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Economic Adjustment of Recent Retirees to Adverse Wealth Shocks

Author

Listed:
  • Gabor Kezdi

    (Central European University)

  • Purvi Sevak

    (Hunter College)

Abstract

Since the mid-nineties, the stock market has had an unprecedented impact on the wealth of current and future retirees. Using data from the Current Population Survey and the Health and Retirement Study, this report estimates consumption and labor supply responses of individuals in their 50s and 60s to the recent stock market downturn. We estimate an elasticity of consumption with respect to wealth changes ranging from five to seven percent. This implies that households respond to a decline in wealth by reducing their consumption by 5 to 7 percent of the wealth decline. For example, if a household's wealth declined by $100,000, this estimate suggests they would reduce their annual consumption by $5,000 to $7,000. Among retirees, we do not observe any re-entry into the labor force in response to wealth losses due to stock market declines. This suggests that retirement is more or less an absorbing state, for either supply or demand reasons: once an individual retires, it is very difficult to become employed once again.

Suggested Citation

  • Gabor Kezdi & Purvi Sevak, 2004. "Economic Adjustment of Recent Retirees to Adverse Wealth Shocks," Working Papers wp075, University of Michigan, Michigan Retirement Research Center.
  • Handle: RePEc:mrr:papers:wp075
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    References listed on IDEAS

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    3. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-788, September.
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    5. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
    6. F. Thomas Juster & Joseph P. Lupton & James P. Smith & Frank Stafford, 2006. "The Decline in Household Saving and the Wealth Effect," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 20-27, February.
    7. Kathryn H. Anderson & Richard V. Burkhauser & Joseph F. Quinn, 1986. "Do Retirement Dreams Come True? The Effect of Unanticipated Events on Retirement Plans," ILR Review, Cornell University, ILR School, vol. 39(4), pages 518-526, July.
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    Cited by:

    1. James Banks & Rowena Crawford & Thomas Crossley & Carl Emmerson, 2012. "The effect of the financial crisis on older households in England," IFS Working Papers W12/09, Institute for Fiscal Studies.
    2. Lucie Schmidt & Purvi Sevak, 2006. "Taxes, Wages, and the Labor Supply of Older Americans," Working Papers wp139, University of Michigan, Michigan Retirement Research Center.
    3. Gopi Shah Goda & John B. Shoven & Sita Nataraj Slavov, 2012. "Does Stock Market Performance Influence Retirement Intentions?," Journal of Human Resources, University of Wisconsin Press, vol. 47(4), pages 1055-1081.
    4. Jacob S. Hacker & Gregory A. Huber & Austin Nichols & Philipp Rehm & Mark Schlesinger & Rob Valletta & Stuart Craig, 2014. "The Economic Security Index: A New Measure for Research and Policy Analysis," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(S1), pages 5-32, May.
    5. Courtney Coile, 2009. "Comment on "The Effect of Large Capital Gains or Losses on Retirement"," NBER Chapters,in: Developments in the Economics of Aging, pages 164-171 National Bureau of Economic Research, Inc.
    6. Courtney C. Coile & Phillip B. Levine, 2006. "Bulls, Bears, and Retirement Behavior," ILR Review, Cornell University, ILR School, vol. 59(3), pages 408-429, April.
    7. John Ameriks & Andrew Caplin & Minjoon Lee & Matthew D. Shapiro & Christopher Tonetti, 2015. "The Wealth of Wealthholders," NBER Working Papers 20972, National Bureau of Economic Research, Inc.

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