Real Wealth Changes from 1982 to 1991 Among the Newly Retired

The RAND unrestricted draft series is intended to transmit preliminary results of RAND research. Unrestricted drafts have not been formally reviewed or edited. The views and conclusions expressed are tentative. A draft should not be cited or quoted without permission of the author, unless the preface grants such permission. RAND is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications and drafts do not necessarily reflect the opinions or policies of its research sponsors. Introduction Although economic status is typically measured by income, assets can be used to augment consumption following retirement: if holdings of assets are substantial and if the retired elderly finance some of their consumption by decumulating assets, welfare as measured by consumption would be higher than welfare as measured by income. Whether the elderly do decumulate assets (dissave) is, of course, an empirical matter. The typical elderly household has enough assets that their decumulation can increase consumption considerably, particularly if housing assets are included. For example, in AHEAD wave 1 mean income among singles age 70-74 was $17.0 thousands and mean wealth was $141.6 thousand (Hurd, McFadden and Merrill, 2001). Life expectancy of a 72 year-old female was about 13.9 years, so that if wealth were consumed at a steady rate over those 13.9 years consumption could increase by about 60 percent each year. 1 The saving behavior of the elderly is important for a number of other reasons. Under the life-cycle model of consumption (LCM) wealth holdings will be at their maximum near retirement, which implies that the elderly as a group should hold a considerable fraction of the assets of the household sector. Therefore, the aggregate household saving rate will depend in an important way on the saving behavior of the elderly: if they dissave, the saving rate of the rest of the population will have to be high for the household saving rate to be even moderate. The economic status of the children of the elderly depends on the saving behavior of their parents: should they not dissave, the children can expect inheritances which may, in turn, affect their own saving behavior. Furthermore, should the elderly have a strong desire to leave bequests (a bequest motive for saving) their time horizon for economic-decision making will be substantial, and that will affect their response to financing of government expenditures by taxation or by borrowing. A bequest motive will …