Abstract
Previous empirical studies have found that individuals do not draw down their assets after retirement which is at odds with the predictions of a simple life cycle model without uncertainty. Hurd (Econometrica 57(4):779–813, 1989; Mortality risk and consumption by couples, 1999) explains such saving behavior of retired singles and couples by adding lifetime uncertainty to the simple life cycle model. We tested whether predictions about consumption during retirement of this extended life cycle model hold for a sample of older Americans. We used data from the Health and Retirement Study supplemented with data from the Consumption and Activities Mail Survey. In line with theory we found that, on average, total consumption is greater than their annuity income after retirement and that this difference increases with the level of initial wealth. For older singles but not for couples our results suggest that, as predicted by the extended theoretical model of Hurd, the on average negative consumption growth decreases with higher mortality rates.
Highlights
A simple life cycle model without uncertainty predicts that rational agents’ level of consumption is determined by their lifetime income
While our findings suggest that consumption growth based on a subset of goods is lower for individuals with higher subjective mortality rates, as predicted by the life cycle model outlined in Sect. 2.1, subjective mortality risk does not explain consumption growth when based on all categories of nondurables
Previous studies have found that individuals do not draw down their assets after retirement which is at odds with the predictions of a simple life cycle model without uncertainty
Summary
A simple life cycle model without uncertainty predicts that rational agents’ level of consumption is determined by their lifetime income. Hurd (1999) developed a theoretical model to explain the consumption behavior of elderly couples His model takes into account the mortality risk of both spouses, allows for bequest motives and predicts that the (negative) growth rate of consumption declines at a faster rate as the mortality risk of the couple increases at advanced ages. The theoretical life cycle model for couples predicts that, unless individuals have a strong bequest motive, annuity income never exceeds consumption. We empirically test this prediction both for singles and couples by using 5 waves (2000, 2002, 2004, 2006, 2008) of the Health and Retirement Study (HRS) supplemented with the Consumption and Activities Mail Survey (CAMS).
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