Silviase/jgov_v1.4_full_ann huggingface dataset:
# Is there a retirement consumption puzzle in Japan? Evidence based on panel data on households in the agricultural sector $ ^{\dagger} $

Masahiro Hori $ ^{a,b} $ , Keiko Murata $ ^{c,a,*} $

$ ^{a} $ Economic and Social Research Institute, Cabinet Office, Tokyo, Japan

$ ^{b} $ Institute of Economic Research, Hitotsubashi University, Kunitachi, Japan

$ ^{c} $ Graduate School of Social Sciences, Tokyo Metropolitan University, Hachioji, Japan

## Abstract

Taking advantage of annual panel data on farm households collected by the Statistical Survey on Farm Management and Economy, this paper investigates 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 shows that households' expenditure does decline after the retirement of the household head. What is more, changes in family size or other demographic factors appear to only marginally account for the expenditure decline upon retirement. Changes in life-style/preferences after retirement also do not appear to fully explain the expenditure decline, since the decline in expenditure is strongly correlated with the magnitude of the decline in income. Further, we find that the expenditure decline is larger for households with smaller net financial assets, which implies that part of the income-expenditure correlation around retirement is probably due to unanticipated negative income shocks. However, our analysis also implies that the consumption decline at retirement in Japan cannot be explained completely without the presence of myopic households or households that lacked discipline, which contradicts the assumptions of the LC/PIH.

Key words: Retirement, Household consumption, Life cycle/Permanent income hypothesis
### 1. Introduction

Many developed countries, and especially Japan, are experiencing rapid population aging. One aspect of considerable interest in this context is the impact on consumption, which accounts for the largest share of GDP in most countries. This means that as a growing share of the population approaches or reaches retirement, how consumers respond to retirement is becoming a topic of increasing importance for economists and policy makers alike.

The canonical life-cycle/permanent income hypothesis (LC/PIH) predicts that households smooth their marginal utility of consumption against anticipated income changes. Forward-looking households are expected to smooth their standard of living in the face of even a large anticipated income drop such as after reaching retirement, since it is assumed that they save enough to make adequate provisions. However, the empirical evidence regarding the ability of households to adequately plan and save for retirement appears to be inconclusive. While studies using simulations to compare optimal savings to actual savings in the United States suggest that savings are adequate (Engen et al., 1999; Scholz et al., 2006), studies using micro-data to examine consumption changes upon retirement tend to find that household expenditures fall precipitously upon retirement (see, e.g., Banks et al., 1998, for the United Kingdom; Bernheim et al., 2001, and Haider and Stephens, 2007, for the United States; Schwerdt, 2005, for Germany; and Miniaci et al., 2003, for Italy) – a result that seems to conflict with the LC/PIH as it implies that households make inadequate savings for retirement and that has consequently been referred to as the “retirement consumption/saving puzzle.”

Probably as a consequence of the conflicting findings, more recent studies on this retirement consumption/saving puzzle have become more nuanced and emphasize the heterogeneity in spending changes upon retirement across households and across consumption categories. For example, Smith (2006) finds that a significant fall in food spending is observed only when retirement is involuntary. Her finding is consistent with the results obtained by Hurd and Rohwedder (2008), who show the spending declines they observe are linked to unexpected retirement due to negative health shocks. Meanwhile, Wakabayashi (2008) and Battistin et al. (2009) report that declines in household consumption upon retirement shrank considerably once changes in household composition at retirement are controlled for. Further, Aguiar and Hurst (2005) argue that modifying the LC/PIH to incorporate home production may help understand the fall in consumption upon retirement. Against this background, Hurst (2008), based on a comprehensive review of this literature, concludes that the standard LC/PIH
augmented with home production and unexpected health shocks can explain retirement consumption behavior for the majority of households, although further work is necessary to understand a relatively small subset of households that are ill-prepared to sustain their consumption through retirement.

Given this debate in the literature, this study focuses on households in Japan and investigates whether their consumption declines upon retirement. While there has been extensive research on consumption patterns upon retirement and hence the retirement consumption puzzle in the United States and other western countries, empirical analyses for Japan are relatively scarce and their results have been inconclusive. For example, Wakabayashi (2008), using cross-section data from a retrospective survey (Survey of the Financial Asset Choice of Households) to examine whether such a "puzzle" can be observed in Japan, finds that consumption does tend to decline, but this decline is primarily due to a decline in family size after retirement. Meanwhile, Stephens and Unayama (2012), employing monthly panel data from the Family Income and Expenditure Survey (FIES), report that no clear fall in consumption at retirement can be observed and argue that this is probably because of the presence of large lump-sum retirement allowances. Therefore, while their views regarding the expenditure decline upon retirement are slightly different, the two studies point in the same direction in that they provide support for consumption smoothing, i.e., the LC/PIH.

