Housing in Retirement Across Countries

Abstract

The “retirement saving puzzle” is a phenomenon in which many U.S. households have significant wealth late in life, contrary to the predictions of a simple life-cycle model.  In this project, we examine cross-country differences in the saving behavior of retirees in order to weigh in on the discussion of the puzzle.  First, we find that countries in our sample vary noticeably in terms of the extent of the puzzle: one group of countries, in South and Central Europe, look like the United States, while in Northern Europe, retirees spend down their wealth much more rapidly.  Second, it appears that the rate of dissaving in retirement is correlated with the extent of public coverage of healthcare and long-term care, and these differences in saving happen predominantly through dissaving of financial assets, while housing assets are less affected.  In a quantitative experiment using a life-cycle model of saving in retirement, we measure the role of out-of-pocket medical spending risk in accounting for differences in observed saving patterns among retirees in the United States and Sweden, considering housing and financial assets separately.  The model predicts that this risk accounts, on average across age, for one-half of the difference in median net worth between United States and Sweden, and for about 70 percent of the difference in median financial assets.  The role of risk diminishes with age, and is seen primarily in financial asset saving, while housing assets do not appear to respond to spending risk, suggesting that housing is not a precautionary asset.