Why Old Age Poverty Matters: Evidence from Consumption Responses to Income Shocks 

72 Pages Posted: 13 Dec 2024 Last revised: 20 Dec 2024

See all articles by Yunho Cho

Yunho Cho

Institute for Economic and Social Research, Jinan University

Jiseob Kim

Yonsei University; Korea Development Institute (KDI)

Julie Kim

University of Wisconsin - Madison, Students

Date Written: November 25, 2024

Abstract

This paper investigates consumption responses to idiosyncratic income shocks, focusing on the elderly in Korea---an economy with the highest old-age poverty rate among developed nations. Using a semi-structural model of income and consumption dynamics alongside household survey data from Korea, the U.S., and Australia, we find that Korean elderly households exhibit consumption responses to permanent income shocks that are 30 percentage points higher than those of middle-aged households in Korea and 57 percentage points higher than those of elderly households in the U.S. and Australia. These large consumption responses are primarily driven by the low wealth elderly, who lack sufficient self-insurance. Our findings emphasize the significant role of poverty, which remains highly persistent throughout the life cycle in Korea, in undermining the elderly's ability to maintain consumption insurance, thereby deteriorating their welfare. Furthermore, our results highlight the critical role of government transfers in providing consumption insurance for the elderly.

Keywords: Consumption Responses, Income Risks, Old-Age Poverty JEL codes: C13, C33, D12, D14, E21, J14

Suggested Citation

Cho, Yunho and Kim, Jiseob and Kim, Julie, Why Old Age Poverty Matters: Evidence from Consumption Responses to Income Shocks  (November 25, 2024). Available at SSRN: https://ssrn.com/abstract=5032583 or http://dx.doi.org/10.2139/ssrn.5032583

Yunho Cho (Contact Author)

Institute for Economic and Social Research, Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

Jiseob Kim

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

Korea Development Institute (KDI) ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

Julie Kim

University of Wisconsin - Madison, Students ( email )

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