We estimate the evolution of permanent and transitory income risk across the income

distribution and over time using newly-digitized, longitudinally-linked Census-IRS tax return data, which cover the universe of US tax returns from 1969 to 2019. Over our sample window, the variance of permanent income shocks rises by over 65% for those in the 95th percentile or higher of the income distribution — a group which collectively owns a sizable fraction of financial wealth. Because our Kalman filter yields a panel of permanent and transitory shocks for every individual, we validate that top earners indeed face “risk” by documenting that negative permanent shocks coincide with observable proxies for adverse life events, changes in asset positions, and financial distress. Using capitalized interest and dividend income from 1040s, we also show that high earners save significantly more in response to greater permanent income risk. We then integrate our income process into a Bewley-Huggett-Aiyagari model in order to quantify the effects of rising permanent income

risk on interest rates. Rising permanent income risk at the top of the income distribution pushes interest rates down by 0.6% (from 3.5% to 2.9%), explaining roughly 25% of the decline in interest rates observed since the 1970s. Moreover, rising permanent income risk at the top of the income distribution provides a distinct and complementary rationale to non-homothetic preferences for increased savings rates among the richest U.S. households.