Economic Adjustment of Recent Retirees to Adverse Wealth Shocks

36 Pages Posted: 13 Feb 2008

See all articles by Gabor Kezdi

Gabor Kezdi

Central European University (CEU) - Department of Economics

Purvi Sevak

University of Michigan at Ann Arbor - Mathematica Policy Research

Date Written: April 1, 2004

Abstract

Since the mid-nineties, the stock market has had an unprecedented impact on the wealth of current and future retirees. Using data from the Current Population Survey and the Health and Retirement Study, this report estimates consumption and labor supply responses of individuals in their 50s and 60s to the recent stock market downturn. We estimate an elasticity of consumption with respect to wealth changes ranging from five to seven percent. This implies that households respond to a decline in wealth by reducing their consumption by 5 to 7 percent of the wealth decline. For example, if a household's wealth declined by $100,000, this estimate suggests they would reduce their annual consumption by $5,000 to $7,000. Among retirees, we do not observe any re-entry into the labor force in response to wealth losses due to stock market declines. This suggests that retirement is more or less an absorbing state, for either supply or demand reasons: once an individual retires, it is very difficult to become employed once again.

Suggested Citation

Kezdi, Gabor and Sevak, Purvi, Economic Adjustment of Recent Retirees to Adverse Wealth Shocks (April 1, 2004). Michigan Retirement Research Center Research Paper No. WP 2004-075, Available at SSRN: https://ssrn.com/abstract=1092905 or http://dx.doi.org/10.2139/ssrn.1092905

Gabor Kezdi (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary

Purvi Sevak

University of Michigan at Ann Arbor - Mathematica Policy Research ( email )

Ann Arbor, MI 481030
United States

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