Working Paper: NBER ID: w13929
Authors: Michael D. Hurd; Susann Rohwedder
Abstract: The simple one-good model of life-cycle consumption requires that consumption be continuous over retirement; yet prior research based on partial measures of consumption or on synthetic panels indicates that spending drops at retirement, a result that has been called the retirement-consumption puzzle. Using panel data on total spending, nondurable spending and food spending, we find that spending declines at small rates over retirement, at rates that could be explained by mechanisms such as the cessation of work-related expenses, unexpected retirement due to a health shock or by the substitution of time for spending. In the low-wealth population where spending did decline at higher rates, the main explanation for the decline appears to be a high rate of early retirement due to poor health. We conclude that at the population level there is no retirement consumption puzzle in our data, and that in subpopulations where there were substantial declines, conventional economic theory can provide the main explanation.
Keywords: Retirement; Consumption; Panel Data
JEL Codes: D91; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| retirement status (J26) | spending changes (H59) |
| cessation of work-related expenses (J32) | spending changes (H59) |
| unexpected retirement due to health shocks (J26) | spending changes (H59) |
| low wealth (I32) | unexpected early retirement due to health shocks (J26) |