However, the datasets used by these earlier studies are less than ideal for examining consumption patterns upon retirement. As highlighted by Blau (2008), in order to identify the effects of retirement on consumption, it is preferable to use a panel dataset which follows households before and after their retirement. Yet, Wakabayashi (2008) uses only cross-section data, while Stephens and Unayama (2012) do employ panel data from the FIES, but the FIES unfortunately follows each household only for a period of six months, which is too short to truly grasp the impact of retirement – a process that usually spans a number of years. $ ^{1} $ Apart from the relatively short period that the FIES follows individual households, another shortcoming is that it does not ask households to report lump-sum retirement allowances – information that is necessary to understand consumption behavior around the time of retirement in Japan.

Against this background, the aim of this study is to examine consumption behavior in Japan around the time of retirement using a true long-run panel dataset. Specifically, we employ the Statistical Survey on Farm Management and Economy, which follows the economic transactions of households in Japan’s agricultural sector in detail over a period of several years.
and includes information on lump-sum retirement allowances. A survey on farm households by its very nature is not representative of all households in Japan. However, many farmers in Japan are only part-time farmers and also have or had a salaried job, so that the survey allows us to gain insights on households' reaction to a large income decline such as that observed at retirement that do not necessarily apply to farm households only. Specifically, we examine the behavior of part-time farm households whose head retired from his salaried job during the observation period, and investigate whether the consumption of such households falls in the years following retirement (up to around five years). We also examine where the decline in consumption upon retirement that we observe comes from.

Our analysis based on annual panel data shows that households’ expenditure does decline after the retirement of the household head. What is more, changes in family size or other demographic factors appear to only marginally account for the expenditure decline upon retirement. Changes in preferences after retirement also do not appear to explain the expenditure decline, since the decline in expenditure is strongly correlated with the magnitude of the decline in income. Further, we find that the expenditure decline is larger for households with fewer net financial assets, which implies that part of the income-expenditure correlation around retirement is probably due to unanticipated negative income shocks. All of these factors are in line with the LC/PIH. However, our analysis also implies that it is difficult to fully account for the consumption decline at retirement in Japan without myopic households or households that lacked the discipline to accumulate sufficient savings – a result which contradicts the assumptions of the LC/PIH.

The remainder of the paper is organized as follows. The next section describes the data used in this paper, which are from the Statistical Survey on Farm Management and Economy. Section 3 then outlines our empirical specification and presents the baseline results of our analysis. Next, Section 4 extends our empirical analysis to investigate the causes of the consumption puzzle in Japan. Section 5 concludes the paper.

### 2. Data

The data we use in this paper are from the Statistical Survey on Farm Management and Economy (SSFME), which is a panel survey on Japanese farm households. The survey has been conducted by the Ministry of Agriculture, Forestry and Fisheries (MAFF) since 1995 for the purpose of monitoring the management and economy of farm households and other entities as well as the production cost of farm products and to contribute to agricultural policy making. The survey is a sample survey which covers commercial farm households (full-time as well as
part-time) with an operating cultivated land area of 0.3 hectares or more, or with an annual turnover of 500,000 yen or more.

The survey relies on self-reporting and interviews by enumerators conducted by the Statistics Department of the MAFF and the local statistical offices of the ministry. Roughly 10,000 farm households throughout Japan are surveyed. The survey provides annual information on household members, working hours, income, wealth, etc. In addition, micro-data on the monthly income and living expenditures of roughly 4,000 households, compiled from daily expenditures and income receipts recorded in a diary which is collected once a month, are available. For selected households, living expenditures, classified into ten categories, are also available, but unfortunately only for households that entered the survey before 2000. This means that we have annual data on living expenditures from 1995 to 2003, and monthly data from 1996 to 2003, when the MAFF stopped asking about living expenditures. The survey follows the same households for consecutive years (for as many years as the households agree to continue participating), while some are replaced by new households.

