Abstract

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Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers


Erik Hurst


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

September 1, 2004

Michigan Retirement Research Center Research Paper No. WP 2004-088

Abstract:     
This paper shows that households who enter retirement with low wealth consistently followed non-permanent income consumption rules during their working years. Using the Panel Study of Income Dynamics (PSID), household wealth in 1989 is predicted for a sample of 50-65 year olds using both current and past income, occupation, demographic, employment, and health characteristics. Using the residuals from this first stage regression, the sample of pre-retired households is subsetted into households who save 'lower' than predicted and all other households. By construction, these households had similar opportunities to save; the average household in both these sub-samples are very similar along all observable income and demographic characteristics. It is then shown that households in the low wealth residual sample had much larger declines in consumption upon retirement. Such a result is consistent with the household having inadequately planned for retirement. The panel component of the PSID is then used to analyze the consumption behavior of these households early in their lifecycle. It is shown that these low pre-retirement wealth households had consumption growth that responded to predictable changes in income during their early working years. No such behavior was found among the other pre-retired households. Moreover, the low wealth residual households responded both to predictable income increases as well as predictable income declines, a result that is inconsistent with a liquidity constraints explanation. After ruling out other theories of consumption to explain these facts, it is concluded that households who entered retirement with lower than predicted wealth consistently followed near sighted consumption plans during their working lives.

Number of Pages in PDF File: 49

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Date posted: February 14, 2008  

Suggested Citation

Hurst, Erik, Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers (September 1, 2004). Michigan Retirement Research Center Research Paper No. WP 2004-088. Available at SSRN: http://ssrn.com/abstract=1092963 or http://dx.doi.org/10.2139/ssrn.1092963

Contact Information

Erik Hurst (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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