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Changes in Consumption and Activities in Retirement

  • Michael D. Hurd

    (RAND and NBER)

  • Susann Rohwedder

    (RAND)

The simple one-good model of life-cycle consumption requires “consumption smoothing.” According to previous results based on partial spending and on synthetic panels, British and U.S. households apparently reduce consumption at retirement. The reduction cannot be explained by the simple one-good life-cycle model, so it has been referred to as the retirement-consumption puzzle. An interpretation is that at retirement individuals discover they have fewer economic resources than they had anticipated prior to retirement, and as a consequence reduce consumption. This interpretation challenges the life-cycle model where consumers are assumed to be forward looking. Using panel data on anticipated consumption changes at retirement and on recollected consumption changes following retirement, we find that the median recollected change in spending at retirement is zero and that the recollections are broadly consistent with anticipations. Based on a measure of total spending in true panel we find that the actual mean and median changes are slightly positive. Therefore, we find no retirement-consumption puzzle.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp096.

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Length: 30 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:mrr:papers:wp096
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  1. Blau, David M., 2007. "Retirement and Consumption in a Life Cycle Model," IZA Discussion Papers 2986, Institute for the Study of Labor (IZA).
  2. Steven J. Haider & Melvin Stephens, 2007. "Is There a Retirement-Consumption Puzzle? Evidence Using Subjective Retirement Expectations," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 247-264, May.
  3. Mark Aguiar & Erik Hurst, 2004. "Consumption vs. Expenditure," NBER Working Papers 10307, National Bureau of Economic Research, Inc.
  4. John Rust, 1989. "Behavior of male workers at the end of the life-cycle: an empirical analysis of states and controls," Discussion Paper / Institute for Empirical Macroeconomics 6, Federal Reserve Bank of Minneapolis.
  5. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, vol. 91(4), pages 832-857, September.
  6. John Ameriks & Andrew Caplin & John Leahy, 2007. "Retirement Consumption: Insights from a Survey," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 265-274, May.
  7. Raffaele Miniaci & Chiara Monfardini & Guglielmo Weber, 2003. "Is there a retirement consumption puzzle in Italy?," IFS Working Papers W03/14, Institute for Fiscal Studies.
  8. 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.
  9. Michael Hurd & Susann Rohwedder, 2005. "The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement," Working Papers 242, RAND Corporation Publications Department.
  10. Sarah Smith, 2004. "Can the retirement consumption puzzle be solved?," IFS Working Papers W04/07, Institute for Fiscal Studies.
  11. Michael D. Hurd, 1993. "The Effect of Labor Market Rigidities on the Labor Force Behavior of Older Workers," NBER Working Papers 4462, National Bureau of Economic Research, Inc.
  12. Mark B. McClellan, 1998. "Health Events, Health Insurance, and Labor Supply: Evidence from the Health and Retirement Survey," NBER Chapters, in: Frontiers in the Economics of Aging, pages 301-350 National Bureau of Economic Research, Inc.
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