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The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement

  • Michael Hurd
  • Susann Rohwedder

The simple one-good model of life-cycle consumption requires "consumption smoothing." However, British and U.S. households apparently reduce consumption at retirement and the reduction cannot be explained by the life-cycle model. An interpretation is that retirees are surprised by the inadequacy of resources. This interpretation challenges the life-cycle model where consumers are forward looking. However, data on anticipated consumption changes at retirement and on realized consumption changes following retirement show that the reductions are fully anticipated. Apparently the decline is due to the cessation of work-related expenses and the substitution of home production for market-purchased goods and services.

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File URL: http://www.rand.org/content/dam/rand/pubs/drafts/2008/DRU3009.pdf
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Paper provided by RAND Corporation Publications Department in its series Working Papers with number 03-12.

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Length: 33 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:ran:wpaper:03-12
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  1. John Ameriks & Andrew Caplin & John Leahy, 2002. "Retirement Consumption: Insights from a Survey," NBER Working Papers 8735, National Bureau of Economic Research, Inc.
  2. Hamermesh, Daniel S, 1984. "Life-Cycle Effects on Consumption and Retirement," Journal of Labor Economics, University of Chicago Press, vol. 2(3), pages 353-70, July.
  3. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-88, September.
  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  5. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 1997. "What Accounts for the Variation in Retirement Wealth Among U.S. Households?," NBER Working Papers 6227, National Bureau of Economic Research, Inc.
  6. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  7. 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.
  8. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
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