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Life-Cycle Effects on Consumption and Retirement

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  • Daniel S. Hamermesh

Abstract

The effects on consumption and retirement of characteristics of the life cycle, especially the length of the horizon, are examined. At any given age people will work more and consume less if they expect to live longer. This and other propositions are tested on several sets of data. The Terman sample of gifted individuals (320 in 1972, 228 in 1977) is used to relate work status to the length of the horizon, as proxied by parents' longevity. The results suggest the expected positive effect on effort, but its magnitude is quite small. The panel from the Retirement History Survey is used, and life-cycle effects on consumption and retirement are estimated jointly for 1973 and 1975. There is a weak small effect of a more distant horizon (proxied by the number of living parents) in increasing work effort and a stronger, but still fairly small effect in reducing consumption; goods and leisure are consumed jointly, suggesting their complementarity in household production; and spending propensities out of Social Security wealth are far below those out of pension wealth. The small effect of changes in the horizon on work effect suggests the rapid secular increase in longevity has produced a disproportionate increase in people's lifetime demand for leisure. The implied small increase in lifetime income and the slight reduction in consumption among persons with longer horizons indicate that increased longevity has not been met with sufficient spending cuts to enable people to maintain real consumption over their longer lifetimes.

Suggested Citation

  • Daniel S. Hamermesh, 1982. "Life-Cycle Effects on Consumption and Retirement," NBER Working Papers 0976, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0976
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    2. Tetsuji Yamada & Tadashi Yamada, 1987. "Social Security and Earlier Retirement in Japan: Cross-Sectional Evidence," NBER Working Papers 2442, National Bureau of Economic Research, Inc.
    3. Nivorozhkina, Ludmila & Nivorozhkin, Anton & Abazieva, Kamilla, 2010. "Drop in consumption associated with retirement. The regression discontinuity design approach," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 19(3), pages 112-126.
    4. Yamada, Tetsuji, 1990. "The effects of Japanese social security retirement benefits on personal saving and elderly labor force behavior," Japan and the World Economy, Elsevier, vol. 2(4), pages 327-363, December.
    5. Rainer Winkelmann, 2002. "Subjektive Daten in der empirischen Wirtschaftsforschung: Probleme und Perspektiven," SOI - Working Papers 0207, Socioeconomic Institute - University of Zurich, revised Jul 2002.
    6. Susan Pozo & Stephen A. Woodbury, 1986. "Pensions, Social Security, and Asset Accumulation," Eastern Economic Journal, Eastern Economic Association, vol. 12(3), pages 273-281, Jul-Sep.
    7. Gensowski, Miriam, 2014. "Personality, IQ, and Lifetime Earnings," IZA Discussion Papers 8235, Institute of Labor Economics (IZA).
    8. Manuel Flores & Melchor Fernández, 2011. "Age discrimination on wages as a determinant of older workers - labour participation in Spain (refereed paper)," ERSA conference papers ersa10p1176, European Regional Science Association.
    9. Gensowski, Miriam, 2018. "Personality, IQ, and lifetime earnings," Labour Economics, Elsevier, vol. 51(C), pages 170-183.
    10. Florina Salaghe & Dimitra Papadovasilaki & Federico Guerrero & James Sundali, 2020. "Temptation and Retirement Accounts: A Story of Time Inconsistency and Bounded Rationality," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 6(3), pages 173-198, April.
    11. Michael Hurd & Susann Rohwedder, 2003. "The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement," NBER Working Papers 9586, National Bureau of Economic Research, Inc.
    12. Francesca Carta & Marta De Philippis, 2021. "Working horizon and labour supply: the effect of raising the full retirement age on middle-aged individuals," Temi di discussione (Economic working papers) 1314, Bank of Italy, Economic Research and International Relations Area.
    13. Michael Perry, 2005. "Estimating Life Cycle Effects of Survival Probabilities in the Health and Retirement Study," Working Papers wp103, University of Michigan, Michigan Retirement Research Center.
    14. Ioannis Laliotis & Mujaheed Shaikh & Charitini Stavropoulou & Dimitrios Kourouklis, 2019. "Retirement and Household Expenditure in Turbulent Times," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 137, Hellenic Observatory, LSE.
    15. Anton Nivorozhkin & Ludmila Nivorozhkina & Kamila Abazieva, 2013. "Expenditures and Income Adequacy at Retirement," Economics Bulletin, AccessEcon, vol. 33(3), pages 2017-2023.
    16. Nicolas Drouhin, 2018. "Theoretical considerations on the retirement consumption puzzle and the optimal age of retirement," Working Papers halshs-01767096, HAL.
    17. Boman, Anders, 2015. "Spending time together? Effects on the retirement decision from partner’s labour market status," Working Papers in Economics 618, University of Gothenburg, Department of Economics.
    18. Pecchenino, Rowena A & Pollard, Patricia S, 1997. "The Effects of Annuities, Bequests, and Aging in an Overlapping Generations Model of Endogenous Growth," Economic Journal, Royal Economic Society, vol. 107(440), pages 26-46, January.
    19. Olivia S. Mitchell, 1982. "The Labor Market Impact of Federal Regulation: OSHA, ERISA, EEO, and Minimum Wage," NBER Working Papers 0844, National Bureau of Economic Research, Inc.
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    21. Anders, Sven M., 2010. "Ageing And Consumption – The Impact Of Demographic Change On Food Expenditure Patterns," 115th Joint EAAE/AAEA Seminar, September 15-17, 2010, Freising-Weihenstephan, Germany 116442, European Association of Agricultural Economists.

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