Understanding why high income households save more than low income households

We use a calibrated life-cycle model to evaluate why high income households save as a group a much higher fraction of income than do low income househ olds in US cross-section data. We find that (1) age and relatively permanen t earnings differences across households together with the structure of the US social security system are sufficient to replicate this fact, (2) witho ut social security the model economies still produce large differences in s aving rates across income groups and (3) purely temporary earnings shocks o f the magnitude estimated in US data alter only slightly the saving rates o f high and low income households. (C) 2000 Elsevier Science B.V. All rights reserved.