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Economic Adjustment of Recent Retirees to Adverse Wealth Shocks

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  • Gabor Kezdi

    (Central European University)

  • Purvi Sevak

    (Hunter College)

Abstract

Since the mid-nineties, the stock market has had an unprecedented impact on the wealth of current and future retirees. Using data from the Current Population Survey and the Health and Retirement Study, this report estimates consumption and labor supply responses of individuals in their 50s and 60s to the recent stock market downturn. We estimate an elasticity of consumption with respect to wealth changes ranging from five to seven percent. This implies that households respond to a decline in wealth by reducing their consumption by 5 to 7 percent of the wealth decline. For example, if a household's wealth declined by $100,000, this estimate suggests they would reduce their annual consumption by $5,000 to $7,000. Among retirees, we do not observe any re-entry into the labor force in response to wealth losses due to stock market declines. This suggests that retirement is more or less an absorbing state, for either supply or demand reasons: once an individual retires, it is very difficult to become employed once again.

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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp075.

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Length: 33 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:mrr:papers:wp075

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  1. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
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  5. Melvin Stephens, 2004. "Job Loss Expectations, Realizations, and Household Consumption Behavior," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 253-269, February.
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  7. Kathryn Anderson & Richard V. Burkhauser & Joseph F. Quinn, 1986. "Do retirement dreams come true? The effect of unanticipated events on retirement plans," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 39(4), pages 518-526, July.
  8. Michael Hurd & James P. Smith, 2002. "Expected Bequests and Their Distribution," NBER Working Papers 9142, National Bureau of Economic Research, Inc.
  9. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-88, September.
  10. Joseph G. Altonji & Aloysius Siow, 1986. "Testing the Response of Consumption to Income Changes with (Noisy) PanelData," NBER Working Papers 2012, National Bureau of Economic Research, Inc.
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  13. Purvi Sevak, 2002. "Wealth Shocks and Retirement Timing: Evidence from the Nineties," Working Papers wp027, University of Michigan, Michigan Retirement Research Center.
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Cited by:
  1. James Banks & Rowena Crawford & Thomas Crossley & Carl Emmerson, 2012. "The effect of the financial crisis on older households in England," IFS Working Papers W12/09, Institute for Fiscal Studies.
  2. Jacob S. Hacker & Gregory Huber & Austin Nichols & Philipp Rehm & Mark Schlesinger & Robert G. Valletta & Stuart Craig, 2012. "The Economic Security Index: a new measure for research and policy analysis," Working Paper Series 2012-21, Federal Reserve Bank of San Francisco.
  3. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2012. "Does Stock Market Performance Influence Retirement Intentions?," Journal of Human Resources, University of Wisconsin Press, vol. 47(4), pages 1055-1081.
  4. Lucie Schmidt & Purvi Sevak, 2008. "Taxes, Wages, and the Labor Supply of Older Americans," Department of Economics Working Papers 2008-16, Department of Economics, Williams College.
  5. Courtney C. Coile & Phillip B. Levine, 2006. "Bulls, bears, and retirement behavior," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 59(3), pages 408-429, April.
  6. Courtney Coile, 2009. "Comment on "The Effect of Large Capital Gains or Losses on Retirement"," NBER Chapters, in: Developments in the Economics of Aging, pages 164-171 National Bureau of Economic Research, Inc.

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