Abstract
Foreseeable income reductions around retirement should not affect aggregate consumption. However, given higher leisure endowments after retirement, theory also predicts lower consumption of leisure substitutes. To avoid misinterpreting this predicted drop as a puzzle, our novel approach focuses on housing consumption (complementary to leisure in utility) and controls for leisure changes. In Germany tenants represent roughly half of all households, making many housing expenditures directly observable in micro data. We find significant negative impacts of the retirement status on housing consumption, which is hard to reconcile with life-cycle theory. Despite the lock-in nature of past housing decisions, income reductions at retirement have additional – though small – effects on housing.
Highlights
Do people save too little? Or more precisely, do they undersave compared to the benchmark prediction of the standard life-cycle model pioneered and formalized byM
We have argued that predictions of the life-cycle hypothesis must be interpreted conditionally on the large increase of available leisure at retirement, a theoretical insight which is often neglected in the literature
Based on the behavior of 55 to 75-year old men in the German SOEP we first found that retirement events have a significant effect on moving to cheaper homes and/or moving for cost reasons in a panel econometric analysis
Summary
Do people save too little? Or more precisely, do they undersave compared to the benchmark prediction of the standard life-cycle model pioneered and formalized by. The novelty of our approach revolves around our focus on housing consumption and explicitly taking into account the discontinuous increase of available leisure time.2 These expenditures cannot be substituted by the increased leisure after retirement. 769) conclude after analyzing UK micro data: “We argue that the only way to reconcile fully the fall in consumption with the life-cycle hypothesis is with the systematic arrival of unexpected adverse information.”. Lührmann (2010) refined those findings for Germany by combining both consumer expenditures and time use data pre and post retirement She reveals a significant drop in expenses at retirement which coincides with an increase in time spent on home production. (In our specific subgroup of older men the ownership rate is somewhat higher, at 58%.) This has the advantage that housing expenditures are directly observable for many households as rents paid For this reason we analyze only nonhome owners.
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