Do Parents Live It Up When Children Fly the Coop?

Publication Date: November 2010

Publisher: Center for Retirement Research at Boston College

Author(s): Norma Coe; Zhenya S. Karamcheva; Anthony Webb

Research Area: Economics

Keywords: savings and consumption

Type: Report

Coverage: United States

Abstract:

With the virtual disappearance of traditional pensions, declining Social Security replacement rates, and longer life spans, the retirement landscape is shifting dramatically. Today, responsibility for a comfortable retirement rests mostly on the individual. This change has led to widespread concern about the adequacy of households’ retirement savings.

Experts disagree on whether Americans are adequately prepared for retirement. A Center for Retirement Research (CRR) study conducted before the financial crisis estimated that 43 percent of households are ‘at risk’ of being unable to maintain their pre-retirement standard of living in retirement. In contrast, another well-publicized study that compares optimal savings with that reported in the Health and Retirement Study (HRS) concluded that less than 4 percent of Americans are behind in their retirement saving.

The difference in the estimated number of individuals under-saving for retirement depends crucially on the assumption of what parents do with the money that is freed up when their children leave home. The CRR study assumes that households maintain relatively constant consumption over time, which implies that parents increase their consumption when their children become financially independent. In contrast, the optimal savings literature assumes that parents save the additional amount. Parents benefit from this strategy in two ways. First, they are able to quickly build up retirement savings. Second, they keep their per-person consumption low and thus need less money to fund consumption in retirement. The question remains: which assumption matches what parents actually do?

This brief presents the findings of a new study that investigates how, in fact, households behave. It shows that parents maintain household-level and increase per-capita consumption when their children leave home. These findings challenge the idea that parents will automatically save more for retirement when their children are independent, indicating that more households are at risk of an unsatisfactory retirement.

This brief is organized as follows. The first section explains a prominent theoretical model of household savings behavior. The second section describes the data and methodology, while the third section reports the findings. The final section concludes that many households are at risk of falling short of maintaining even the consumption level they had while raising their children, let alone the higher level they have enjoyed since their children flew the coop.