(Un)expected Retirement and the Consumption Puzzle
15 Pages Posted: 28 Feb 2012
Date Written: October 1, 2011
In this work we revisit the retirement consumption puzzle using Italian panel data. As emphasized in the literature, the observed consumption drop might be due to unexpected wealth shocks at retirement, which modify optimal consumption plans. Using an Euler equation approach, we test the impact of unexpected retirement on the consumption patterns of individuals around the age of retirement by using the panel component of the Survey of Household Income and Wealth (SHIW). This data set contains information on the expected age of retirement, which can be used to distinguish between expected and unexpected retirement. We furthermore investigate the heterogeneous behaviour of individuals with different levels of education and wealth. We find evidence of a consumption drop at retirement, especially for low-educated people and individuals with low wealth. The consumption drop at retirement seems to be rationally planned by individuals, rather than a response to unexpected retirement.
Keywords: Consumption, life cycle, retirement puzzle, unexpected retirement
JEL Classification: D91, J26
Suggested Citation: Suggested Citation