Friday, August 07, 2009

The Retirement Consumption Puzzle: Actual Spending Change in Panel Data

The fall in consumption after retirement is frequently used to demonstrate the need to incorporate psychological theories into economics of consumption. A number of recent papers have been asking whether this fall is as large as previously thought. This paper below is a striking example of this.

NBER Working Paper
Michael D. Hurd
Susann Rohwedder

The simple one-good model of life-cycle consumption requires that consumption be continuous over retirement; yet prior research based on partial measures of consumption or on synthetic panels indicates that spending drops at retirement, a result that has been called the retirement-consumption puzzle. Using panel data on total spending, nondurable spending and food spending, we find that spending declines at small rates over retirement, at rates that could be explained by mechanisms such as the cessation of work-related expenses, unexpected retirement due to a health shock or by the substitution of time for spending. In the low-wealth population where spending did decline at higher rates, the main explanation for the decline appears to be a high rate of early retirement due to poor health. We conclude that at the population level there is no retirement consumption puzzle in our data, and that in subpopulations where there were substantial declines, conventional economic theory can provide the main explanation.

1 comment:

Mark McG said...

There is an excellent recent paper on this topic by Fogarty et al (2008), *** ******* The 39 Year Old?