John G. Watson
725 Magnolia Street
Menlo Park, CA 94025
Institutional Affiliation: Stanford Graduate School of Business
NBER Working Papers and Publications
|February 2019||Retirement Implications of a Low Wage Growth, Low Real Interest Rate Economy|
with Jason Scott, John B. Shoven, Sita Slavov: w25556
We examine the implications of persistent low real interest rates and wage growth rates on individuals nearing retirement. We begin by reviewing the concept of r star – the long-term real, safe interest rate that is neither expansionary nor contractionary – and presenting recent estimates suggesting that this value has declined. We then examine the implications of low returns and low wage growth for individuals currently aged 45 and 55. We find that low returns and low wage growth have substantial welfare effects, with compensating variations that are often in the hundreds of thousands of dollars. Low returns increase optimal Social Security claiming ages and the marginal benefit of working longer, while low wage growth decreases the marginal benefit of working longer. Low economy-wide wag...