How large is the retirement Consumption Drop in Italy? Erich battistin Agar brugiavini Enrico rettore Guglielmo Weber
How Large is the Retirement Consumption Drop in Italy? Erich Battistin Agar Brugiavini Enrico Rettore Guglielmo Weber
Motivation wadb According to the life-cycle permanent income Hi consumers decide how much to consume, keeping in mind their future prospects They form intertemporal plans aimed at smoothing the (discounted )marginal utility of consumption over the life cycle Any period to period change in the actual level of the marginal utility of consumption is uncorrelated with past information available to the household. That is ,it should be a result of unpredictable shocks
Motivation • According to the life-cycle permanent income Hp consumers decide how much to consume, keeping in mind their future prospects • They form intertemporal plans aimed at smoothing the (discounted) marginal utility of consumption over the life cycle • Any period to period change in the actual level of the marginal utility of consumption is uncorrelated with past information available to the household. That is, it should be a result of unpredictable shocks
Motivation wadb This holds true also around retirement age: any change in the marginal utility of consumption should be uncorrelated with planned retirement behaviour Recent micro evidence has emphasized that there is a one-off drop in consumption at the time of retirement that might be hard to reconcile with life-time optimizing behaviour(see for example Banks et al 1998. Bernheim et al. 2001 This is known as the retirement consumption puzzle
Motivation • This holds true also around retirement age: any change in the marginal utility of consumption should be uncorrelated with planned retirement behaviour. • Recent micro evidence has emphasized that there is a one-off drop in consumption at the time of retirement that might be hard to reconcile with life-time optimizing behaviour (see for example Banks et al., 1998, Bernheim et al., 2001). • This is known as the retirement consumption puzzle
Motivation wadb Some possible reasons mentioned in the literature changes in preferences due to increased lei Isure shocks inducing retirement and affecting the level of consumption reduction in work-related expenditures(transport meals out, clothing increase in home production of services and/or more efficient purchases unexpectedly low pensions or liquidity problems(not in italy though -think of severance pay uidazione
Motivation Some possible reasons mentioned in the literature: • changes in preferences due to increased leisure • shocks inducing retirement and affecting the level of consumption • reduction in work-related expenditures (transport, meals out, clothing) • increase in home production of services and/or more efficient purchases • unexpectedly low pensions or liquidity problems (not in Italy, though – think of severance pay - liquidazione!)
What others have done Banks, Blundell and Tanner(1998)use repeated cross section data from the fes -they estimate log- linear Euler equations from cohort data by iv(using lagged interest rates, consumption and income growth as instruments) and find unexplained negative residuals around typical male retirement ages(60-67) he largest residual obtains at age 63(1.5% Altogether, cumulated residual are in the 8-10% region Non-separabilities between leisure and consumption can explain only part of the drop
What Others Have Done • Banks, Blundell and Tanner (1998) use repeated cross section data from the FES – they estimate loglinear Euler equations from cohort data by IV (using lagged interest rates, consumption and income growth as instruments) and find unexplained negative residuals around typical male retirement ages (60-67). • The largest residual obtains at age 63 (1.5%). Altogether, cumulated residual are in the 8-10% region. • Non-separabilities between leisure and consumption can explain only part of the drop