Uncertain Lifetime, Consumption, and Dissaving in Retirement

Abstract

This paper asks whether the continued accumulation, or mild dissaving, observed among the retired can be explained by uncertain lifetime. In the absence of annuities, after an initial period influenced by borrowing constraints, under constant relative risk aversion, uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is "small." Illustrative computations, based on actual income and survival data, show that plausible elasticities are sufficiently small to give this effect. The reduction in consumption is large enough to explain much of the lack of decumulation by the elderly.