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Some Answers to the Retirement-Consumption Puzzle

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  • Michael D. Hurd
  • Susann Rohwedder

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12057.

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Date of creation: Feb 2006
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Handle: RePEc:nbr:nberwo:12057

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  1. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 1997. "What Accounts for the Variation in Retirement Wealth Among U.S. Households?," NBER Working Papers 6227, National Bureau of Economic Research, Inc.
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  3. Johnathan Fisher & David S. Johnson & Joseph Marchand & Timothy M. Smeeding & Barbara Boyle Torrey, 2005. "The Retirement Consumption Conundrum: Evidence from a Consumption Survey," Working Papers, Center for Retirement Research at Boston College wp2005-14, Center for Retirement Research, revised Dec 2005.
  4. Sarah Smith, 2004. "Can the retirement consumption puzzle be solved?," IFS Working Papers W04/07, Institute for Fiscal Studies.
  5. John Rust, 1989. "Behavior of male workers at the end of the life-cycle: an empirical analysis of states and controls," Discussion Paper / Institute for Empirical Macroeconomics 6, Federal Reserve Bank of Minneapolis.
  6. 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.
  7. Blau, David M., 2007. "Retirement and Consumption in a Life Cycle Model," IZA Discussion Papers 2986, Institute for the Study of Labor (IZA).
  8. Mark Aguiar & Erik Hurst, 2007. "Life-Cycle Prices and Production," American Economic Review, American Economic Association, vol. 97(5), pages 1533-1559, December.
  9. Michael D. Hurd, 1993. "The Effect of Labor Market Rigidities on the Labor Force Behavior of Older Workers," NBER Working Papers 4462, National Bureau of Economic Research, Inc.
  10. Mark Aguiar & Erik Hurst, 2004. "Consumption vs. Expenditure," NBER Working Papers 10307, National Bureau of Economic Research, Inc.
  11. Steven Haider & Melvin Stephens Jr., 2004. "Is There a Retirement-Consumption Puzzle? Evidence Using Subjective Retirement Expectations," NBER Working Papers 10257, National Bureau of Economic Research, Inc.
  12. Raffaele Miniaci & Chiara Monfardini & Guglielmo Weber, 2003. "Is there a retirement consumption puzzle in Italy?," IFS Working Papers W03/14, Institute for Fiscal Studies.
  13. Mark B. McClellan, 1998. "Health Events, Health Insurance, and Labor Supply: Evidence from the Health and Retirement Survey," NBER Chapters, in: Frontiers in the Economics of Aging, pages 301-350 National Bureau of Economic Research, Inc.
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