We estimate the evolution of permanent and transitory income risk across the income distribution and over time using newly-digitized and longitudinally-linked Census-IRS tax returns. Since the 1970s, the variance of permanent income shocks (i.e., permanent income risk) has increased by over 65% for those in the top 5% of the income distribution. Using capitalized interest and dividend income, we document that high income households save significantly more in response to increases in permanent income risk compared to lower income households. To examine the implications of rising permanent income risk among high income households we integrate our income process into a Bewley-Huggett-Aiyagari model and calibrate the model to be consistent with our savings elasticities. We find that increasing permanent income risk among high income households has put downward pressure on interest rates and increased wealth inequality.
