Consumption Behavior, Annuity Income and Mortality Risk of the Elderly

Abstract

Previous studies find that individuals do not draw down their assets after retirement which is at odds with the predictions of a simple life cycle model without uncertainty. Hurd (1989, 1999) explains saving behavior of elderly singles and couples by adding lifetime uncertainty and bequest motives to the simple life cycle model. In this paper we aim to test whether predictions of the models proposed by Hurd (1989, 1999) hold for a sample of elderly Americans. We also extend the theoretical model of Hurd (1999) for couples. We use data taken from the Health and Retirement Study (HRS) supplemented with the Consumption and Activities Mail Survey (CAMS). In line with theory we find that, on average, individuals’ total consumption is greater than their annuity income after retirement and the difference between total consumption and annuity income increases with the wealth level. Our results also suggest that consumption growth decreases with higher mortality rates for elderly singles. On the other hand, for elderly couples, consumption growth does not respond to changes in the mortality risk of the couple.