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Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers

dc.contributor.authorHurst, Erik
dc.date.accessioned2007-04-24T20:52:50Z
dc.date.available2007-04-24T20:52:50Z
dc.date.issued2004-10
dc.identifier.urihttps://hdl.handle.net/2027.42/50531
dc.description.abstractThis paper shows that households who enter retirement with low wealth consistently followed non-permanent income consumption rules during their working years. Using the Panel Study of Income Dynamics (PSID), household wealth in 1989 is predicted for a sample of 50-65 year olds using both current and past income, occupation, demographic, employment, and health characteristics. Using the residuals from this first stage regression, the sample of pre-retired households is subsetted into households who save ‘lower’ than predicted and all other households. By construction, these households had similar opportunities to save; the average household in both these sub-samples are very similar along all observable income and demographic characteristics. It is then shown that households in the low wealth residual sample had much larger declines in consumption upon retirement. Such a result is consistent with the household having inadequately planned for retirement. The panel component of the PSID is then used to analyze the consumption behavior of these households early in their lifecycle. It is shown that these low pre-retirement wealth households had consumption growth that responded to predictable changes in income during their early working years. No such behavior was found among the other pre-retired households. Moreover, the low wealth residual households responded both to predictable income increases as well as predictable income declines, a result that is inconsistent with a liquidity constraints explanation. After ruling out other theories of consumption to explain these facts, it is concluded that households who entered retirement with lower than predicted wealth consistently followed near sighted consumption plans during their working lives.en
dc.description.sponsorshipSocial Security Administrationen
dc.format.extent325221 bytes
dc.format.mimetypeapplication/pdf
dc.language.isoen_USen
dc.publisherMichigan Retirement Research Center, University of Michigan, P.O. Box 1248, Ann Arbor, MI 48104en
dc.relation.ispartofseriesWP 2004-088en
dc.titleGrasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumersen
dc.typeWorking Paperen
dc.subject.hlbsecondlevelPopulation and Demography
dc.subject.hlbtoplevelSocial Sciences
dc.contributor.affiliationotherUniversity of Chicagoen
dc.contributor.affiliationotherNBERen
dc.contributor.affiliationumcampusAnn Arboren
dc.description.bitstreamurlhttp://deepblue.lib.umich.edu/bitstream/2027.42/50531/1/wp088.pdfen_US
dc.owningcollnameRetirement and Disability Research Center, Michigan (MRDRC)


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