Some Answers to the Retirement-Consumption Puzzle
30 Pages Posted: 12 Jul 2007
There are 2 versions of this paper
Some Answers to the Retirement-Consumption Puzzle
Some Answers to the Retirement-Consumption Puzzle
Date Written: January 2006
Abstract
The simple one-good model of life-cycle consumption requires "consumption smoothing." According to previous results based on partial spending and on synthetic panels, British and U.S. households apparently reduce consumption at retirement. The reduction cannot be explained by the simple one-good life-cycle model, so it has been referred to as the retirement-consumption puzzle. An interpretation is that at retirement individuals discover they have fewer economic resources than they had anticipated prior to retirement, and as a consequence reduce consumption. This interpretation challenges the life-cycle model where consumers are assumed to be forward-looking. Using panel data, we find that prior to retirement workers anticipated on average a decline of 13.3% in spending and after retirement they recollected a decline of 12.9%: widespread surprise is not the explanation for the retirement-consumption puzzle. Workers with substantial wealth both anticipated and recollected a decline. Therefore, for many workers the decline is not necessitated by the fall in income that accompanies retirement. Poor health is associated with above-average declines. At retirement time spent in activities that could substitute for market-purchased goods increases. Apparently a number of factors contribute to the decline in spending, which, for most of the population, can be accommodated in conventional models of economic behavior.
Keywords: Retirees-Economic conditions, United States-Econometric models, Retirees-Economic conditions, Great Britain-Econometric models, Retirement-Economic aspects, United States-Econometric models, retirement-Economic aspects, Great Britain-Econometric models, Consumption (Economics)
JEL Classification: D91, J26
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
What Accounts for the Variation in Retirement Wealth Among U.S. Households?
By B. Douglas Bernheim, Jonathan S. Skinner, ...
-
What Accounts for the Variation in Retirement Wealth Among U.S. Households?
By B. Douglas Bernheim, Jonathan S. Skinner, ...
-
Are Americans Saving "Optimally" for Retirement?
By John Karl Scholz, Ananth Seshadri, ...
-
Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?
-
By Mark Aguiar and Erik Hurst
-
The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement
By Michael D. Hurd and Susann Rohwedder
-
The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement
By Michael D. Hurd and Susann Rohwedder
-
Household Production and the Excess Sensitivity of Consumption to Current Income
By Marianne Baxter and Urban J. Jermann
-
Consumption During Retirement: The Missing Link in the Life Cycle
-
The Effect of Labor Market Rigidities on the Labor Force Behavior of Older Workers