Housing in Retirement Across Countries

Abstract

The "retirement saving puzzle" in the literature is a phenomenon in which many U.S.households have significant wealth late in life, contrary to the predictions of a simple life-cycle model. In this project, we examine cross-country differences in the saving behavior of retirees in order to weigh in on the discussion of the puzzle. First, we find that countries in our sample vary noticeably in terms of the extent of the puzzle: one group of countries, in South and Central Europe, look like the United States, while in Northern Europe, retirees spend down their wealth much more rapidly. Second, it appears that the rate of dissaving in retirement is correlated with the extent of public coverage of healthcare and long-term care, and these differences in saving happen predominantly through dissaving of financial assets, while housing assets are less affected. In a quantitative experiment using a life-cycle model of saving in retirement, we measure the role of out-of-pocket medical spending risk in accounting for differences in observed saving patterns among retirees in the United States and Sweden, considering housing and financial assets separately. The model predicts that this risk accounts, on average across age, for one-half of the difference in median net worth between United States and Sweden, and for about 70 percent of the difference in median financial assets. The role of risk diminishes with age, and is seen primarily in financial asset saving, while housing assets do not appear to respond to spending risk, suggesting that housing is not a precautionary asset.

Comparing Retirement Wealth Trajectories on Both Sides of the Pond

“…These comparisons suggest that the nature of housing as an asset – its utility value, illiquidity, and mix of risk and returns – is likely to be an important factor in explaining the trajectory of wealth in retirement. This is in line with the findings of Nakajima and Telyukova ( and ) and contrary to the findings of Skinner (). In this analysis, we do not quantify the relative importance of housing versus other factors driving retirement saving, such as bequest motives or saving to insure against the risk of living long and having high medical spending.…”

The Retirement‐savings Puzzle Reviewed: The Role of Housing and Bequests

“…In addition, they also find that economic reasons can play a role, since, after controlling for country characteristics and family transitions, retirees that are cash‐poor and house‐rich are the most likely to downsize their housing asset. These findings are also reflected in the study by Nakajima and Telyukova (), who also conduct a European‐level cross‐country empirical comparison of the evolution of HER, and link it with the literature on the RSP.…”

“…Their model is also introduced in Nakajima and Telyukova (), where, in addition to exposing the model, they also conduct a European‐level cross‐country empirical comparison of the RSP and the evolution of HER.…”

Comparing Retirement Wealth Trajectories on Both Sides of the Pond

“…Furthermore, they find that households would choose to reduce house maintenance (at the cost of declining equity values) if given the option -suggesting that households would choose to decumulate housing wealth if it were more liquid. In subsequent work, Nakajima and Telyukova (2013), demonstrate that if medical expense risk were lower, then asset decumulation would be predicted to be faster, but predominantly through faster decumulation of nonhousing assets. This suggests that housing is not acting as a precautionary asset.…”