Life Cycle Impacts of the Financial Crisis on Optimal Consumption—Portfolio Choices and Labor Supply

Jingjing Chai, Raimond Maurer, Olivia S. Mitchell and Ralph Rogalla

in Reshaping Retirement Security

Published in print September 2012 | ISBN: 9780199660698
Published online January 2013 | e-ISBN: 9780191745058 | DOI:

Series: Pensions Research Council

Life Cycle Impacts of the Financial Crisis on Optimal Consumption—Portfolio Choices and Labor Supply

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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. The 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. The study does so with a realistically calibrated life cycle framework allowing for time-varying investment opportunities and countercyclical risky labor income dynamics. The chapter shows 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.

Keywords: portfolio; consumption; annuities; risky labor income; work; retirement; wealth; shocks; economic downturn; social security; unemployment

Chapter.  11256 words.  Illustrated.

Subjects: Pensions

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