Changes in Consumption at Retirement: Evidence from Panel Data

Households' joint consumption spending and home production responses to retirement in the US

We analyze the effect of retirement on households' joint consumption spending and home production decisions using a micro panel with detailed spending and time use categories of US households. For causal identification, we use panel data regressions. Our results suggest that the spending drop at retirement is partially compensated by increases in home production of the retiring household member. Home production can particularly make up for losses in spending categories that are well-substitutable by home production, although only about 12% of total pre-retirement consumption spending, but there is no evidence that households fully replace consumption spending at retirement. In a Life-Cycle Model, we find no empirical evidence for full consumption smoothing at retirement.

Does home production replace consumption spending? Evidence from shocks in housing wealth in the Great Recession

Becker's theory of home production suggests substitutability between consumption spending and home production. Using panel data with detailed information on spending and time use, we analyze house-holds' ability to replace consumption spending by home produced counterparts. Keeping wages fixed and changing lifetime resources by the shock to housing wealth during the Great Recession we estimate an elasticity of substitution that is consistent with a Life-Cycle Becker model. However, we estimate that only about 11% of total spending is replaceable by home production, which, in contrast to prior literature, makes it unlikely that home production fully mitigates the consequences of wealth shocks to well-being.

Retirement Consumption Puzzle in Malaysia: Evidence from Bayesian Quantile Regression Model

The objective of this study is to use the Bayesian quantile regression for studying the retirement consumption puzzle, which is defined as the drop in consumption upon retirement, using the cross-sectional data of the Malaysian Household Expenditure Survey (HES) 2009/2010. Three different measures of consumption, namely, total expenditure, work-related expenditure, and nonwork-related expenditure, are suggested for studying the retirement consumption puzzle. The results show that the drop in consumption upon retirement is significant and has a regressive distributional effect as indicated by larger drops at lower percentiles and smaller drops at higher percentiles. The smaller drops among higher consumption retirees (or higher income retirees) may imply that they have more savings and/or retirement benefits than the smaller consumption retirees (or lower income retirees). Comparison between the three types of consumption shows that the work-related expenditure has a uniform drop across the distribution. The drop under the nonwork-related expenditure varies across the distribution, implying that it is the source behind the variation of the consumption drop.

Health care utilization at retirement: The role of the opportunity cost of time

We investigate the causal impact of retirement on health care utilization using SHARE data for 10 European countries. We show that the number of doctor's visits and the probability of visiting a doctor more than four times a year (our measures of health care utilization) increase after retirement. The increase in health care utilization is found to depend mainly on the years spent in retirement, suggesting that adjustment may take time. We find evidence of heterogeneous effects by gender and across different patterns of time use prior to retirement (i.e., working long hours and combined work and out-of-work activities). Overall, the empirical findings suggest that the increase in health care utilization is consistent with the decrease in the opportunity cost of time faced by individuals when they retire.

Consumption-portfolio choice with subsistence consumption and risk aversion change at retirement

This paper considers subsistence consumption of an economic agent both before and after retirement in analyzing the optimal consumption, portfolio, and retirement problem. We allow the relative risk aversion of the economic agent to make a one-off jump at retirement. With a Cobb-Douglas utility function, we obtain explicit expressions for the optimal policies. Numerical results show that, whereas post-retirement subsistence consumption tends to delay retirement, pre-retirement subsistence consumption and the magnitude of jump in relative risk aversion may stimulate early retirement. Also, the consumption drop at retirement deepens as post-retirement subsistence consumption increases, but it weakens as pre-retirement subsistence consumption increases.

Heterogeneity in spending change at retirement

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 at retirement, 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. We find substantial heterogeneity in spending change at retirement: in the upper half of the wealth distribution spending increased. In the low-wealth population where spending did decline at higher rates, the main explanation for the decline appears to be early retirement due to poor health, possibly augmented by a short planning horizon by a minority of the population.