By: Michael Hurd, Susann
Rohwedder – RAND
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, the authors 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.
They conclude that at the population level there is no retirement-consumption
puzzle in their data, and that in subpopulations where there were substantial
declines, conventional economic theory can provide the main explanation.
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