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Lifecycle Impacts of the Financial and Economic Crisis on Household Optimal Consumption, Portfolio Choice, and Labor Supply

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  • Jingjing Chai
  • Raimond Maurer
  • Olivia S. Mitchell
  • Ralph Rogalla

Abstract

The direct financial impact of the financial crisis has been to deal a heavy blow to investment-based pensions; many workers lost a substantial portion of their retirement saving. The financial sector implosion produced an economic crisis for the rest of the economy via high unemployment and reduced labor earnings, which reduced household contributions to Social Security and some private pensions. Our research asks which types of individuals were most affected by these dual financial and economic shocks, and it also explores how people may react by changing their consumption, saving and investment, work and retirement, and annuitization decisions. We do so with a realistically calibrated lifecycle framework allowing for time-varying investment opportunities and countercyclical risky labor income dynamics. We show that households near retirement will reduce both short- and long-term consumption, boost work effort, and defer retirement. Younger cohorts will initially reduce their work hours, consumption, saving, and equity exposure; later in life, they will work more, retire later, consume less, invest more in stocks, save more, and reduce their demand for private annuities.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17134.

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Date of creation: Jun 2011
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Publication status: published as Chai, Jingjing, Raimond Maurer, Olivia S. Mitchell, & Ralph Rogalla. (2012). “Lifecycle Impacts of the Financial and Economic Crisis on Household Optimal Consumption, Portfolio Choice, and Labor Supply.” In Reshaping Retirement Security: Lessons from the Global Financial Crisis. Eds. R. Maurer, O.S. Mitchell, and M. Warshawsky. Oxford: Oxford University Press. 120-151.
Handle: RePEc:nbr:nberwo:17134

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  1. Jingjing Chai & Wolfram Horneff & Raimond Maurer & Olivia S. Mitchell, 2009. "Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts," NBER Working Papers 15079, National Bureau of Economic Research, Inc.
  2. Chris Carroll & Wendy Dunn, 1997. "Unemployment Expectations, Jumping (S,s) Triggers, and Household Balance Sheets," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 165-230 National Bureau of Economic Research, Inc.
  3. Alan L. Gustman & Thomas L. Steinmeier & Nahid Tabatabai, 2009. "What the Stock Market Decline Means for the Financial Security and Retirement Choices of the Near-Retirement Population," NBER Working Papers 15435, National Bureau of Economic Research, Inc.
  4. Brown, Jeffrey R. & Mitchell, Olivia S. & Poterba, James M. & Warshawsky, Mark J., 1999. "Taxing Retirement Income: Nonqualified Annuities and Distributions from Qualified Accounts," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 563-92, September.
  5. Michael D. Hurd & Susann Rohwedder, 2010. "The Effects of the Economic Crisis on the Older Population," Working Papers wp231, University of Michigan, Michigan Retirement Research Center.
  6. Gomes, Francisco J & Michaelides, Alexander, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," CEPR Discussion Papers 4853, C.E.P.R. Discussion Papers.
  7. Gordon, Stephen & St-Amour, Pascal, 1999. "A Preference Regime Model of Bull and Bear Markets," Cahiers de recherche 9906, Université Laval - Département d'économique.
  8. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
  9. Hans Fehr & Sabine Jokisch & Laurence J. Kotlikoff, 2005. "Will China Eat Our Lunch or Take Us Out to Dinner? Simulating the Transition Paths of the U.S., EU, Japan, and China," NBER Working Papers 11668, National Bureau of Economic Research, Inc.
  10. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2008. "Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds," American Economic Review, American Economic Association, vol. 98(2), pages 297-303, May.
  11. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
  12. Massimo Guidolin & Allan Timmermann, 2008. "International asset allocation under regime switching, skew, and kurtosis preferences," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 889-935, April.
  13. João Cocco & Francisco Gomes & Pascal Maenhout, 1998. "Consumption and Portfolio Choice over the Life-Cycle," Center for Economic Studies - Discussion papers ces9805, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  14. repec:crr:crrwps:1999-06 is not listed on IDEAS
  15. COILE, Courtney & DIAMOND, Peter & GRUBER, Jonathan & JOUSTEN, Alain, 2000. "Delays in claiming social security benefits," CORE Discussion Papers 2000029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
  17. Brady, Peter J., 2009. "What Does the Market Crash Mean for the Ability of 401(k) Plans to Provide Retirement Income?," National Tax Journal, National Tax Association, vol. 62(3), pages 455-76, September.
  18. Olivia S. Mitchell & John W.R. Phillips, 2006. "Social Security Replacement Rates for Alternative Earnings Benchmarks," Working Papers wp116, University of Michigan, Michigan Retirement Research Center.
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Cited by:
  1. Hugo Benitez-Silva & J. Ignacio Garcia-Perez & Sergi Jimenez-Martin Author-Email: sergi.jimenez@upf.edu, 2012. "The Effects of Employment Uncertainty and Wealth Shocks on the Labor Supply and Claiming Behavior of Older American Workers," Department of Economics Working Papers 12-12, Stony Brook University, Department of Economics.
  2. Florida, Richard & Mellander, Charlotta & Holgersson, Thomas, 2012. "Up in the Air: The Role of Airports for Regional Economic Development," Working Paper Series in Economics and Institutions of Innovation 267, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.

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