No Retirement Consumption Puzzle–the Effect of Labour Supply on Disaggregated Life Cycle Expenditure in the Later Life

This paper examines the life cycle profile of disaggregated nondurable expenditures for Chinese urban households. The result shows that aggregated expenditure conceals substantial heterogeneity in the life-cycle pattern of expenditure subcomponents and underestimates the uninsurable permanent income risk that households face. Based on the observed empirical pattern, I test how much of the adjustment of consumption across time and categories can be attributed to the labour supply status. A regression discontinuity approach shows that elderly households adjust expenditure at retirement across subaggregated categories even though there is no significant change in total nondurable spending. In particular, households are not only able to smooth food expenditure but also food consumption upon retirement. Furthermore, by using subjective retirement expectations as an instrument for actual retirement, I find that the adjustments in sub-aggregated expenditure categories are resulting from unexpected retirement. This study has important implications for using disaggregated data to test the existence of retirement consumption puzzle and for testing consumption theories.