Do Households Save More When the Kids Leave? Take Two

Much of the disagreement over whether the United States faces a retirement savings crisis hinges on different assumptions on how household consumption changes once the kids leave home. “Optimal savings†studies, which assume that household consumption declines and savings increase when the kids leave, suggest that most people are saving optimally. On the other hand, studies based on the assumption of steady consumption over the working years conclude that many households will end up underprepared for retirement. Researchers have tried to determine empirically which of these two theories better describes actual household behavior. Some have found that parents reduce consumption after their kids become independent, allowing them to save more for retirement. Others, however, have found that 401(k) savings do not increase. If households are both consuming less but not saving more after the kids leave, where are the resources going? This brief, which is based on a recent study, examines three ways to reconcile these seemingly inconsistent results: 1) define savings more broadly: beyond 401(k)s, parents may be saving by paying down debt faster; 2) define consumption more broadly: beyond survey definitions of consumption, parents may still be providing financial support to their grown children; and 3) define income more carefully: parents may be adjusting their labor supply and earnings.1 The analysis explores each of these avenues using data from the Health and Retirement Study and the Panel Study of Income Dynamics. The discussion proceeds as follows. The first section briefly summarizes the evidence to date. The second section describes the methodology and data for the current analysis. The third section presents the results. The final section concludes that parents do not increase savings after children leave but do reduce consumption and income. While the analysis does not completely resolve the apparent conflicting behaviors, understanding that a third dimension – changes in income – is at play can help inform future research on the topic.