Silviase/jgov_v1.4_full_ann huggingface dataset:
household head have a positive effect on the level of household income and consumption, as expected, while having a child or children aged zero to five appears to have a negative effect. While the significant coefficients on these household demographic variables may appear to support the argument by Wakabayashi (2008), we should not ignore the fact that the effect of retirement on consumption is negative and significant even after controlling for household demographics. Therefore, the changes in household demographics explain part of the consumption decline at retirement, but they do not appear to be the primary explanation for the retirement consumption puzzle in Japan. $ ^{9} $

### 4.2 Changes in lifestyle/preferences?

The next possible explanation is that the “puzzle” is the result of changes in lifestyle/preferences after retirement. In his comprehensive review of the consumption puzzle, Hurst (2008) argues that the decline in spending during retirement for the average household is limited to food and work-related expenses, reflecting changes in lifestyle/preferences. In their study on Japanese households, Stephens and Unayama (2012) indeed find a retirement consumption decrease in food and work-related expenses, which appears to be in line with this argument. Unfortunately, our dataset, as mentioned, does not provide household expenditure data sufficiently broken down into expenditure categories to analyze changes in particular expenditure categories. In order to assess the importance of changes in lifestyle/preferences, we therefore use an alternative approach, dividing households in our sample into two groups in terms of the size of the income drop, assuming that if the expenditure decline at retirement results from changes in lifestyle/preferences, the decline should be correlated with the event of retirement and not with the size of the income drop.

Table 3 reports the results when dividing retiring households into two groups based on whether the rate of income drop (from the year before retirement to the year after retirement) was smaller or larger than the median. When we confine our sample only to households that retired sometime during our observation period, the income regression coefficients for households with a large income drop (column $ (i) $ ) indicate that their income declined significantly from the first year after retirement onward, while the coefficients for households with a small/no income drop (column $ (iii) $ ) are not significantly different from zero. And more interestingly, only households that saw a large drop in income also reduced their consumption significantly. The correlation between income and consumption can be observed more clearly.
when we include the control households in our regressions (columns $ (v) $ to $ (viii) $ ). While the level of consumption of households with a large income drop declines significantly after retirement, no significant decline is observed for households with a small/no income drop. Therefore, broadly speaking, the consumption drop upon retirement appears to be correlated with the size of the income drop at retirement, which seems to contradict the hypothesis that the consumption drop around retirement reflects changes in lifestyle/preferences.

### 4.3 Insufficient wealth accumulation?

Another possible explanation is that the puzzle is due to the reaction of households that did not save enough for their retirement. To investigate this hypothesis, we split our sample households in terms of their wealth-consumption ratio (=net financial asset holdings / annual consumption) at the time of their retirement and examine whether the consumption decline is significantly more pronounced for households with a smaller ratio. The results, which are reported in Table 4, indicate that while the income decline for the two groups is similar in size – especially in the first two years after retirement – the drop in consumption appears to be larger and longer-lasting for households with fewer financial assets at their retirement. We find this pattern irrespective of whether we include the control households or not. Therefore, the results indicate that there were households with insufficient savings that responded to the income drop after retirement by cutting back their consumption to make ends meet.

### 4.4 Disentangling the determinants of the decline in consumption

The finding above indicates that part of the retirement consumption puzzle in Japan is explained by households that do not have sufficient savings for retirement. However, the fact that we find that to some extent consumption falls upon retirement even for households with high savings (column (viii) of Table 4) and that income and consumption are correlated (Table 3) suggests that the retirement consumption puzzle is a complex phenomenon that results from several factors. Moreover, in the case of Japan, measuring the effect of retirement on consumption may be more complicated due to the existence of large lump-sum retirement allowances, which, as shown in Figure 1(a), result in a jump in income in the year of retirement. $ ^{10} $ To address the complication arising from the existence of lump-sum retirement allowances, we extend our regression by including interaction dummies. Specifically, we estimate the following
specification:

