Skip to main content Accessibility help
×
Home
Hostname: page-component-684899dbb8-5dd2w Total loading time: 0.335 Render date: 2022-05-18T12:05:01.438Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "useRatesEcommerce": false, "useNewApi": true }

What is an adequate standard of living during Retirement?*

Published online by Cambridge University Press:  14 November 2011

JOHANNES BINSWANGER*
Affiliation:
Department of Economics, CentER and Netspar, Tilburg University, P.O.Box 90153, 5000 LE Tilburg, The Netherlands (e-mail: j.binswanger@uvt.nl)
DANIEL SCHUNK
Affiliation:
Department of Economics, University of Mainz, Germany and University of Zurich, Switzerland (e-mail: daniel.schunk@uni-mainz.de)
*
Corresponding Author.

Abstract

Many economists and policy-makers argue that households do not save enough to maintain an adequate standard of living during retirement. However, there is no consensus on the answer to the underlying question about what this standard should be, despite the fact that it is crucial for the design of saving incentives and pension systems. We address this question with a randomized survey design, individually tailored to each respondent's financial situation, and conducted both in the U.S. and The Netherlands. We find that adequate levels of retirement spending exceed 80% of working life spending for a majority of respondents. Minimum acceptable income replacement rates range from 95 to 45% across income quintiles in the U.S., and from 75 to 60% across income quintiles in The Netherlands. The smaller range in The Netherlands may in part reflect the much tighter income distribution there.

Type
Articles
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

We are grateful to the editor and anonymous referees for very helpful suggestions. We are also grateful to Yvonne Adema, Rotraut Binswanger, Jan Boone, Axel Börsch-Supan, Katie Carman, Norma Coe, Jeffrey Dominitz, Josef Falkinger, Ernst Fehr, Alia Gizatulina, Sally Gschwend, Michael Halliasos, Eline van der Heijden, Hendrik Jürges, Arie Kapteyn, Miles Kimball, Markus Knell, Annamaria Lusardi, Olivia Mitchell, Hans-Theo Normann, Charles Noussair, Jan Potters, Maarten van Rooij, Claudia Sahm, Matthew Shapiro, Jonathan Skinner, Arthur van Soest, Karen van der Wiel, Joachim Winter, and to participants at the MESS workshop, at Netspar workshops, at the conference on ‘Economic and Psychological Aspects of Household Saving Behavior’ in Deidesheim, and seminar participants at Tilburg University, the University of Mannheim, and the University of Muenster for many helpful comments. Daniel Schunk thanks the Center for Economic Studies (University of Munich), where part of this work was done, for its generous hospitality and the helpful comments from colleagues. Special thanks go to Vera Toepoel from CentERdata and to Bas Weerman from RAND for programming our questionnaire. Financial support from CentER and Netspar is gratefully acknowledged.

