1. The Average Propensity to Consume Out of Full Wealth: Testing a New Measure

2. Full Wealth: The Right Measure of Wealth for Consumption  Lifecycle/PIH theory since Modigliani says consumption should depend on all current and future resources (including financial and human wealth.) Essentially a stock value of permanent income from today forward I call this PDV of all resources: “Modigliani full wealth” = M

3. Unprecedented Ability to Measure Full Wealth Health and Retirement Study  Expected present value of resources: M = Net Worth + Human Wealth Net Worth = 10 categories of assets less 3 categories of debt Human Wealth= Earnings+Pensions+Social Security+Other Transfers (deterministic for older households)

4. Outline Full wealth: How it’s different –by age profile, variance, and distribution The APC out of full wealth: C/M (Comparing C/M to C/NetWorth and C/Income) –What to expect from C/M theoretically More tightly distributed More consistent over time Relatively invariant to circumstances and shocks –Empirical Results

5. Full Wealth is Not Just Scaled-Up Net Worth Age Profile of Wealth Full Wealth Net worth

6. Full Wealth Has Less Variance… Coefficients of Variation CVMean Full Wealth0.96$825,000 Net Worth1.67$322,000 Income1.21$61,600 Consumption0.77$40,300

7. …and is more equally distributed Full Wealth Net worth Lorenz Curves

8. The Average Propensity to Consume Out of Full Wealth Neoclassical model: C proportional to M Very limited sources of variation in C/M across households C/M changes only slowly over time (from mortality, changes in returns expectations, or changes in preferences) C/M does not change with income shocks if consumption responds quickly

9. Which Implies… C/M relative to C/NetWorth or C/Income Should Have: Lower variance Higher covariance over time Lower correlation with “circumstances” such as: –Having a pension or the generosity of pension and social security benefits (income replacement rate in retirement) –Earnings profile over lifetime –Having children –Income Shocks Also ∆(C/M) Should Have: Lower correlation with income shocks (also proxied by employment and health shocks)

10. And the data says… Std. Dev.MeanMedianCV C/M 2001.058.078.0600.74 C/M 2003.062.084.0670.74 C/NW 20013.261.05.2213.10 C/NW 200312.562.59.2564.85 C/I 20011.471.22.8281.20 C/I 2003 Lower and more consistent variance Higher covariance over time Covariance 2001&2003 C/M0.70 C/NW0.37 C/I

11. Circumstances Traditional savings or consumption rates (C/I) have “noise” from circumstances, both cross- sectionally and longitudinally Examples: –Households expecting generous DB pension income will save less than otherwise identical households with little or no DB pension –Households experiencing a temporary positive income shock will save more that period

12. How much of C/I is explained by circumstances? If C/M is a cleaner measure of true consumption rates… Then a low covariance between C/I and C/M means a lot of noise in C/I from circumstances Cov = 0.31

13. Cross-Section or Level of C/M: Less Correlated with Many Circumstances Circumstance: Generosity of retirement benefits (DB pension and Social Security) Measure: RetRatio: Ratio of PV(Pension+Social Security) to Average Earnings Over Ages 45-55 Outcome: C/M is less correlated Bivariate OLSCoefficient & T-statR2Const ln(C/M) 2001 on RetRatio.0032** (2.4).004-2.86 ln(C/NW) 2001 on RetRatio.0159*** (6.0).025-1.58 ln(C/M) 2003 on RetRatio.0014 (0.9).001-2.79 ln(C/NW) 2003 on RetRatio.0154*** (5.0).025-1.52

14. …Cont Income Profile Circumstance: Income Profile Measure: Average slope of household earnings during 30s, 40s, 50s & early 60s Outcome: C/M uncorrelated; C/NW & C/I have some significant correlation

15. Dependent Variable → ln(C/M)ln(C/NW)ln(C/I) Independent Variables↓ 2001Earning slope 30s-.067 (-1.3)-.267** (-2.2)-.111* (-1.9) Earning slope 40s.059 (1.3).220** (2.4)-.001 (-0.1) Earning slope 50s.060 (1.1).049 (0.4)-.073 (-1.2) Earning slope early 60s-.049 (-0.6).029 (0.2)-.222** (-2.2) Separate Regressions: 2003Earning slope 30s-.074 (-1.4)-.050 (-0.5) Earning slope 40s.037 (0.8).238*** (2.8) Earning slope 50s.019 (0.4).187* (1.7) Earning slope early 60s-.022 (-0.2)-.183 (-0.8)

16. …Cont Having Children Circumstance: Children Measure: Dummy variable for having any children Outcome: C/M less correlated for 2001; both uncorrelated in 2003 OLSCoefficientT-statR2Const ln(C/M) 2001 on Children-0.102*-1.73.002-2.73 ln(C/NW) 2001 on Children-0.302**-2.32.005-1.16 ln(C/M) 2003 on Children 0.0640.94.001-2.83 ln(C/NW) 2003 on Children-0.109-0.73.001-1.22

17. …Cont Income Shocks Circumstance: Past Income Shock Measure: Change in Earnings over previous years Outcome: C/M less correlated than C/I; results mixed comparing C/M with C/NW Dependent Variable → ln(C/M)ln(C/NW)ln(C/I) Independent Variables↓ 2001Y Shock 2000-2001.086** (2.0).138* (1.6)-.141*** (-3.2) Y Shock 1999-2000-.034 (-0.7)-.086 (-0.8)-.168*** (-3.3) Separate Regressions: 2003Y Shock 2000-2001.076 (1.3)-.069 (-0.6) Y Shock 1999-2000.014 (0.2).088 (0.7)

18. Time-Series: Change in C/M Previous tables showed relative invariance of the level of C/M to circumstances, including income shocks The change in C/M should also be invariant to income shocks if C responds relatively quickly to new information.

19. Change in C/M Less Correlated With Shocks Dependent Variable → ∆(C/M)∆(C/NW)∆(C/I) Independent Variables↓ Y Shock 2000-2001-.050 (-1.3)-.175** (-2.0) Y Shock 1999-2000.001 (0.0).044 (0.4) Separate Regressions: Recent Past Negative Employment Shock -.132 (-1.5)-.429** (-2.3)

20. Instrument that affects M ex-post: Show it does not affect C/M Note: Not sure about this, still working on it. I’ve thought about employment shock (unexpected retirement between 2001 & 2003 or unemployment in 2002) but survey timing of C and M makes this difficult Rate of return shock problematic b/c can’t separate portfolio changes from returns – especially relevant in 2000-2003 when people probably changed their portfolio

21. Conclusion Full Wealth and the APC out of Full Wealth: Empirically match expected distribution characteristics The level of C/M has less correlation with circumstances than either C/NW or C/I The change in C/M is relatively invariant to recent shocks when compared to C/NW or C/I