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Consumption during Retirement: The Missing Link in the Life Cycle

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  • Hamermesh, Daniel S

Abstract

This study presents the first evidence on the relation of consumption to lifetime wealth, based on data from the 1973 and 1975 Retirement History Survey that have been linked to Social Security earnings records. Nearly 500 white, married, fully retired couples ages 62-69 form the basis of the analysis. On average their consumption early in retirement exceeds by 14 percent the income that their financial, pension and Social Security wealth can generate. This implies that their saving, both private and through Social Security, is insufficient to sustain consumption throughout the rest of their lives. Additional evidence based on changes in spending between 1973 and 1975 shows that these households respond by reducing their real consumption at a rate sufficient to generate positive changes in net financial worth within a few years after retirement. These two pieces of evidence can be rationalized by a rate of time preference much higher than the interest rate, coupled with either a bequest motive or uncertainty about the length of life. They also imply that, even when combined with private pensions and savings, Social Security in the United States today does not enable most recipients to maintain their living standard at the levels they enjoyed before they retired.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 66 (1984)
Issue (Month): 1 (February)
Pages: 1-7

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Handle: RePEc:tpr:restat:v:66:y:1984:i:1:p:1-7

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Web page: http://mitpress.mit.edu/journals/

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  1. Michael D. Hurd & John B. Shoven, 1982. "The Economic Status of the Elderly," NBER Working Papers 0914, National Bureau of Economic Research, Inc.
  2. Sobol, Marion Gross, 1979. "Factors Influencing Private Capital Accumulation on the "Eve of Retirement"," The Review of Economics and Statistics, MIT Press, vol. 61(4), pages 585-93, November.
  3. Kotlikoff, Laurence J & Spivak, Avia & Summers, Lawrence H, 1982. "The Adequacy of Savings," American Economic Review, American Economic Association, vol. 72(5), pages 1056-69, December.
  4. Levhari, David & Mirman, Leonard J, 1977. "Savings and Consumption with an Uncertain Horizon," Journal of Political Economy, University of Chicago Press, vol. 85(2), pages 265-81, April.
  5. Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1, October.
  6. King, M A & Dicks-Mireaux, L-D L, 1982. "Asset Holdings and the Life-Cycle," Economic Journal, Royal Economic Society, vol. 92(366), pages 247-67, June.
  7. Mirer, Thad W, 1979. "The Wealth-Age Relation among the Aged," American Economic Review, American Economic Association, vol. 69(3), pages 435-43, June.
  8. Mervyn A. King & Louis Dicks-Mireaux, 1982. "Asset Holdings and the Life Cycle," NBER Working Papers 0614, National Bureau of Economic Research, Inc.
  9. Martin Feldstein, 1985. "Social Security Benefits and the Accumulation of Preretirement Wealth," NBER Working Papers 0477, National Bureau of Economic Research, Inc.
  10. Davies, James B, 1981. "Uncertain Lifetime, Consumption, and Dissaving in Retirement," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 561-77, June.
  11. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1981. "Social Security, Bequests, and the Life Cycle Theory of Saving: Cross-Sectional Tests," NBER Working Papers 0619, National Bureau of Economic Research, Inc.
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