Extreme Weather and Retirement Savings

Vol. 22, No. 2, 2024
by Ted Daverman, Joshua Kazdin, Michael Pensky and Fiona Sloof

In this paper, we discuss the impact of extreme weather on US families with a specific focus on household finances. We first derive a life-cycle model of consumption, then introduce climate change-oriented consumption shocks as an additional expense which is proportional to labor income. Our key finding is that exposure to shocks associated with natural disasters may lower lifetime wealth by interrupting savings contributions. We test this model by demonstrating that households living in counties which experience a high amount of natural disasters suffer lower contributions to long-term savings between 1970 and 2020. We suggest this is driven in part by temporarily lowered income and increased labor market turnover. We conclude with a discussion on how climate change may accelerate a retirement crisis and recommend suggestions for how the financial industry can help households address this challenge.