Do Households Increase Their Savings
When the Kids Leave Home?
Irena Dushi, Alicia H. Munnell, Geoffrey T. Sanzenbacher, and Anthony Webb
U.S. Social Security Administration and Center for Retirement Research at Boston College
17th Annual Meeting of the Retirement Research Consortium
Washington, DC
August 7, 2015
Saving behavior when kids leave home has
big effect on target replacement rates…
Hundreds
Illustrative Consumption by Age, as Percent of Income, Alternative Assumptions Regarding Kids
Income
100%
80%
60%
40%
Consumption cut when
kids leave home
Constant consumption
20%
Social Security
0%
25
35
45
55
65
75
85
90
Age
Source: Authors’ illustration.
1
…and explains why researchers disagree
about retirement savings adequacy.
• Research that assumes households do not cut consumption
when kids leave generally finds households are not prepared
(e.g. Munnell, Rutledge, and Webb (2014) using the NRRI).
• Research that assumes households do cut consumption
generally finds households are prepared (e.g. Scholz, Seshadri,
and Khitatrakun (2006)).
2
Kids explain half the difference in the results
between the two approaches.
Percentage of Households Age 51-61 At Risk, 2004
40%
35.3%
30%
24.3%
20%
11.5%
10%
8.0%
0%
Original NRRI NRRI adjusted NRRI adjusted
Scholz and
for optimal
for optimal Seshadri (2008)
drawdown
drawdown +
children
Source: Alicia H. Munnell, Matthew S. Rutledge, and Anthony Webb. 2014. “Are Retirees Falling Short? Reconciling the Conflicting
Evidence.” Working Paper 2014-16. Center for Retirement Research at Boston College.
3
What evidence do we have about how
households actually behave?
• Coe and Webb (2010) used Health and Retirement Study
consumption data.
o They find no evidence that total consumption declines
when the kids leave home.
o But sample size is small and data noisy.
• Rottke and Klos (2013) used European data.
o They find a modest decline in consumption and increase
in saving when kids leave.
4
We examine savings instead of consumption.
• For a given level of income and taxes, the amount not
consumed is saved.
• So testing for changes in savings is the flip side of testing for
changes in consumption.
• Study uses two separate datasets to explore the effects:
o Health and Retirement Study (HRS).
o Survey of Income and Program Participation (SIPP).
5
Advantages of our datasets.
Advantages of HRS Data
• Linked to W-2 data on 401(k) contributions.
• Long panel, so observations pre- and post-kids leaving home.
• Includes extensive control variables.
Advantages of SIPP Data
• Includes households of all ages.
• Large sample size.
6
We estimate two equations: 1) pooled cross
section (HRS and SIPP)…
Si ,t   0  1 NoKidsi ,t   2 KidsGonei ,t   3Yi ,t  X i ,t   i ,t
Where,
• Si,t = 401(k) contribution rate
• NoKidsi,t = indicator for households that never had kids
• KidsGonei,t = indicator for households with kids who have left home
• Yi,t = income
• Xi,t = vector of controls including education, race and ethnicity,
presence of a mortgage.
7
…and (2) fixed effects model (HRS only).
Si,t - S i = a2 KidsGonei, t + a3 (Yi,t -Yi )+ g (Xi,t - Xi)+ ui.t
Where,
• Si,t - S i = deviation from average 401(k)
• KidsGonei,t = indicator for households with resident kids during
sample but who have left home.
• Yi,t -Yi = deviation from average household income.
• Xi,t - Xi = deviation in controls (only controls that change over time,
e.g. age, presence of mortgage).
8
HRS households whose kids have left home
are similar to those with resident kids.
Selected Characteristics of Married HRS Households With Kids
Number of kids
Age when oldest kid born
Age at first observation
Education
Less than high school
Some college
Black non-Hispanic
Hispanic
Homeowner
Has mortgage
Kid status during observation period
Never resident
Resident throughout
Left home
2.8
3.2
3.1
23.2
28.2
25.2
54.6
52.3
53.5
10.6%
49.6%
7.2%
3.4%
90.7%
65.8%
10.8%
61.0%
14.1%
13.7%
91.4%
79.0%
11.9%
57.1%
9.8%
7.3%
91.7%
73.5%
Source: Authors’ calculations from Waves 1-10 of the Health and Retirement Study.
9
HRS results for pooled cross section show
small effect of kids on contribution rate.
Impact of Kids on 401(k) Contributions as Percentage of Salary
Not resident
Kids not in home
Never had kids
0.898***
(0.199)
-0.148
(0.484)
Definition of kids leaving home
Not resident and
Not continuously resident or
not in school
in school
0.446**
0.753***
(0.190)
(0.194)
0.407
0.609
(0.488)
(0.490)
Note: Significance is indicated at the 1-percent level (***) and 5-percent level (**).
Source: Authors’ calculations from Waves 1-10 of the Health and Retirement Study.
10
HRS results with fixed effects generally
show no effect.
Impact of Kids on 401(k) Contributions as Percentage of Salary
Not resident
Kids were in residence, but left
0.381*
(0.225)
Definition of kids leaving home
Not resident and
Not continuously resident or
not in school
in school
-0.046
0.118
(0.197)
(0.220)
Note: Significance is indicated at the 10-percent level (*).
Source: Authors’ calculations from Waves 1-10 of the Health and Retirement Study.
11
SIPP results are consistent with the HRS
cross-section analysis – a small effect when
kids leaving defined by age.
Impact of Kids on 401(k) Contributions as Percentage of Salary
Kids not in home
(Base = Res. kids)
Youngest 19-22
(Base = 0-18)
Youngest 23+
(Base = 0-18)
Never had kids
Definition of kids leaving home
Based on residence
Based on age of
in household
youngest child
-0.094
(0.103)
-0.292**
(0.148)
0.320**
(0.150)
0.497***
0.518***
(0.107)
(0.105)
Note: Significance is indicated at the 1-percent level (***) and 5-percent level (**).
Source: Authors’ calculations from the 2001, 2004, and 2008 Survey of Income and Program Participation.
12
What effect do models predict?
• The HRS and SIPP suggest households increase 401(k) saving
by 0.3 to 0.9 percent of salary when kids leave.
• The increase in saving is small compared to that predicted by
models that assume consumption cut when kids leave.
• For example, consider a household with 2 kids making
$100,000 and contributing 6 percent to 401(k):
o
Those models imply an increase in contributions to the
deferral limit of 18 percent when kids leave.
o
This increase of 12 percentage points is much larger than
that indicated by our results.
13
Caveats
• This finding is not the final word on the subject.
• Households could increase savings in other ways, for example
by paying down debt or increasing mortgage payments.
• The response may be lagged even more than is visible in the
HRS.
• Finally, parents might still support kids who are out of house
and school.
14
Conclusion and next steps
• Evidence of only small increases in 401(k) contributions when
the kids leave home.
• Will investigate other forms of savings/debt reduction, such as
increases in non-401(k) saving.
• Subject to this caveat, our findings are more consistent with the
model used in the National Retirement Risk Index – many
households may be at risk.
15