References

Banks, James, Richard, Blundell and Sarah, Tanner (1998) Is There a Retirement-Savings Puzzle? American Economic Review, 88(4): 769788.Google Scholar
Banks, James, Richard, Blundell, Richard, Disney and Carl, Emmerson (2002) Retirement, Pensions and the Adequacy of Saving: A Guide to the Debate. IFS Briefing Note No. 29. London: The Institute for Fiscal Studies.Google Scholar
Banks, James, Carl, Emmerson, Zoë, Oldfield and Gemma, Tetlow (2005 a) Prepared for Retirement? The Adequacy and Distribution of Retirement Resources in England. London: The Institute for Fiscal Studies.Google Scholar
Banks, James, Richard, Blundell and Carl, Emmerson (2005 b) The balance between defined benefit, defined contribution and state provision. Journal of the European Economic Association, 3(2–3): 466476.CrossRefGoogle Scholar
Banks, James (2006) Economic choices, capabilities and outcomes at older ages. Fiscal Studies, 27(3): 281311.CrossRefGoogle Scholar
Barsky, Robert B., Juster, Thomas F., Kimball, Miles S. and Shapiro, Matthew D. (1997) Preference parameters and behavioral heterogeneity: an experimental approach in the health and retirement study. Quarterly Journal of Economics, 112(2): 537579.CrossRefGoogle Scholar
Bernheim, Douglas B., Forni, Lorenzo, Gokhale, Jagadeesh and Kotlikoff, Laurence J. (2000) How much should americans be saving for retirement? American Economic Review, 90(2): 288292.CrossRefGoogle Scholar
Beshears, John, Choi, James J., Laibson, David and Madrian, Brigitte C. (2006) The importance of default options for retirement savings outcomes: evidence from the United States. NBER Working Paper 12009.Google Scholar
Binswanger, Johannes (2007) Risk management of pensions from the perspective of loss aversion. Journal of Public Economics, 91: 641667.CrossRefGoogle Scholar
Binswanger, Johannes (2010) Understanding the heterogeneity of savings and asset allocation: a behavioral-economics perspective. Journal of Economic Behavior and Organization, 76: 296317.CrossRefGoogle Scholar
Dillman, Don A. (2000) Mail and Internet Surveys: The Tailored Design Method, 2nd edition. New York: John Wiley.Google Scholar
Duflo, Esther and Emmanuel, Saez (2002) Participation and investment decisions in a retirement plan: the influence of colleagues' choices. Journal of Public Economics, 85: 121148.CrossRefGoogle Scholar
Duflo, Esther and Emmanuel, Saez (2003) The role of information and social interactions in retirement plan decisions: evidence from a randomized experiment. Quarterly Journal of Economics, 118(3): 815842.CrossRefGoogle Scholar
Duflo, Esther, William, Gale, Jeffrey, Liebman, Peter, Orszag and Emmanuel, Saez (2006) Saving incentives for low- and middle-income families: evidence from a field experiment with H&R block. Quarterly Journal of Economics, 121(4): 13111346.CrossRefGoogle Scholar
Feldstein, Martin and Elena, Ranguelova (2001) Individual risk in an investment-based social security system. American Economic Review, 91(4): 11161125.CrossRefGoogle Scholar
Fornero, Elsa, Annamaria, Lusardi and Chiara, Monticone (2009) Adequacy of saving for old age in Europe. Working Paper, CeRP-Center for Research on Pensions and Welfare Policies and Dartmouth College.Google Scholar
Gomes, Francisco and Alexander, Michaelides (2003) Portfolio choice with internal habit formation: a life-cycle model with uninsurable labor income risk. Review of Economic Dynamics, 6: 729766.CrossRefGoogle Scholar
Gruber, Jonathan and Wise, David A. (1999) Social Security and Retirement Around the World. Chicago: University of Chicago Press.CrossRefGoogle Scholar
Gruber, Jonathan and Wise, David A. (2004) Social Security Programs and Retirement Around the World: Micro Estimation. Chicago: University of Chicago Press.Google Scholar
Hurd, Michael D. and Rohwedder, Susann (2008) The retirement consumption puzzle: actual spending change in panel data. NBER Working Paper 13929.Google Scholar
Kapteyn, Arie and Teppa, Federica (2003) Hypothetical intertemporal consumption choices. Economic Journal, 113: C140C152.CrossRefGoogle Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2007) Baby boomer retirement security: the roles of planning, financial literacy, and housing wealth. Journal of Monetary Economics, 54: 205224.CrossRefGoogle Scholar
Madrian, Brigitte C. and Shea, Dennis F. (2001) The power of suggestion: inertia in 401(k) participation and savings behavior. Quarterly Journal of Economics, 116(4): 11491187.CrossRefGoogle Scholar
Moore, James F. and Mitchell, Olivia S. (1997) Projected retirement wealth and savings adequacy in the health and retirement study. NBER Working Paper 6240.Google Scholar
Munnell, Alicia, Anthony, Webb and Luke, Delorme (2006) Retirements at risk: a new national retirement index. Boston College Center for Retirement Research.Google Scholar
OASDI (2008) The 2008 Annual Report of the Board of Trustees of the Federal Old Age and Survivors' Insurance and Federal Disability Insurance Trust Funds. Washington, DC: U.S. Government Printing Office.Google Scholar
OECD (2006) , Live Longer, Work Longer. Paris: OECD.Google Scholar
OECD (2007) Pensions at a Glance: Public Policies across OECD Countries. Paris: OECD.Google Scholar
OECD (2008) Economic Policy Reforms: Going for Growth. Paris: OECD.Google Scholar
Palmer, Bruce A. (1994) Retirement income replacement ratios: an update. Benefits Quarterly, Second Quarter: 5969.Google Scholar
Poterba, James, James, Rauh, Steven, Venti and David, Wise (2003) Utility evaluation of risk in retirement saving accounts. NBER Working Paper 9892.Google Scholar
Scholz, John K., Ananth, Seshadri and Surachai, Khitatrakun (2006) Are Americans saving ‘optimally’ for retirement? Journal of Political Economy, 114(4): 607643.CrossRefGoogle Scholar
Skinner, Jonathan (2007) Are you sure you're saving enough for retirement? Journal of Economic Perspectives, 21(3): 5980.CrossRefGoogle Scholar
Thaler, Richard H. (1994) Psychology and savings policies. American Economic Review, 84(2): 186192.Google Scholar
Van Rooij, Maarten C. J., Annamaria, Lusardi and Rob, Alessie (2007 a) Financial literacy and stock-market participation. NBER Working Paper No. 13565.Google Scholar
Van Rooij, Maarten C. J., Kool, Clemens J. M. and Prast, Henriëtte M. (2007 b) Risk-return preferences in the pension domain: are people able to choose? Journal of Public Economics, 91(3–4): 701722.CrossRefGoogle Scholar
33
Cited by

Save article to Kindle

To save this article to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

What is an adequate standard of living during Retirement?*
Available formats
×

Save article to Dropbox

To save this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about saving content to Dropbox.

What is an adequate standard of living during Retirement?*
Available formats
×

Save article to Google Drive

To save this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about saving content to Google Drive.

What is an adequate standard of living during Retirement?*
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *