Transcript Comments on: “Do Households Increase their Savings When the Kids Leave Home?”

Comments on:
“Do Households Increase their Savings
When the Kids Leave Home?”
17th Annual Joint Meeting of the Retirement Research Consortium
August 6-7, 2015
Washington, DC
Bill Gale
Brookings Institution and Retirement Security Project
Background
• In life-cycle models, the unit making choices is “the household”
• Households aim to equate the marginal utility of consumption
across time periods
• This can be different from equating the level of consumption
across periods
• Differences in achieving these alternative goals will be biggest at
times when household size changes
• Specifically, when kids leave the household, keeping marginal
utility constant for the (remaining) household members involves
cutbacks in consumption levels (i.e., increases in saving)
So, the question is “does saving rise
when kids leave home?”
• YES implies households are rational and we should
worry less low rates of wealth accumulation.
• NO could imply households are irrational and we
should worry more about retirement wealth.
• OR NO could imply that a “kid leaving home” is not
always the same as a “kid leaving the household.”
Major Conclusions
• Household 401(k) contributions rise by less
than 1 percent of earnings when kids leave
home (under various definitions of “leaving
home”).
• This is a tiny fraction of the predicted rise in
saving implied by optimizing models that
imply no undersaving.
Some Comments
• 401(k) contributions can under-measure saving, since saving can occur
in other forms (as the authors note).
– On the other hand, 401(k) contributions could overstate saving, too.
• Are adults with kids somehow different than adults without kids (NO -the coefficient on “never had kids” is smaller than 1 percent of
earnings).
• A kid leaving the home may be a one-time, discrete event, but “kid
leaving “the household” may be a more gradual process.
– If so, instantaneous analysis of saving (or 401(k)) changes will understate the
effects of the kid leaving the household.
Thinking more carefully about
expenditures and financing
• Do household expenditures go down when a
kid leaves home?
• How are those expenditures financed?
(Suggests looking at debt, as well as non401(k) asset accumulation.)
Household Expenses
Child Moves Out and is Gone
18
Child's Age
Household Expenses
Child Goes to College - Expenses
18
22
Child's Age
Child Goes to College - Expenses
and Payments
Household Expenses
Expenses
Payments
18
22
Child's Age
Bottom Line
• The authors are careful to note the caveats
related to their study.
• I think the authors succeed, in their basic mission,
which is to say that there is no evidence of a
major increase in saving when children leave the
home.
• The question that lingers in my head is how long
it takes, empirically, for a kid to really have left
“the household.”