exclusive of imputed Social Security and pension saving; for the SCF they used the total change in wealth; and for the CES they used the flow of disposable income less consumption. They researchers concluded that saving rates increased with income using each data set.
The research paper is available as NBER Working Paper 7906, September 2000.
