Swedish Retirees Spend More Freely
Americans are known for being reluctant to spend their life savings after they retire. The burning question has always been why.
New research comparing tight-fisted Americans with more free-spending Swedes found that U.S. retirees tend to hold on to their savings, because they face more risk of having to pay high out-of-pocket costs in the future for their medical and long-term care.
U.S. households, by the time they’re in their late 80s, have tapped only about one-third of the net worth they held in their late 60s, according to the study. Swedish households in their late 80s have spent more than three-fourths.
In preliminary findings presented at an August meeting of the Retirement Research Consortium in Washington, researcher Irina Telyukova said her study with Makoto Nakajima found that nearly 70 percent of the difference in the way Swedish and U.S. retirees spend down their financial assets can be explained by differences in their potential future medical costs.
Sweden’s healthcare system reduces the uncertainties for retirees in two ways. Sweden has national health care for everyone. Swedish municipalities are responsible for providing long-term care to the elderly in their communities, limiting a cost that can be enormous for U.S. retirees who need these services.
As a result, older Swedish households pay, on average, one-tenth of what older U.S. households pay for medical and long-term care, said Telyukova.
Note that the findings apply to the rate at which retirees spend down their financial assets. When it comes to housing, retirees in both countries are reluctant to “spend” this asset – by downsizing or tapping home equity – indicating this decision may be influenced by non-medical considerations, such as whether to leave something to their offspring.
But the implication of this study’s main finding makes sense: U.S. retirees have more to worry about, so they cling to their financial assets as a precaution.
Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.
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The findings of this research on post-retirement spending has important macroeconomic implications that deserve exploration. In a system which reduces risks of catastrophic medical and personal care expenses associated with aging, the savings of retired people feed into the demand side of the macroeconomy most likely at a slow and steady rate. If so, this will provide a counter cyclical buffer in bad times. This suggests the current system in the U.S. creates the opposite effect–a sort of ‘drag’ on demand over the cycle. Assuming some 30 to 40 percent of retired people have significant savings–the overall effect of the save versus spend could be one or two percentage points in overall employment. Something to study.
Swedish taxes are much greater than ours, enabling Swedes to receive these health and LTC benefits. So, it may well be that pre-retirement per capita consumption is greater in the U.S. than in Sweden.
My previous conjecture about pre-retirement pre-crisis consumption is too simplistic. Other factors need to be taken into account. For example, even if the average family income has been roughly comparable in both countries, the fact that higher education has been free in Sweden considerably offsets the impact of its higher level of taxation, especially now that the cost of higher ed. in the U.S. has become enormous.
In Sweden, even if we spend all our money, we can get social help money per month or be placed in homes to be taken care of.
That, Americans don’t have. They won’t get €1,500 as unemployed.