Savings Matter Most for Retirement Income, Risk and Chance Events Less Important

August 29, 2000

A study by Dartmouth College economics professor Steven F. Venti and NBER researcher David A. Wise finds that the greatest determinant of retirement income is not the types of investments workers make, nor is it unexpected events that might increase or decrease their savings. The prime determinant of retirement wealth is simply whether and how much a worker chooses to set aside for retirement. Supporters of the current system argue that despite Social Security's low returns, it plays an important insurance function by paying benefits regardless of the performance of the market or of chance events like health emergencies that might reduce a worker's savings. But Venti and Wise's research shows that investment strategies and chance events play a far smaller role in determining retirement wealth than defenders of the current Social Security program suppose.

Venti and Wise "consider the extent to which differences in household lifetime financial resources explain the wide dispersion in wealth, given lifetime earnings. We find that very little of this dispersion can be explained by chance differences in individual circumstances - 'largely outside the control of individuals' - that might limit the resources from which saving might plausibly be made. We also consider how much of the dispersion in wealth might be accounted for by different investment choices of savers - some more risky, some less risky - given lifetime earnings. We find that investment choice is not a major determinant of the dispersion in asset accumulation. It matters about as much as chance events that limit the available resources of households with the same lifetime earnings. We conclude that the bulk of the dispersion must be attributed to differences to in the amount that households choose to save. The differences in saving choices among households with similar lifetime earnings lead to vastly different levels of asset accumulation by the time retirement age approaches."

The conclusion to be drawn from Venti and Wise's study is that the current Social Security system "protects" against risks that are not very important in determining retirement income while simultaneously preventing workers from doing the one thing - saving - that is important.

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