$$ \begin{aligned}ln C_{it}=\sum_{k=0}^{4}\eta_{c}^{(a)}{}_{,k}RD(k)_{i,t}+\sum_{k=0}^{4}\eta_{c}^{(b)}{}_{,k}RD(k)_{i,t}\times CDum1_{i,t}\\+\sum_{k=0}^{4}\eta_{c}^{(c)}{}_{,k}RD(k)_{i,t}\times CDum2_{i,t}+\ldots+\mu_{c,i}+\eta_{c,i,t}\end{aligned} $$

where $ RD(k)_{i,t} $ is short for $ \text{RetiredDum}(k)_{i,t} $ , the dummy for households where the head retired in year t-k used in the previous sections, CDum1 is a dummy for households that experienced a relatively small income drop at retirement, and CDum2 is a dummy for households that received a lump-sum retirement allowance. $ ^{11} $

The results are reported in Table 5 and indicate that for households with smaller financial assets, the coefficients on the retirement dummies, $ RD(k) $ , are negative and significant after the year of retirement, as shown in the columns labeled $ (a_{1} $ and $ a_{2}) $ in Tables 5-1A and 5-2A. Turning to the interaction terms, while the coefficients on the dummy for households with a small income drop, $ RD(k) \times CDum1 $ (columns $ (b_{1} $ , and $ b_{2}) $ ), are generally positive and significant, the coefficients on the dummy for households that received a lump-sum retirement allowance, $ RD(k) \times CDum2 $ (columns $ (c_{1} $ , and $ c_{2}) $ ) are not statistically significant.

The panels labeled with B in the right half of Table 5 report the estimated patterns of consumption decline after retirement by household type, which are derived from the estimated coefficients in the panels labeled with A in the left half of the table. The observed patterns reveal a number of interesting facts about the retirement consumption puzzle in Japan. First, the size of the income drop appears to be a key determinant of the magnitude of the consumption decline. Specifically, while we find a significant consumption decline for households with a relatively large income drop, for households with a relatively small income drop we cannot detect a statistically significant decline in consumption after retirement. Another key determinant of the magnitude of the consumption decline is the wealth-consumption ratio at the time of the household head's retirement. The estimated size of the consumption decline upon retirement is clearly larger for households with a lower wealth-consumption ratio. In contrast, whether a household receives a lump-sum retirement allowance does not appear to noticeably change the pattern of consumption around retirement.

To sum up, the decline in consumption upon retirement in Japan appears to be due to the response of households that were unable to save enough for their retirement to compensate
for the decline in income upon retirement. Moreover, lump-sum retirement allowances appear to influence households' consumption response only through their effect on the level of household wealth at the time of retirement.

### 4.5 Was the retirement a “surprise”?

While the finding that the consumption decline upon retirement in Japan is largely due to the response of households that could not save enough for their retirement is a useful piece of information regarding the consumption puzzle, it does not provide conclusive evidence on the validity of the LC/PIH. On the one hand, we can say that the finding is consistent with the LC/PIH if for some of the households the income decline was unexpected. A reduction in consumption to cope with a negative surprise would be entirely consistent with the LC/PIH, since it reflects an unexpected decline in lifetime income. On the other hand, however, insufficient savings at retirement are not necessarily solely the result of such surprises. Some households may not have saved enough, not because their income dropped unexpectedly, but because they were just myopic or lacked sufficient discipline.

A number of preceding studies (e.g., Smith, 2006; Hurd and Rohwedder, 2008; Hurst, 2008) cite forced retirement and health problems as potential reasons for unanticipated early retirement. Unfortunately, the SSFME does not contain information that would allow us to determine directly whether retirement was unexpected due to, for example, health problems. However, we think it is possible to conjecture whether retirement was unexpected by examining proxy variables that are potentially correlated with health problems. As our first proxy, we focus on changes in agricultural working hours of the retiring household head, which are available from the SSFME. As shown in Figure 1(b), retiring household heads typically increase their agricultural working hours after leaving their salaried job as a regular employee outside agriculture. If we can assume that a retiring head will not increase his/her agricultural working hours when he/she has some health problems, then household heads that did not increase their agricultural working hours are more likely to be suffering from health problems. As a second proxy, we also focus on changes in households' medical expenditure, since medical expenditure is likely to increase if the head retired due to health problems. Although information on consumption by category, as explained above, is available only for a subset of households in the SSFME, we can use this information for our analysis, assuming that the heads of households that reported an increase in medical expenditure around the time of the head's retirement are more likely to be suffering from health problems.

