Are Americans economically prepared for retirement? The popular media and some researchers have expressed doubt, given the shift from defined-benefit to defined-contribution retirement plans, but a few empirical studies state otherwise. This project estimates life-cycle trajectories of consumption and spending for single and married persons. The estimates explicitly include important components such as the consumption of owner-occupied housing services and out-of-pocket spending on health care and long-term care. Those estimates are combined with data on income and wealth to evaluate the risk of exhausting wealth before death. The project will also shed some light on why spending declines with age: Is it because of mortality risk or because of worsening health? The project includes an assessment of the effect of the Great Recession on preparedness for retirement. Life-cycle trajectories of spending are estimated through two methods. The first is based on nonparametrically estimated models of life-cycle consumption for single persons and for couples. Based on these and on income and asset data, a simulation model estimates the probability of depleting assets before death. This approach is transparent and not encumbered by restrictions on functional form but does not well support utility or welfare analysis or policy simulations. In the second approach, expected utility maximization under uncertainty is imposed, which leads to the use of dynamic programming models. These can account for behavioral responses to environmental variations but are difficult computationally. The simulations based on the nonparametric models and those based on the dynamic programming models are complementary in terms of their respective strengths and weaknesses. Both approaches make extensive use of the richness of the available data, which are drawn from the Health and Retirement Study and its Consumption and Activities Mail Survey.
This project is concerned with whether Americans are economically prepared for retirement. If they are not, expenditures on health care and long-term care will compete with spending on other important contributors to well-being such as housing. The project will also shed light on whether the reason spending declines with increasing age is because worsening health limits the ability to enjoy recreational pursuits of various types.
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