Working Paper: NBER ID: w0876
Authors: Gary S. Fields; Olivia S. Mitchell
Abstract: This paper examines how the structure of earnings and pension opportunities affects retirement behavior. We use a life cycle model of labor supply, paying special attention to the institutional features of private pensions and Social Security benefits. This theoretical formulation is used to develop comparative dynamic pre- dictions and to guide empirical modeling. Data from a new survey of workers and their income alternatives are used to implement the empirical model. Along the way, we highlight a number of interesting and little known facts about older workers' income. Contrary to popular opinion we find that private pensions are not always actuarially neutral; Social Security benefits do not typically decline (in present value terms) the longer retirement is deferred; and for many people, retirement income approaches and even exceeds net labor income. On the basis of empirical estimates of retirement parameters, we conclude that (1) people with higher base incomes retire earlier, and (2) those who have more to gain by postponing retirement, retire later. These findings are relevant to proposed reforms of the Social Security system as well as pension programs.
Keywords: retirement; pensions; social security; labor supply
JEL Codes: J26; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher base income (J31) | Earlier retirement (J26) |
| Postponing retirement (J26) | Later retirement (J26) |
| Higher base income (J31) | Higher marginal utility of leisure (D11) |
| Potential increase in retirement income (J26) | Delay in retirement (J26) |
| Earnings and pension structures (H55) | Optimal retirement age (J26) |