Working Paper: NBER ID: w10257
Authors: Steven J. Haider; Melvin Stephens Jr.
Abstract: Previous research finds a systematic decrease in consumption at retirement, a finding that is inconsistent with the Life-Cycle/Permanent Income Hypothesis if retirement is an expected event. In this paper, we use workers' subjective beliefs about their retirement dates as an instrument for retirement. After demonstrating that subjective retirement expectations are strong predictors of subsequent retirement decisions, we still find a retirement consumption decline for workers who retire when expected. However, our estimates of this consumption fall are about a third less than those found when we instead rely on the instrumental variables strategy used in prior studies. Finally, we examine a number of hypotheses that have been put forward to explain the retirement consumption decline. We find little empirical support for these explanations in our data.
Keywords: retirement; consumption; lifecycle hypothesis
JEL Codes: D84; D91; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| age (J14) | actual retirement decisions (J26) |
| expected retirement (J26) | consumption changes (E21) |
| subjective retirement expectations (J26) | actual retirement decisions (J26) |
| subjective retirement expectations (J26) | consumption changes (E21) |
| retirement (J26) | consumption decline (E21) |