The simple one-good model of life-cycle consumption requires that consumption be continuous over retirement; yet prior research based on partial measures of consumption or on synthetic panels indicates that spending drops at retirement, a result that has been called the retirement-consumption puzzle. Using panel data on total spending, nondurable spending and food spending, the authors find that spending declines at small rates over retirement, at rates that could be explained by mechanisms such as the cessation of work-related expenses, unexpected retirement due to a health shock or by the substitution of time for spending. In the low-wealth population where spending did decline at higher rates, the main explanation for the decline appears to be a high rate of early retirement due to poor health. They conclude that at the population level there is no retirement-consumption puzzle in their data, and that in subpopulations where there were substantial declines, conventional economic theory can provide the main explanation.
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Paper provided by RAND Corporation Publications Department in its series Working Papers with number
563.
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