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Since the mid-nineties, the stock market has had an unprecedented impact on the wealth
of current and future retirees. Using data from the Current Population Survey and the
Health and Retirement Study, this report estimates consumption and labor supply
responses of individuals in their 50s and 60s to the recent stock market downturn. We
estimate an elasticity of consumption with respect to wealth changes ranging from five to
seven percent. This implies that households respond to a decline in wealth by reducing
their consumption by 5 to 7 percent of the wealth decline. For example, if a household's
wealth declined by $100,000, this estimate suggests they would reduce their annual
consumption by $5,000 to $7,000. Among retirees, we do not observe any re-entry into
the labor force in response to wealth losses due to stock market declines. This suggests
that retirement is more or less an absorbing state, for either supply or demand reasons:
once an individual retires, it is very difficult to become employed once again.
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