Do Households Increase Their Savings When the Kids Leave Home?mandag, 23 november 2015
Much of the disagreement over whether households are adequately prepared for retirement reflects differences in assumptions regarding the extent to which consumption declines when the kids leave home.
If consumption declines substantially when the kids leave home, as some life-cycle models of retirement saving assume, households need to achieve lower replacement rates in retirement and need to accumulate less wealth. Using administrative tax data from the Health and Retirement Study (HRS), as well as the Survey of Income and Program Participation (SIPP), this paper investigates whether household consumption declines when kids leave the home and, if so, by how much. Because consumption data are noisy and savings is the flip side of consumption, this paper examines whether savings in 401(k) plans increase when the kids leave home. The paper also investigates alternative methods of saving, including non-401(k) savings and increased mortgage payments.
This paper found that:
Households increase contributions to 401(k) plans by 0.3-1.0 percentage points when the kids leave home.
The finding is significant across datasets and for alternative definitions of the kids leaving home.
The increase in 401(k) contributions, however, is only a fraction of that predicted by life-cycle models that assume consumption declines substantially when the kids leave.
Home-owning households whose kids leave home are also less likely to have a mortgage than other households – suggesting higher post-kid payments – but the amount of increased savings implied is again much smaller than predicted by the life-cycle model.
The policy implications of this paper are:
Most households will not be able to maintain their pre-retirement standard of living.
Retirement saving needs to increase.