Bo Zhao, China Center for Economic Research

Too Poor to Retire? Housing Prices and Retirement

In this paper, Zhao documents two facts. First, the near-retirement households among all working-age groups in the U.S. experienced larger drops in consumption and greater increases in labor force participation during the financial crisis of 2007 to 2009. Second, the retirement probability for the near-retirement home-owners (but not for renters) decreases more in those areas where house prices also decline more. This paper argues that the wealth effect of house prices on retirement can account for this fact. It creates a calibrated incomplete-market life-cycle partial-equilibrium model with risky housing assets and endogenous retirement. It first verifies that the joint response of retirement and non-durable consumption implied by the structural model is consistent with the empirical findings using data from the Health and Retirement Study 1992 to 2012. It then shows that after a one-time unexpected 27.7 percent house price decline, the near-retirement home-owners aged 55-64 will reduce their non-durable consumption by 4.7 percent and increases their LFP by 0.96 percentage points immediately and delay their retirement by 3 months in the long run. The model also quantifies endogenous retirement as self-insurance for the elderly homeowners against house price risk.