People in retirement save more and consume less, who knew?

An interesting study (pdf file) out of Britain, shows that most people in retirement end up as net savers. Consumption in retirement starts relatively high and ends low. This pattern is common to both high and low-income groups, is robust to the inclusion of factors other than age and is not simply the result of the time period in which the data was collected. Subsequently, households make substantial savings in later life. Now, of course, not all older people are savers, a significant proportion does not save and hold debt, but the vast majority of older households (77.1%) put something away at the end of the week.

This mirrors the behaviour and attitude of my friends and I. Consumption is something I do, but I am not into buying the latest and greatest or newest of things as I was when I was younger.

The survey data demonstrated that consumption does indeed fall as people age and this is true even after accounting for other factors and time periods. But what type of consumption do older people forego and how does this change during retirement?

The Living Costs and Food Survey collects detailed information on the amount of money households spend across twelve different groups of goods and services. The information was split into two broad categories of essential and non-essential items. In the essentials category are:

• Food and Non-alcoholic Drinks;

• Clothing and Footwear;

• Housing, Water, and Electricity;

• Health Expenditure;

• Transport.

In the non-essentials category are:

• Alcohol and Tobacco;

• Recreation and Culture;

• Restaurants and Hotels;

• Communication;

• Education;

• Household Goods and Services;

• Miscellaneous Goods and Services.

As people get older, they spend an increasingly larger share of their total expenditure on essential goods and services, with a parallel reduction in the share of nonessentials. This has huge implications for business as we are still in the phase where 10,000 Boomers a day are retiring. With their retirement comes a shift in consumption and a change in where entrepreneurs should be looking for the next niche.

The decline in consumption during retirement is explained by reduced spending on non-essential items while expenditure on essential items remains relatively flat. There are both potential positive implications and potential negative ones stemming from this. On a positive note, at least essential spending does not fall by much, the majority are still able to purchase the same quantity of essential goods and services that they were able to before.

If older people do not consume, this can ultimately help exacerbate the economic problems caused by population ageing. According to the consumption smoothing hypothesis, people who are middle-aged are the big savers readying themselves for leaving work, while those of older age consume their accumulated wealth.

However, we know that older people do not always consume as might be expected and this can limit economic output. Excess savings are not always a problem, assuming there are sufficient investment opportunities to put those savings to good use, but if there aren’t sufficient opportunities this can spell economic trouble.

In his analysis of what went wrong in Japan, economist Paul Krugman argued that individual savings were too high relative to the economy’s investment opportunities. More specifically he wrote:

“Japan, like the United States only much more so, is an aging society. Thanks to a declining birth rate and negligible immigration, it faces a steady decline in its working-age population for at least the next several decades while retirees increase. Given this prospect, the country should save heavily to make provision for the future […] and it does. But investment opportunities in Japan are limited, so that businesses will not invest all those savings even at a zero-interest rate. And as anyone who has read John Maynard Keynes can tell you, when desired savings consistently exceed willing investment, the result is a permanent recession.”  Paul Krugman

The populations of many advanced (and developing) countries are growing older while many of their older people are continuing to save in later life. Unless we a.) understand how to convert these savings into investment opportunities or b.) stimulate greater consumption amongst older people, it could be argued that countries that don’t do this might experience similar economic