Working Paper: NBER ID: w12341
Authors: Gary D. Hansen; Selahattin Mrohoroglu
Abstract: We explore the quantitative implications of uncertainty about the length of life and a lack of annuity markets for life cycle consumption in a general equilibrium overlapping generations model in which markets are otherwise complete. Empirical studies find that consumption tends to rise early in life, peak around age 45-55, and to decline after that. Our calibrated model exhibits life cycle consumption that is consistent with this pattern. This follows from the fact that, due to a lack of annuity markets, households discount the future more heavily as they age and their probability of survival falls. Once an unfunded social security system is introduced, the profile is still hump shaped, but the decline in consumption does not begin until after retirement in our base case. Adding a bequest motive causes this decline to begin at a younger age.
Keywords: Life Cycle Consumption; Annuities; Social Security; General Equilibrium Model
JEL Codes: E21; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of annuity markets (G19) | hump-shaped consumption profile (D15) |
| lack of annuity markets (G19) | effective discount rate increases with age (D15) |
| effective discount rate increases with age (D15) | decline in consumption over time (D15) |
| social security (H55) | maintains hump shape of consumption profile (D15) |
| social security (H55) | delays onset of consumption decline after retirement (D15) |
| bequest motive (D64) | consumption starts declining at a younger age (D15) |