The Retirement Consumption Puzzle: Actual Spending Change in Panel Data

50 Pages Posted: 11 Apr 2008 Last revised: 25 Jul 2010

See all articles by Michael D. Hurd

Michael D. Hurd

RAND Corporation; State University of New York at Stony Brook - College of Arts and Science - Department of Economics; National Bureau of Economic Research (NBER)

Susann Rohwedder

RAND Corporation

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Date Written: April 2008

Abstract

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, we 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. We conclude that at the population level there is no retirement consumption puzzle in our data, and that in subpopulations where there were substantial declines, conventional economic theory can provide the main explanation.

Suggested Citation

Hurd, Michael D. and Rohwedder, Susann, The Retirement Consumption Puzzle: Actual Spending Change in Panel Data (April 2008). NBER Working Paper No. w13929, Available at SSRN: https://ssrn.com/abstract=1119220

Michael D. Hurd (Contact Author)

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State University of New York at Stony Brook - College of Arts and Science - Department of Economics ( email )

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Susann Rohwedder

RAND Corporation ( email )

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