The simple one-good model of life-cycle consumption requires “consumption smoothing.” However, British and U.S. households apparently reduce consumption at retirement and the reduction cannot be explained by the life-cycle model. An interpretation is that retirees are surprised by the inadequacy of resources. This interpretation challenges the life-cycle model where consumers are forward looking. However, data on anticipated consumption changes at retirement and on realized consumption changes following retirement show that the reductions are fully anticipated. Apparently the decline is due to the cessation of work-related expenses and the substitution of home production for market-purchased goods and services.
The research described in this report was performed under the auspices of RAND Labor and Population and was supported by the Social Security Administration via a grant to the Michigan Retirement Research Center. Additional support for data development was provided by the National Institute on Aging.
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