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Can Unexpected Retirement Explain the Retirement-Consumption Puzzle? Evidence for Subjective Retirement Expectations

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by Melvin Stephens Jr. and Steven J. Haider August 2003

WP#2003-15  

Abstract

Previous research finds a systematic fall in consumption at retirement, even when these retirements are expected, which implies households do not behave as predicted by the lifecycle/ permanent income hypothesis. However, the worker’s expected date of retirement is typically predicted using an instrument - age - that we show to be correlated with unexpected retirements and will therefore lead to biased estimates. In this paper, we use an alternative instrument for expected retirement: workers’ own subjective beliefs of their expected retirement dates. We find that subjective retirement expectations provide strong predictive power for subsequent retirements above and beyond the impact of age on retirement probabilities. We still find, however, that consumption falls for workers who retire when expected although the estimated impact is 50 percent smaller when using retirement expectations as an instrument instead of age.

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Melvin Stephens Jr. is a professor at Carnegie Mellon University. Steven J. Haider is a professor at Michigan State University. The research reported herein was supported by the Center for Retirement Research at Boston College pursuant to a grant from the U.S. Social Security Administration funded as part of the Retirement Research Consortium. The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of the Social Security Administration or any agency of the Federal Government or the Center for Retirement Research at Boston College. The authors would like to thank Kerwin Charles and participants at the 2003 Retirement Research Consortium Conference for useful comments.