Transition to retirement and beyond: Studies in retirement behaviour in Australia

Abstract

The ageing of the population is a global phenomenon which poses a unique set of challenges for policymakers regarding health and age care, labour market dynamics of older workers and devising systems of social protection. The design of the Australian retirement income system based on a public Age Pension supplemented by mandatory and voluntary retirement savings places emphasis on individual decision-making and accountability by individuals to deliver adequate retirement incomes. The focus of this thesis is to understand the investment and consumption decisions made by Australians who are transitioning to, and in the early years of, retirement. That is, specifically people aged 45 years and over. We start by developing and solving a simple life-cycle optimisation problem for individuals 45 years and over incorporating features of the Australian retirement income system to motivate our empirical research questions and inform our research findings. We find optimal consumption paths to be smooth throughout the individual’s lifetime while the optimal portfolio weight for risky asset is higher for working life than for retirement. We then investigate investment and consumption behaviour of the pre and actual retirees using the Household Income Labour Dynamics of Australia panel dataset for the period 2001 to 2011. We find some evidence of a fall in the proportion of risky assets held for retired single and couple Australian households using a pooled ordinary least squares model, a fixed effects model and a random effects model. We also find a drop in consumption at retirement for older Australian households. However, after employing instrumental variables estimation with subjective retirement expectations as an instrument we find the fall is mainly due to unplanned retirement. There is also a possible delayed effect as the impact of retirement on consumption maybe felt beyond the first year of retirement. Overall, older Australian households are behaving fairly consistently with the life-cycle portfolio theory of consumption and portfolio choice – they hold less risky assets in retirement and have smooth consumption unless faced with external shock leading to unplanned retirement.