Working Paper: NBER ID: w17134
Authors: Jingjing Chai; Raimond Maurer; Olivia S. Mitchell; Ralph Rogalla
Abstract: The direct financial impact of the financial crisis has been to deal a heavy blow to investment-based pensions; many workers lost a substantial portion of their retirement saving. The financial sector implosion produced an economic crisis for the rest of the economy via high unemployment and reduced labor earnings, which reduced household contributions to Social Security and some private pensions. Our research asks which types of individuals were most affected by these dual financial and economic shocks, and it also explores how people may react by changing their consumption, saving and investment, work and retirement, and annuitization decisions. We do so with a realistically calibrated lifecycle framework allowing for time-varying investment opportunities and countercyclical risky labor income dynamics. We show that households near retirement will reduce both short- and long-term consumption, boost work effort, and defer retirement. Younger cohorts will initially reduce their work hours, consumption, saving, and equity exposure; later in life, they will work more, retire later, consume less, invest more in stocks, save more, and reduce their demand for private annuities.
Keywords: financial crisis; economic crisis; household consumption; portfolio choice; labor supply
JEL Codes: D1; G11; G23; G35; J14; J26; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Households near retirement (D14) | Reduce short- and long-term consumption (E21) |
| Households near retirement (D14) | Increase work effort (J29) |
| Households near retirement (D14) | Defer retirement (J26) |
| Younger cohorts (J19) | Reduce work hours (J22) |
| Younger cohorts (J19) | Reduce consumption (D10) |
| Younger cohorts (J19) | Reduce saving (E21) |
| Younger cohorts (J19) | Reduce equity exposure (G12) |
| Younger cohorts (J19) | Work more in the long run (J29) |
| Younger cohorts (J19) | Retire later (J26) |
| Younger cohorts (J19) | Consume less (D19) |
| Younger cohorts (J19) | Invest more in stocks (G11) |
| Younger cohorts (J19) | Save more (Y60) |
| Younger cohorts (J19) | Reduce demand for private annuities (G52) |