The reason that we focus on farm households is that the SSFME allows us to construct a high quality long-run household panel of unrivalled richness, reflecting the fact that, until recently, the Japanese government has spent generously on the collection of statistics for the agricultural sector. $ ^{2} $ As mentioned, the survey covers both households where the household head is a full-time farmer and households where the household head’s main source of income is not farming but a salaried job, and we focus on the latter. Although such household heads may continue to work as farmers when they retire from their salaried job, so that they may not be fully retired, they will likely share many features with non-farm households when it comes to retiring from a salaried job, including a large anticipated decline in income and substantial changes in lifestyle. This is particularly the case for those whose employment status is that of a “regular employee,” and it is these households that we focus on to construct a panel dataset (spanning several years) that follows the annual expenditure and income flows, including lump-sum retirement allowances, and asset holdings of part-time farm households. $ ^{3} $

The basic statistics of our dataset are reported in Table 1. Roughly speaking, the levels of income and expenditure of households in the SSFME are higher than those of households in
the FIES (Table 1(a)). Therefore, there is a bias in our dataset toward richer households, although the households are also older and consist of more family members on average. Agricultural income accounts for roughly 30 percent of the total current income of all households in the SSFME, who, moreover, spend a sizable amount of time on their agricultural activities. However, for part-time farm households, which our analysis focuses on, income from agricultural activities accounts for only 5 percent of the total current income, and household heads spend less than 400 working hours annually on agricultural activities.

To further check the reliability of our dataset, we compared it with data from the National Survey of Family Income and Expenditure (NSFIE), which provides information on the average income and living expenditures of part-time farmers. The NSFIE is a nationally representative survey that is conducted every five years and covers around 60,000 households (households randomly selected each time) throughout Japan. We find that the average income and expenditure of part-time farmers in the NSFIE are broadly consistent with those in our dataset. $ ^{4} $

Next, Table 1(b) compares the sample statistics for the treatment group consisting of households where the household head retired from his/her salaried job at some point during our observation period with those of the control group consisting of households where the household head did not retire. The basic statistics for the control households look broadly similar to those for the treatment households before retirement. After their retirement, the annual income of the treatment households decreased by about 20 percent. Wage income declined drastically after retirement. However, as suggested by Figure 1(a) presenting the average income pattern of households whose head retired at some point, the income in the retirement year is higher for retiring households, as they often receive a large lump-sum retirement allowance. Although increases in pensions and income from agricultural activities partly make up for the loss in wage income, income flows after retirement are substantially lower than those before retirement. Household heads' working hours spent on agricultural activities increase substantially after retirement, although the observed increase in income from agricultural activities looks relatively modest. We also observe a fall in consumption (expenditures) after retirement (see Figure 1(b)).

### 3. Baseline specification and consumption changes at retirement

To investigate the impact of retirement on consumption, we examine farm households whose heads are part-time farmers and mainly work as regular employees. More precisely, we focus on
households with the following characteristics: (i) the household head was a regular employee at the beginning of the panel, retired from his/her regular job, and never returned to regular employment during the observation period; (ii) the household head was 55 years old or older; (iii) the number of regular employees in the household other than the (working) household head was at most one; and (iv) the household's wage income dropped by more than half upon the head's retirement. We use households whose heads were 55 years old or older and continued to be regular employees throughout the observation period as our control group.

We examine the impact of retirement on consumption expenditures, as well as household income, by exploiting the panel feature of our dataset. Following the strategy taken by Stephens and Unayama (2012), we estimate the following two equations in a fixed effects specification: $ ^{5} $

$$ ln Y_{i,t}=\sum_{k=0}^{5}\gamma_{Y,k}Retired Dum(k)_{i,t}+\beta_{Y}X_{i,t}+\phi_{Y}Z_{t}+\mu_{Y,i}+\eta_{Y,i,t} $$

$$ l n C_{i,t}=\sum_{k=0}^{5}\gamma_{C,k}R e t i r e d D u m\left(k\right)_{i,t}+\beta_{C}X_{i,t}+\phi_{C}Z_{t}+\mu_{C,i}+\eta_{C,i,t} $$

where $ Y_{i,t} $ , is household i's annual disposable income in year t, $ C_{i,t} $ , stands for household i's living expenditures in year t, and $ \text{RetiredDum}(k)_{i,t} $ is a dummy variable that takes one if household i retired in year t-k. Moreover, $ X_{i,t} $ is a set of household-specific factors in year t, which can change over time, such as the household head's age, the number of household members, the number of regular employees in the household other than the household head, the number of part-time workers, and dummies indicating whether there is a child/there are children aged 0 to 5, 6 to 12, and/or 13 to 18 living in the household. Further, $ Z_{t} $ is a set of year dummies to control for time-specific characteristics, $ \mu_{Y,i} $ and $ \mu_{C,i} $ are household-specific time-invariant characteristics, and $ \eta_{Y,i,t} $ and $ \eta_{C,i,t} $ are well-behaved disturbance terms.

