Consumption Over the Life Cycle: The Role of Annuities / Gary D. Hansen, Selahattin Imrohoroglu.

Format:

Book

Author/Creator:

Hansen, Gary D.

Contributor:

National Bureau of Economic Research.

Imrohoroglu, Selahattin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12341.

NBER working paper series no. w12341

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

We explore the quantitative implications of uncertainty about the length of life and a lack of annuity markets for life cycle consumption in a general equilibrium overlapping generations model in which markets are otherwise complete. Empirical studies find that consumption tends to rise early in life, peak around age 45-55, and to decline after that. Our calibrated model exhibits life cycle consumption that is consistent with this pattern. This follows from the fact that, due to a lack of annuity markets, households discount the future more heavily as they age and their probability of survival falls. Once an unfunded social security system is introduced, the profile is still hump shaped, but the decline in consumption does not begin until after retirement in our base case. Adding a bequest motive causes this decline to begin at a younger age.

Notes:

Print version record

June 2006.