Children and Retirement Income Adequacy

Abstract

A typical household spends about $13,000 per year providing each child with food, clothing, shelter, and other essentials of life, with parental expenditures on children totaling 5% of gross domestic product. Several studies have shown that how children are assumed to interact with household expenditures and saving has first-order effects on judgments of the adequacy of retirement saving by US households, yet the effect of children on their parents’ ability and need to save for retirement is unresolved. This article uses data from the Panel Study of Income Dynamics (PSID) to track changes in household spending and saving as children transition to financial independence and parents’ transition from work into retirement. The PSID data accord with an interpretation of the life-cycle model in which parental households consume more and save less during the period children are being raised, but reduce consumption and increase saving as children become economically independent. These results point toward a more optimistic picture of the adequacy of US household retirement savings.