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Key Findings Details

The Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks
John Karl Scholz and Ananth Seshadri
WP 2012-271

  • Using a life-cycle model we analyze, household by household, the implications of wealth shocks and changes in Social Security policy on retirement decisions.
  • We estimate the impact on economic decisions of a sudden, unexpected shock that results in a 20 percent decline in wealth. 
  • Since poorer households are less reliant on private savings to finance retirement than are richer households, this decline in wealth has a much smaller impact on their decisions.
  • Richer households experience a greater decline in consumption than poorer households.
  • The decline in wealth induces households to postpone retirement by one year, on average, with poorer households remaining relatively unaffected; households cut health expenditures, which increases mortality; and households save less than they otherwise would since their lifetime horizon is shorter.
  • We estimate the impact of an unanticipated increase in the Early Eligibility Age (EEA) for retirement from age 62 to 64 when households are 55 years old. 
  • Households decrease their consumption beginning at age 55, especially poorer households, and increase their savings.
  • The median retirement age rises to 64 from 62.
  • Households spend a little less on medical expenses, and working longer mitigates the adverse consequences for health for most households.