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Economic Adjustment of Recent Retirees to Adverse Wealth Shocks

  • Gabor Kezdi

    (Central European University)

  • Purvi Sevak

    (Hunter College)

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.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp075.pdf
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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp075.

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Length: 33 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:mrr:papers:wp075
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  1. N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
  2. Michael D. Hurd & James P. Smith, 1999. "Anticipated and Actual Bequests," NBER Working Papers 7380, National Bureau of Economic Research, Inc.
  3. Alan B. Krueger & Jorn-Steffen Pischke, 1991. "The Effect of Social Security on Labor Supply: A Cohort Analysis of the Notch Generation," NBER Working Papers 3699, National Bureau of Economic Research, Inc.
  4. Purvi Sevak, 2002. "Wealth Shocks and Retirement Timing: Evidence from the Nineties," Working Papers wp027, University of Michigan, Michigan Retirement Research Center.
  5. Karen E. Dynan & Dean M. Maki, 2001. "Does stock market wealth matter for consumption?," Finance and Economics Discussion Series 2001-23, Board of Governors of the Federal Reserve System (U.S.).
  6. Melvin Stephens, 2004. "Job Loss Expectations, Realizations, and Household Consumption Behavior," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 253-269, February.
  7. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
  8. 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.
  9. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-88, September.
  10. Joseph G. Altonji & Aloysius Siow, 1986. "Testing the Response of Consumption to Income Changes with (Noisy) PanelData," NBER Working Papers 2012, National Bureau of Economic Research, Inc.
  11. Michael Hurd & James P. Smith, 2002. "Expected Bequests and Their Distribution," NBER Working Papers 9142, National Bureau of Economic Research, Inc.
  12. Kathryn Anderson & Richard V. Burkhauser & Joseph F. Quinn, 1986. "Do retirement dreams come true? The effect of unanticipated events on retirement plans," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 39(4), pages 518-526, July.
  13. Alicia H. Munnell & Annika Sunden & Elizabeth, 2002. "How Important Are Private Pensions?," Issues in Brief ib-8, Center for Retirement Research.
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