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Theoretical considerations on the retirement consumption puzzle and the optimal age of retirement

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  • Nicolas Drouhin

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay)

Abstract

Defining retirement as a discontinuity in the labor supply of the agent, this paper resolves the retirement consumption puzzle in a very general model of in-tertemporal choice of consumption and savings of a fully rational, forward looking, agent. Building on a specific version of Bellman (1957) principle of optimality, it provides a very general and parsimonious formula for determining the optimal age of retirement taking into account the possible discontinuity of the optimal consumption profile at the age of retirement. Code JEL: C61 D91 J26

Suggested Citation

  • Nicolas Drouhin, 2018. "Theoretical considerations on the retirement consumption puzzle and the optimal age of retirement," Working Papers halshs-01767096, HAL.
    • Handle: RePEc:hal:wpaper:halshs-01767096
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01767096
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    References listed on IDEAS

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    1. Erich Battistin & Agar Brugiavini & Enrico Rettore & Guglielmo Weber, 2009. "The Retirement Consumption Puzzle: Evidence from a Regression Discontinuity Approach," American Economic Review, American Economic Association, vol. 99(5), pages 2209-2226, December.
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    5. Hamermesh, Daniel S, 1984. "Consumption during Retirement: The Missing Link in the Life Cycle," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 1-7, February.
    6. Drouhin, Nicolas, 2020. "Non-stationary additive utility and time consistency," Journal of Mathematical Economics, Elsevier, vol. 86(C), pages 1-14.
    7. Chang, Fwu-Ranq, 1991. "Uncertain Lifetimes, Retirement and Economic Welfare," Economica, London School of Economics and Political Science, vol. 58(230), pages 215-232, May.
    8. Drouhin, Nicolas, 2015. "A rank-dependent utility model of uncertain lifetime," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 208-224.
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    10. Heijdra, Ben J. & Romp, Ward E., 2009. "Retirement, pensions, and ageing," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 586-604, April.
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    More about this item

    Keywords

    life cycle theory of consumption and saving; optimal retirement; retirement consumption puzzle; discontinuous optimal control;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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