Rowe on retirement

By saving, and by paying taxes to support government pensions for retirees, we smooth consumption over our lifetime. In striking contrast, we don’t smooth our ‘consumption’ of leisure, taking much of it in one large chunk (known as ‘retirement’) in the last years of life. Nick Rowe asks, Why?

If real interest rates were higher than your subjective rate of time preference, then you would choose a consumption path that is smoothly growing over time. You would consume more when old than when you were young. For all other consumption goods, some people act a bit like that, and others don’t. Some people consume a bit more when old than when young, and others consume a bit less when old than when young. But when it comes to the consumption of leisure, we don’t act at all like that. We consume roughly the same amount of leisure every year. And then we suddenly go on a massive consumption binge for the rest of our lives. Why?

As we have gotten richer over the last two centuries, we have chosen to spend a greater proportion of our lives consuming leisure rather than working. But I think I’m correct in saying that by far the biggest increase in our leisure has been in that big bunch of leisure at the end of our lives. Most people used to work until they died. Now most people stop working and then consume a decade or two of leisure before they die. Proportionately, the growth in leisure taken in retirement massively exceeds the growth of coffee breaks, lunch breaks, evenings, weekends, and holidays. The income elasticity of demand for retirement leisure massively exceeds that of all other forms of leisure. Why?

Nick Rowe, “Retirement and the non-smoothing of consumption of leisure“, Worthwhile Canadian Initiative, 4 February 2012.

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