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The Retirement of a Consumption Puzzle

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  • Erik Hurst

Abstract

This paper summarizes five facts that have emerged from the recent literature on consumption behavior during retirement. Collectively, the recent literature has shown that there is no puzzle with respect to the spending patterns of most households as they transition into retirement. In particular, the literature has shown that there is substantial heterogeneity in spending changes at retirement across consumption categories. The declines in spending during retirement for the average household are limited to the categories of food and work related expenses. Spending in nearly all other categories of non-durable expenditure remains constant or increases. Moreover, even though food spending declines during retirement, actual food intake remains constant. The literature also shows that there is substantial heterogeneity across households in the change in expenditure associated with retirement. Much of this heterogeneity, however, can be explained by households involuntarily retiring due to deteriorating health. Overall, the literature shows that the standard model of lifecycle consumption augmented with home production and uncertain health shocks does well in explaining the consumption patterns of most households as they transition into retirement.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13789.

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Date of creation: Feb 2008
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Publication status: published as “Understanding Consumption in Retirement: Recent Developments”, in Recalibrating Retirement Spending and Saving (eds, John Ameriks and Olivia Mitchell), Oxford University Press, September 2008.
Handle: RePEc:nbr:nberwo:13789

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  1. Schwerdt, Guido, 2005. "Why does consumption fall at retirement? Evidence from Germany," Economics Letters, Elsevier, Elsevier, vol. 89(3), pages 300-305, December.
  2. Sarah Smith, 2006. "The retirement-consumption puzzle and involuntary early retirement: Evidence from the British Household Panel Survey," The Centre for Market and Public Organisation 06/138, Department of Economics, University of Bristol, UK.
  3. Raffaele Miniaci & Chiara Monfardini & Guglielmo Weber, 2003. "Is there a retirement consumption puzzle in Italy?," IFS Working Papers, Institute for Fiscal Studies W03/14, Institute for Fiscal Studies.
  4. Michael Hurd & Susann Rohwedder, 2003. "The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement," NBER Working Papers 9586, National Bureau of Economic Research, Inc.
  5. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, American Economic Association, vol. 88(4), pages 769-88, September.
  6. John Ameriks & Andrew Caplin & John Leahy, 2007. "Retirement Consumption: Insights from a Survey," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 265-274, May.
  7. Erik Hurst, 2004. "Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers," Working Papers, University of Michigan, Michigan Retirement Research Center wp088, University of Michigan, Michigan Retirement Research Center.
  8. Daniel S. Hamermesh, 1982. "Consumption During Retirement: The Missing Link in the Life Cycle," NBER Working Papers 0930, National Bureau of Economic Research, Inc.
  9. Michael Hurd & Susann Rohwedder, 2006. "Some Answers to The Retirement-Consumption Puzzle," Working Papers, RAND Corporation Publications Department 342, RAND Corporation Publications Department.
  10. 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.
  11. Fisher, Jonathan D. & Johnson, David S. & Marchand, Joseph & Smeeding, Timothy M. & Torrey, Barbara Boyle, 2008. "The retirement consumption conundrum: Evidence from a consumption survey," Economics Letters, Elsevier, Elsevier, vol. 99(3), pages 482-485, June.
  12. 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.
  13. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2004. "Are Americans Saving "Optimally" for Retirement?," NBER Working Papers 10260, National Bureau of Economic Research, Inc.
  14. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," NBER Working Papers 13893, National Bureau of Economic Research, Inc.
  15. John Laitner & Dan Silverman, 2005. "Estimating Life—Cycle Parameters from Consumption Behavior at Retirement”," Working Papers, University of Michigan, Michigan Retirement Research Center wp099, University of Michigan, Michigan Retirement Research Center.
  16. Shelly Lundberg & Richard Startz & Steven Stillman, 2001. "The Retirement-Consumption Puzzle: A Marital Bargaining Approach," Working Papers, RAND Corporation Publications Department 01-04, RAND Corporation Publications Department.
  17. Heckman, James J, 1974. "Life Cycle Consumption and Labor Supply: An Explanation of the Relationship Between Income and Consumption Over the Life Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 64(1), pages 188-94, March.
  18. Mark Aguiar & Erik Hurst, 2004. "Consumption vs. Expenditure," NBER Working Papers 10307, National Bureau of Economic Research, Inc.
  19. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 832-857, September.
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Citations

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Cited by:
  1. Fisher, Jonathan & Marchand, Joseph, 2010. "Does the Retirement Consumption Puzzle Differ Across the Distribution?," Working Papers 2010-20, University of Alberta, Department of Economics, revised 01 Apr 2011.
  2. Nivorozhkina, Ludmila & Nivorozhkin, Anton & Abazieva, Kamilla, 2010. "Drop in consumption associated with retirement. The regression discontinuity design approach," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 19(3), pages 112-126.
  3. Mark Aguiar & Erik Hurst, 2008. "Deconstructing Lifecycle Expenditure," Working Papers, University of Michigan, Michigan Retirement Research Center wp173, University of Michigan, Michigan Retirement Research Center.
  4. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
  5. Barrett, Garry F. & Brzozowski, Matthew, 2010. "Involuntary Retirement and the Resolution of the Retirement-Consumption Puzzle: Evidence from Australia," Working Papers, University of Sydney, School of Economics 2010-10, University of Sydney, School of Economics.
  6. Stancanelli, Elena G. F. & van Soest, Arthur, 2011. "Retirement and Home Production: A Regression Discontinuity Approach," IZA Discussion Papers 6229, Institute for the Study of Labor (IZA).
  7. Almudena Sevilla-Sanz & Maria Jose Luengo-Prado, 2010. "Consumption, Retirement and Life-cycle Prices: Evidence From Spain," Economics Series Working Papers 498, University of Oxford, Department of Economics.
  8. 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, American Economic Association, vol. 99(5), pages 2209-26, December.
  9. Raffaele Miniaci & Chiara Monfardini & Guglielmo Weber, 2010. "How does consumption change upon retirement?," Empirical Economics, Springer, Springer, vol. 38(2), pages 257-280, April.
  10. Yingying Dong, 2012. "Regression Discontinuity Applications with Rounding Errors in the Running Variable," Working Papers 111206, University of California-Irvine, Department of Economics.
  11. Fe, Eduardo & Hollingsworth, Bruce, 2012. "Estimating the eect of retirement on mental health via panel discontinuity designs," MPRA Paper 38162, University Library of Munich, Germany.
  12. Stephens, Melvin & Unayama, Takashi, 2012. "The impact of retirement on household consumption in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 62-83.
  13. Kilponen, Juha & Vilmunen, Jouko & Vähämaa, Oskari, 2013. "Estimating intertemporal elasticity of substitution in a sticky price model," Research Discussion Papers, Bank of Finland 9/2013, Bank of Finland.
  14. Mark van Duijn & Maarten Lindeboom & Mauro Mastrogiacomo & M. Lundborg, 2009. "Pension plans and the retirement replacement rates in the Netherlands," CPB Discussion Paper 118, CPB Netherlands Bureau for Economic Policy Analysis.

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