The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement

Abstract

The simple one-good model of life-cycle consumption requires "consumption smoothing." However, British and U.S. households apparently reduce consumption at retirement and the reduction cannot be explained by the life-cycle model. An interpretation is that retirees are surprised by the inadequacy of resources. This interpretation challenges the life-cycle model where consumers are forward looking. However, data on anticipated consumption changes at retirement and on realized consumption changes following retirement show that the reductions are fully anticipated. Apparently the decline is due to the cessation of work-related expenses and the substitution of home production for market-purchased goods and services.

Back to Work: Expectations and Realizations of Work after Retirement

“…Third, among those with unfulfilled work expectations, the evidence points to the arrival of positive news about financial position after retirement (though not driven by the stock market gains) and/or negative news about health. These results complement evidence from studies of consumption behavior that suggest actual retirement turns out better than expected for most people (Forni 1999 ; Hurd and Rohwedder 2003; Mastrogiacomo 2003). Fourth, among the minority with unfulfilled expectations of leisure, the evidence points to the arrival of negative news about preferences for retirement leisure, rather than negative news about financial position.…”

“… 1 A growing literature has examined whether such shocks can explain the seemingly “irrational” drops in consumption spending after retirement known as the retirement-consumption puzzle (Banks, Blundell, and Tanner 1998; Haider and Stephens 2004; Hurd and Rohwedder 2003; Smith 2004). …”

The Retirement Consumption Puzzle: Evidences for Brazil and the State of Rio Grande Do Sul

“…In this case household consumption should be constant over time and not change at retirement (HAI-DER;STEPHENS JR., 2007). However, several studies have founded evidences which challenges the implications of LCPIT showing that consumption tends to decrease at retirement (HAMERMESH, 1984;FAIR;DOMINGUEZ, 1991;BANKS;BLUNDELL;TANNER, 1998;BERNHEIM;SKINNER;WEINBERG, 2001;HURD;ROHWEDDER, 2003;SCHWERDT, 2005;HAIDER;STEPHENS JR., 2007;BAT-TISTIN et al, 2009;LI;CHI;WU, 2015).…”

“…The explanation for this phenomenon would be that the marginal utility of consumption, and not consumption itself, would be smoothed over time, so that changes in family size, number of workers (economically active individuals), mortality or population aging may adjust the marginal utility consumption and cause consumption to fall at advanced ages. Furthermore, the reduction in consumption could also be explained by limitations in households' knowledge to forecast their correct permanent income and by the substitution effect between consumption and leisure which tends to increase over the time (HURD;ROHWEDDER, 2003;SMITH, 2004).…”

“…while other tends to be less favored (food, clothing, transportation, etc.). The effect of demographic change on household consumption is another important channel affecting economic system and some studies have found a retirement consumption puzzle, evidencing that household consumption tends to decrease at the retirement (HAMERMESH, 1984;FAIR;DOMINGUEZ, 1991;BANKS;BLUNDELL;TANNER, 1998;BERNHEIM;SKINNER;WEINBERG, 2001;HURD;ROHWEDDER, 2003;SCHWERDT, 2005;HAIDER;STEPHENS JR., 2007;BATTISTIN et al, 2009;LI;CHI;WU, 2015). This result challenges the implications of the life cycle/permanent income hypothesis by which rational households should be saving adequately for retirement and their consumption would be expected to not reduce.…”