The Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks
by John Karl Scholz and Ananth Seshadri
- 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.