To examine the effects of unanticipated retirement due to health problems, we
re-estimate equation (3) replacing $ CDum2 $ by one of the following two dummy variables: $ CDum3 $ , a dummy variable for households whose head's agricultural working hours increased after the head's retirement; and $ CDum4 $ , a dummy for households whose medical and healthcare expenditure did not increase at the retirement of the household head. $ ^{12} $ Given our finding that it is households without sufficient savings whose consumption declines substantially upon retirement, we focus on households whose wealth-consumption ratio is below the median.

The results are reported in Table 6. Starting with the regressions for our first proxy, CDum3, we find that the size of the consumption decline upon retirement is larger for households whose heads' agricultural working hours did not increase, which supports the PI/LCH and the “surprise” hypothesis, that is, that at least for some households the consumption decline is explained by an unexpected decline in income. The result using the second proxy, CDum4, also appears to endorse the “surprise” hypothesis in that the size of the consumption decline is larger for households whose medical expenditure increased at retirement.

In sum, comparing households whose head appears to be experiencing health problems and those that do not suggest that a surprise decline in income does play some role, which is in line with the PI/LCH. However, a consumption decline, though to a lesser degree, can also be observed for households which are less likely to have experienced health problems. Therefore, in that sense our results suggest that the consumption decline at retirement in Japan cannot fully be explained without myopic households or households that lacked the discipline to accumulate sufficient savings – a result which contradicts the assumptions of the LC/PIH.

### 5. Conclusion

Taking advantage of panel data on farm households collected by the Statistical Survey on Farm Management and Economy, this paper investigated whether a retirement consumption puzzle can be observed in Japan and, given that this is the case, what the reasons are. Our long-run panel data allow us to examine the behavior of households whose head actually retired during the observation period.

Our analysis based on this annual panel dataset showed that the retirement consumption puzzle – that is, the fact that households' expenditure declines after the household head retires – can also be observed in Japan. Contrary to Wakabayashi (2008), we find that changes in family size or other demographic factors only marginally account for the expenditure decline upon retirement. Further, the observed consumption decline can also not fully be
explained by changes in lifestyle/preferences, as the consumption decline is strongly correlated with the size of the income decline upon retirement. In addition, we find that households with fewer assets experience a larger decline in consumption upon retirement, suggesting that part of the puzzle may be explained by households that do not have sufficient savings for retirement and need to reduce their expenditures to make ends meet. However, the reason why some households have insufficient savings for retirement are not entirely clear and there are at least two, not necessarily mutually exclusive, possibilities, namely, that rational households experienced an unanticipated negative income shock, or that households were myopic or lacked the discipline to accumulate sufficient savings for retirement (i.e., they were irrational). Our analysis suggests that unanticipated negative income shocks including health problems probably explain part of the puzzle; at the same time, though, part of the consumption drop cannot be explained without the existence of households that were myopic or lacked sufficient saving discipline. The presence of large lump-sum retirement allowances appears to complicate the consumption puzzle in Japan; however, the results of our analysis suggest that lump-sum retirement allowances influence consumption around retirement only through their effects on the level of household wealth at the time of retirement.

To sum up, although it may sound like a cliché, the retirement consumption puzzle is a complex phenomenon that cannot be explained by a single factor alone. Instead, many of the factors proposed in earlier studies can each help to explain part of the puzzle. Therefore, we can say that part of the retirement consumption puzzle in Japan can certainly be explained by factors that are not necessarily inconsistent with the LC/PIH; at the same time, however, we cannot rule out the possibility that there are some households that are myopic or lack sufficient saving discipline and thus contradict the assumptions of the LC/PIH.
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Figure 1. Changing pattern of income, consumption, and working hours of households whose head retired at some point during our observation

Notes: Average figures calculated from an unbalanced panel using 118 households whose heads retired during the observation period. Household heads are 55 years old or older.
Table 1. Sample statistics (Based on data from 1995 to 2003) (a) Basic statistics and comparison with the Family Income and Expenditure Survey

