The Retirement-Consumption Puzzle and Unretirement

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This project uses data from the Health and Retirement Study which represents the population of Americans over age 50 and their spouses. We investigate the drop in consumption at retirement, i.e. the so-called retirement-consumption puzzle by taking into account the fact that individuals may go back to work after retirement. The evidence from the United States shows that about 26 percent of Americans re-enter the labor force following a retirement spell. Focusing on the consumption drop at retirement only may be misleading while unretirement among retirees is so prevalent. For example, those who retired earlier than expected due to unemployment may experience a negative income shock at retirement and therefore may choose to re-enter the labor force to finance their consumption after retirement. Therefore, in this project we investigate consumption behavior of retirees also after they re-enter the labor force. The findings show that moving back to the labor force after retirement is very common among older Americans and most of the unretirement transitions are anticipated before retirement. We also find that the amount of individuals’ accumulated savings at the time of retirement plays a role in the decision of unretirement, suggesting that arrival of new information after retirement regarding the financial situation may cause individuals to update their expectations of work during retirement. In contrast with the earlier studies in the literature, we do not find a significant drop in consumption at retirement when retirement is fully anticipated. Similarly, consumption does not respond to unretirement if it is fully anticipated. One of the reasons for this finding could be that post-retirement jobs pay much less than pre-retirement jobs and therefore individuals’ income does not increase significantly when they unretire. Overall, this project concludes that individuals are forward-looking and they have saved enough to smooth their consumption around retirement. The results of this project were presented at a number of conferences and published as Netspar Discussion paper No. DP 11/2014-049.

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