Why Old-Age Poverty Matters: Evidence from Consumption Responses to Income Shocks

Yunho Cho, Jiseob Kim and Julie Kim
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Yunho Cho: Jinan University
Julie Kim: University of Wisconsin Madison

No 2024rwp-234, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: This paper investigates consumption responses to idiosyncratic income shocks, focusing on the elderly in Korea—an economy with the highest old-age poverty rate among developed nations. Using a semi-structural model of income and consumption dynamics alongside household survey data from Korea, the U.S., and Australia, we find that Korean elderly households exhibit consumption responses to permanent income shocks that are 30 percentage points higher than those of middle-aged households in Korea and 57 percentage points higher than those of elderly households in the U.S. and Australia. These large consumption responses are primarily driven by the low wealth elderly, who lack sufficient self-insurance. Our findings emphasize the significant role of poverty, which remains highly persistent throughout the life cycle in Korea, in undermining the elderly’s ability to maintain consumption insurance, thereby deteriorating their welfare. Furthermore, our results highlight the critical role of government transfers in providing consumption insurance for the elderly.

Keywords: Consumption Responses; Income Risks; Old-Age Poverty (search for similar items in EconPapers)
JEL-codes: C13 C33 D12 D14 E21 (search for similar items in EconPapers)
Pages: 72pages
Date: 2024-12
New Economics Papers: this item is included in nep-age and nep-dem
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