In this specification, the estimated coefficients on $ \text{RetiredDum}(k)_{i,t} $ represent the cumulative impact of retirement on income and consumption. As retirement typically leads to a sudden decline in income flows, the $ \gamma_{Y,k} $ should clearly be negative and be both economically and statistically significant. Therefore, what we are interested in is whether the $ \gamma_{C,k} $ are also negative and significant.

Table 2 presents the results from estimating equations (1) and (2). The first four columns report the results using households where the household head retired from his/her
salaried job during our observation period. As expected, disposable income declines significantly after retirement $ \left(\gamma_{Y,k}<0\right) $ . Consumption also declines $ \left(\gamma_{C,k}<0\right) $ after retirement, although the estimated coefficients generally are not statistically significant.

A potential problem in these estimates, however, is that they may suffer from measurement error due to “survey fatigue.” Stephens and Unayama (2012) in their analysis of FIES data found that the longer households are in the survey, the less consumption they generally report, regardless of whether they retire or not. In order to control for this potential source of bias, we also tried regressions that include non-retiring households as a control group. The results are reported in columns (v) and (viii) and show that the pattern of the estimated coefficients on $ \text{RetiredDum}(k)_{i,t} $ remains broadly unchanged, although the size of the negative coefficients in the consumption regression becomes larger (in absolute terms) and more significant when we include the control households in our regressions. The results therefore suggest that the consumption expenditure of retired households is lower (by around 10 percent, as indicated by the coefficients for years one to five and more after retirement) than that of non-retired households, indicating that the “retirement consumption puzzle” also seems to hold for Japan.

Our finding that there is a retirement consumption puzzle in Japan looks inconsistent with the finding by Stephens and Unayama (2012). This probably results from the difference in time horizon, i.e., our study examines the impact over several years, while Stephens and Unayama focus only on several months. $ ^{6} $ Considering the fact that retirement is one of the largest turning points in someone’s life and its impact on a person’s lifestyle is probably gradual, spanning a period of years, we believe that it is necessary to carefully monitor changes after retirement over several years to fully grasp the retirement puzzle. Another likely reason for the different findings is that living expenditures in our dataset include expenditures on durables, while most of the earlier studies focus on non-durable consumption. Given that the LC/PIH focuses on consumption smoothing rather than expenditure smoothing and durables are consumed over a long period of time (i.e., there is a “lag” between expenditure on and consumption of such goods), the natural choice for examining the retirement consumption puzzle is indeed to focus on non-durable consumption. However, since data in the SSFME on individual living expenditure categories are available only for a small subset of households in our sample and only up to 1999, we had no choice but to use total living expenditures. $ ^{7} $
However, fortunately, the fact that we are interested in the long-run effects alleviates this problem, because the discrepancy between expenditure on and consumption of durables decreases over time.

### 4. What explains the puzzle?

Given that we did find a retirement consumption puzzle, that is, a simultaneous decline in income and expenditure, in our analysis in the preceding section, we next investigate the reasons for the simultaneous decline. Earlier studies mention several factors that could possibly explain this puzzle, some of which are consistent with the LC/PIH, while others are not. $ ^{8} $ One simple explanation could be that consumption declines after retirement because some dependents (children) are forced to be financially independent and live separate from the retired parents. Changes in preferences due to increased non-market time also may account for the decline. For example, working-related expenses decline naturally after retirement, while leisure-related expenses may change because retired households can spend more time on leisure than working households. Unexpected declines in lifetime income (or permanent income) just around retirement, caused by forced retirement earlier than planned or by a reform of the public pension system, would also provide an explanation for the consumption declines that is consistent with the LC/PIH, since households that had been unable to save enough for retirement would have to cut back on their expenditures. In addition to these explanations in line with the LC/PIH, another possible factor – which would be inconsistent with the LC/PIH – is that some or many of the households were myopic and/or lacked the discipline to save sufficiently for retirement. Such households would be forced to respond to the income drop after retirement by cutting back on consumption to make ends meet even without a shock affecting their life-time income. In the following sub-sections, we examine the role that these possible explanations play in our dataset.

### 4.1 Effects of changes in household demographics

Wakabayashi (2008) argues that the consumption decline at retirement in Japan that she observed is primarily due to the declines in family size. Going back to our results in Table 2, we find that a number of the demographic variables are significant. Specifically, the number of household members as well as the number of regular employees in the household other than the