Life Cycle Impacts of the Financial Crisis on Optimal Consumption—Portfolio Choices and Labor Supply
Date of this Version
The direct financial impact of the financial crisis has been to deal a heavy blow to investment-based pensions; many workers lost a substantial portion of their retirement saving. The financial sector implosion produced an economic crisis for the rest of the economy via high unemployment and reduced labor earnings, which reduced household contributions to Social Security and some private pensions. Our research asks which types of individuals were most affected by these dual financial and economic shocks, and it also explores how people may react by changing their consumption, saving and investment, work and retirement, and annuitization decisions. We do so with a realistically calibrated lifecycle framework allowing for time-varying investment opportunities and countercyclical risky labor income dynamics. We show that households near retirement will reduce both short- and long-term consumption, boost work effort, and defer retirement. Younger cohorts will initially reduce their work hours, consumption, saving, and equity exposure; later in life, they will work more, retire later, consume less, invest more in stocks, save more, and reduce their demand for private annuities.
Working Paper Number
All findings, interpretations, and conclusion of this paper represent the views of the authors and not those of the Wharton School or the Pension Research Council. © 2011 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
The research reported herein was performed pursuant to a grant from the US Social Security Administration (SSA) to the Michigan Retirement Research Center (MRRC) as part of the Retirement Research Consortium. Additional research support was provided by Netspar, the German Investment and Asset Management Association (BVI), the Pension Research Council at The Wharton School of the University of Pennsylvania, and the Metzler Bank Exchange Professorship. Helpful comments were provided by Peter Brady, Susann Rohwedder, Mark Warshawsky, and participants at the 2011 Pension Research Council Conference. This research is part of the NBER programs on Aging, Public Economics, and Labor Studies.
Date Posted: 28 June 2019
The published version of this Working Paper may be found in the 2012 publication: Reshaping Retirement Security: Lessons from the Global Financial Crisis.