Tuesday, May 18, 2010

Quick Lit: Retirement Consumption

One of the minor difficulties for the permanent income hypothesis is that consumption drops significantly when people retire. If people are fully rational, they should anticipate retirement and make small adjustments to their consumption well in advance of retirement so they can live the same lifestyle. Battistin, Brugiavini, Rettore, Weber show that the reason for a 10% drop in consumption is not liquidity problems, but reduced consumption of work-related expenses and leisure substitutes (meals out, clothing, transportation) and a drop in the number of grown children living with their parents. These changes alone count for more than half of the drop in consumption and what's left is not statistically different from 0.

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