What happens when workers suffer a decrease in total wealth due to changes in their retirement plan's benefit levels?
Summary
Individuals participating in the workforce face a complex trade-off between either consuming more now and working longer until retirement, or saving more now and being able to retire earlier. This trade-off is exacerbated when workers suffer an unanticipated reduction in their future retirement benefits. This paper examines how people who experienced such a reduction responded along two dimensions—how long they kept working until retiring and how much consumer credit they used.
Key Insights
- Workers who experience a reduction in retirement benefits are apt to delay retirement by approximately three months.
- Such workers also are likely to increase their outstanding debt balances by roughly $1,600.
- The debt increase is due almost exclusively to an increase in auto-related debt and installment loans.
- The additional debt may represent a worker's attempt to make up for the delayed leisure of retirement by spending more on durable goods while still working.
