Working Paper: NBER ID: w2686
Authors: James H. Stock; David A. Wise
Abstract: The paper develops a model of retirement based on the option value of continuing to work. Continuing to work maintains the option of retiring on more advantageous terms later. The model is used to estimate the effects on retirement of firm pension plan provisions. Typical defined benefit pension plans in the United States provide very substantial incentives to remain with the firm until some age, often the early retirement age, and then a strong incentive to leave the firm thereafter. (This may be a major reason for the rapidly declining labor force participation rates of older workers in the United States.) The model fits firm retirement data very well; it captures very closely the sharp discontinuous jumps in retirement rates at specific ages. The model is used to simulate the effect on retirement of potential changes in pension plan provisions. Increasing the age of early retirement from 55 to 60, for example, would reduce firm departure rates between ages 50 and 59 by almost forty percent.
Keywords: Pensions; Retirement; Labor Force Participation; Option Value
JEL Codes: J26; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pension plan provisions (H55) | retirement age of employees (J26) |
| increasing early retirement age from 55 to 60 (J26) | reduce rates at which employees leave the firm (J63) |
| retirement decisions of older workers (J26) | retirement age of employees (J26) |
| pension incentives (J32) | retirement timing (J26) |