The Economist

Ageing and personal finance

Time as money
Aug 8th 2013, 11:40 by C.W. | LONDON

HOW much we spend depends on how old we are. Generally, people

increase their day-to-day expenditure until middle age, but spending drops
thereafter. Economists call this the hump in life-cycle spending. But it is
difficult to determine exactly what drives the fall in spending as people age.
Most people think that declining income leads to cutting back on nonessential purchases. This makes intuitive sense. If you have less purchasing
power, it is easier to cut back on holidays than it is on food.
A new paper* challenges this consensus. The authors, Mark Aguiar from
Princeton and Erik Hurst from Chicago, argue that our understanding of
life-cycle expenditure has missed quite a bit of detail. The focus of their
paper is on non-durable itemsgoods that wear out quickly, such as food,
clothing and drink. The authors start their analysis on familiar ground.
They show that expenditures peak in middle age, at a level roughly 25%
higher than expenditures at 25 or 65: the classic hump shape.

But their data, primarily drawn from the Consumer Expenditure Survey
from 1980 to 2003, provide an alternative explanation for why expenditure
falls as people enter old age. To start with, they reveal that spending on
non-essential items does not drop. In fact, it increases. But three categories
do see declines: food, transportation and personal care (which includes
clothing).
To explain these trends, Messrs Aguiar and Hurst argue we cannot just look
at fluctuations in financial firepower. Instead, lifestyle changes are more
important. For example, beyond the age of 60, when people are more likely
to be retired, expenditure on transport to work declines. Non-work travel
time actually increases over the second half of the life cycle; people have
more time to go to museums and see friends. But, overall, the effect of
retirement is so strong that total travel time, and spending on travel, drops.
The authors make a similar argument in relation to money spent on
clothing. Quite simply, people out of work need feweror less expensive
clothes.
The authors also argue that, as people age, their relationship with time
changes. Economists are fond of the phrase opportunity cost, which
refers to what you forego in order to do something else.
For people in work, the opportunity cost of time is high. An hour spent
preparing a meal at home could be an hours foregone earnings; it might
make economic sense to go to the local takeaway instead. But when retired,
people might not think in this way. Rather, they may take pleasure in
spending time making a quality meal, rather than buying it. And the authors
find that the decline in expenditure on food consumed away from home
after middle age is driven by people visiting fast food establishments or
cafeterias less frequently. In addition, after middle age, individuals spend
more time carefully preparing meals and shopping for food, leading to
lower expenditure on food at home.
But the authors show that elderly people do not spend less at table-service
restaurants. These restaurants do not serve a time-saving function to
anybody; rather, they are pleasant places to go to. So, even though retired
people have more time, they are as inclined to sit down for a meal at a nice
restaurant as they ever were.
The paper shows that changing time richness, rather than income richness,
is what drives changing spending patterns in the elderly. Why are these
findings important? They could revolutionise the way that we measure
poverty. Normally, expenditure is the measure used to assess whether
someone is in poverty or not. And by this metric, older people are more

likely to be in poverty. The elderly do spend less. But once we include time
into the equation, grey poverty levels might be lower. Elderly people
have more time, and this can compensate for lower income.
The problem for researchers is that government data collection practices
lag behind advances in economic thinking. Mr Hurst grumbles that most
methods for wellbeingsuch as the British Household Surveytypically
do not include many questions about time use. But it would be relatively
easy to include them. And this would help us to understand better exactly
what happens to people as they age.
* Aguiar, M. and Hurst, E. (2013) Deconstructing Life Cycle Expenditure Journal of Political Economy, Vol. 121, No. 3, pp. 437492.