Variable	Statistical Survey on Farm Management and Economy	Family Income and Expenditure Survey
All households	Households used in our analysis	All households with head working as an employee	Households with head working as an employee and aged 55 and over
Mean	Std. Dev.	Mean	Std. Dev.	Mean	Std. Dev.	Mean	Std. Dev.
Income	9,102	5,623	9,869	5,654	6,868	3,397	6,722	3,813
Income from business	3,164	4,764	570	1,188	45	313	67	392
Wages	3,274	3,954	6,407	4,440	6,559	3,454	5,883	3,994
Pensions	1,254	1,123	1,192	1,295	246	755	744	1,258
Other (including lump-sum retirement allowance)	1,411	2,474	1,700	3,823	19	161	29	199
Consumption	4,980	2,562	5,173	2,619	4,194	2,178	4,223	2,455
Consumption (including self-production)	5,115	2,582	5,304	2,632	na	na	na	na
Net financial assets	25,035	31,664	28,648	22,597	6,882	20,046	17,860	25,166
Lump-sum retirement allowance	116	1,440	270	2,399	na	na	na	na
Dummy for households who received lump-sum retirement allowance	0.01	0.10	0.13	0.34	na	na	na	na
Lump-sum retirement allowance for those who received	5,885	8,423	11,580	10,875	na	na	na	na
Working hours of household head in agriculture	1,225	983	396	346	na	na	na	na
Age of household head	58.5	10.8	60.3	4.3	45.9	10.8	60.3	4.5
Number of household members	4.7	1.9	3.9	1.7	3.5	1.2	2.9	1.0
Number of workers (including farmers)	3.3	1.3	2.9	1.3	1.6	0.7	1.8	0.9
Number of observations	37,105	2,578	70,399	16,497
Number of households	9,466	765	70,399	16,497

Notes: Income, consumption and assets are in thousand yen. Net financial assets, gross financial assets, and debts in the FIES are available from 2001. The number of observations for all households in the FIES is 13,936, while that for households with a head aged 55 and over is 3,263.
Table 1. Sample statistics (continued)

(b) Regular employee households whose head has not retired vs. households whose head retired at some point during the observation period

Variable	Treatment group: Households whose head retired (from a regular job) at some point during the observation period	Control group: Regular employee households whose head has not retired
All observations	Before retirement	After retirement	Mean	Std. Dev.
Mean	Std. Dev.	Mean	Std. Dev.	Mean	Std. Dev.
Income	8,724	6,273	9,628	4,462	8,013	7,320	10,293	5,347
Income from business	731	1,260	662	1,244	785	1,272	510	1,155
Wages	3,909	3,939	6,795	3,551	1,637	2,467	7,333	4,255
Pensions	1,677	1,536	873	1,424	2,311	1,310	1,012	1,142
Other (including lump-sum retirement allowance)	2,407	5,222	1,297	2,420	3,280	6,515	1,439	3,112
Consumption	4,557	2,208	4,961	2,377	4,240	2,013	5,402	2,721
Consumption (including self-production)	4,684	2,220	5,094	2,392	4,361	2,020	5,534	2,734
Net financial assets	30,963	22,281	29,479	21,855	32,130	22,570	27,790	22,659
Lump-sum retirement allowance	997	4,538	282	2,225	1,733	5,924	389	2,900
Dummy for households who received lump-sum retirement allowance	0.48	0.50	0.11	0.31	0.47	0.50	0.04	0.02
Lump-sum retirement allowance for those who received	12,066	11,013	1,593	3,931	10,725	11,054	9,371	10,957
Working hours of household head in agriculture	538	454	354	258	683	518	343	277
Age of household head	61.3	4.2	59.2	3.5	63.0	3.9	59.9	4.3
Number of household members	3.4	1.5	3.6	1.6	3.2	1.5	4.1	1.7
Number of workers (including farmers)	2.4	1.2	2.8	1.1	2.2	1.3	3.1	1.2
Number of observations	697	307	390	1,881
Number of households	118	118	118	647

Note: Income, consumption, and assets are in thousand yen.