1. The Retirement Consumption Puzzle: Actual Spending Change in Panel Data Michael Hurd & Susann Rohwedder Discussant: Margherita Borella CeRP Annual Conference: Financial Security in Retirement 18-19 September 2008

2. The retirement consumption puzzle Life-cycle model of consumption: forward looking agents will smooth their marginal utility of consumption across predictable income changes such as retirement. Empirical literature: household expenditure at retirement suddenly drops

3. Possible explanations for the drop 1)Within LCM: work-related expenditure, home production,uncertainty about the time of retirement 2)Alternative: lack of self-control; short planning horizon; rules of thumb

4. Previous work 1)Synthetic panel data (CEX, FES, Survey of Family Budgets): heterogeneity in consumption categories (food, clothing, transportation) 2)Panel data (PSID, RHS, HRS): great heterogeneity across individuals

5. This paper 1) panel data: focus on heterogeneity across individuals 2) what mechanisms can cause consumption to drop at retirement. DATA: panel HRS+CAMS about 400 obs (actual spending) + about 1300 (recollected spending)

6. MAIN FINDINGS 1) Hh median change at retirement: -5.7% TOTEXP; -2.4% ND, -3% FOOD 2) ND Only: by pre-retirement wealth quartile: median HH change falls more in first quartile (-7.8%), is +ve in the highest(+8.6%) 3) all but the lowest quartile: anticipated change is greater than actual (total spending)

7. MAIN FINDINGS /2 4) planning horizon: % of short planners in lowest wealth quartile is higher; in lower half of wealth distribution median change is around zero for long planners, -15% for short planners. 5) Health status before retirement + Importance of health as a reason for retirement: extremely strong evidence. In particular, importance of health in the recollections sample: always higher drop when health is important! 6) Regression: wealth alone does not matter! Short planning horizon * wealth; health important for retirement; education do matter

8. Some comments Change in the sample mean or mean of the household changes? Heterogeneity seems well explained by few factors: health important for retirement; planning horizon (?); education: –investigate further? –Planning horizon correlated with health, age, education? Answers constant over time? Regression: additional controls? Recollections sample? Finer expenditure categories?