Retirement Implications of a Low Wage Growth, Low Real Interest Rate Economy

Social Security Bulletin. 80(3): 31-45, 2020

15 Pages Posted: 7 Oct 2020

See all articles by Jason Scott

Jason Scott

Independent

John B. Shoven

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Sita Slavov

George Mason University - School of Policy, Government, and International Affairs

John G. Watson

Stanford Graduate School of Business

Date Written: August 12, 2020

Abstract

Using a life-cycle model, the authors examine the implications of persistent low real interest rates and low wage growth for individuals nearing retirement. Low returns and low wage growth are found to affect welfare substantially, often producing large compensating variations. Low economy-wide wage growth has a much larger welfare effect than low individual wage growth, largely because the Social Security benefit formula is progressive and incorporates wage indexing. Low economy-wide wage growth undercuts the effects of wage indexation as average wages fall along with individual wages. Low returns raise the optimal Social Security claiming age and the marginal benefit of working longer, while low wage growth decreases the marginal benefit of working longer. Low returns also increase the relative price of consumption during retirement, suggesting that individuals may wish to reduce future consumption relative to current consumption. The authors then compare these findings with standard financial planning advice.

Keywords: Life-Cycle Model, Wages, Interest Rates, Compensating Variation, Retirement Saving, Financial Planning

JEL Classification: D15, E43, G51, J30

Suggested Citation

Scott, Jason and Shoven, John B. and Slavov, Sita and Watson, John G., Retirement Implications of a Low Wage Growth, Low Real Interest Rate Economy (August 12, 2020). Social Security Bulletin. 80(3): 31-45, 2020, Available at SSRN: https://ssrn.com/abstract=3677159

John B. Shoven

Stanford University - Department of Economics ( email )

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Sita Slavov

George Mason University - School of Policy, Government, and International Affairs ( email )

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John G. Watson

Stanford Graduate School of Business ( email )

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