Retirement and Saving in a Life Cycle Model

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 24.02.2004, 12:15 - 13:30


Presentation by 

David M. Blau (Ohio State University)


The adequacy of saving for retirement has received considerable attention in recent years. Consumption expenditure declines around the time of retirement for many households. Some analysts argue that this is inconsistent with the behavior implied by forward-looking life-cycle models. However, most studies of saving for retirement take the timing of retirement as given, and analyze saving behavior conditional on retirement. This study builds a dynamic life cycle model in which both saving and employment are choices. The model incorporates several key features of the budget constraint facing older households: a stochastic earnings process, a stochastic process for asset returns, layoff risk, health and mortality risk, Social Security retirement and disability programs, and employer-provided pensions. The model is solved and calibrated to the behavior of a cohort of men from the U.S. Health and Retirement Study. The main finding of the study is that the type of savings behavior that has been characterized as inconsistent with the forward-looking life cycle model is in fact consistent with the life cycle framework. The model can generate patterns of behavior in which (1) consumption falls at retirement, (2) there is large dispersion in wealth at retirement, and (3) post-retirement consumption is significantly lower than pre-retirement consumption. The two key features necessary to generate these patterns are that the timing of retirement is a choice and there are sources of uncertainty with persistent consequences.

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