The Savings Wedge

Abstract:

We derive a new criterion for evaluating over- or under-saving in over-lapping generations economies with both ex-ante and ex-post household heterogeneity. Our criterion, which we call the Savings Wedge, nests the traditional ‘r vs. g’ (Golden Rule) criterion as a special case, but accounts for how aggregate savings affects households’ exposure to uninsurable risk and shifts the income distribution, and can be thought of as a risk and redistribution robust Golden Rule criterion. A second-order approximation of the Savings Wedge yields a tractable formula of measurable statistics. Using PSID data from 1978 to 2024, we measure the Savings Wedge in the United States and compare our measure to the traditional Golden Rule. The latter implies mild under-saving (10 percent) before 2005, then mild over-saving (6 percent). Relative to the Golden Rule, our criterion suggests substantially more under-saving, driven by both high levels of capital income risk and capital income inequality being greater than labor income inequality. We find the U.S. under-saves by 30 percent before 2005, with no over-saving in the later years