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The social security early entitlement age in a structural model of retirement and wealth

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  • Gustman, Alan L.
  • Steinmeier, Thomas L.

Abstract

This paper specifies and estimates a structural life cycle model of retirement and wealth that explains the peaks in retirement both at ages 62 and at 65. Our estimates suggest that leisure and time preference are widely distributed among the population, with a bimodal distribution of time preference. Discount rates are either very low or very high. Those with high discount rates find the actuarial adjustments in Social Security benefits, which use a 3 percent real interest rate, to be inadequate. Once they reach age 62, the benefit accrual profile declines with age. This is the major explanation for the spike in retirement activity at 62. Liquidity constraints from inability to borrow on Social Security and pension benefits add to this effect. Simulations with the model suggest that raising the Social Security early entitlement age from age 62 to 64 will shift about three fifths of the bunching of retirements at age 62 to age 64. The bunching amounts to about 8 percent of the population, so raising the Social Security early age of entitlement will cause about 5 percent of the population to delay their retirement, implying a substantial effect on the Social Security system and its finances.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 2-3 (February)
Pages: 441-463

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:2-3:p:441-463

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Robin L. Lumsdaine & Olivia S. Mitchell, . "New Developments in the Economic Analysis of Retirement," Pension Research Council Working Papers 98-8, Wharton School Pension Research Council, University of Pennsylvania.
  2. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
  3. Courtney Coile & Peter Diamond & Jonathan Gruber & Alain Jousten, 1999. "Delays in Claiming Social Security Benefits," NBER Working Papers 7318, National Bureau of Economic Research, Inc.
  4. Gustman, Alan L & Steinmeier, Thomas L, 1986. "A Structural Retirement Model," Econometrica, Econometric Society, vol. 54(3), pages 555-84, May.
  5. Alan L. Gustman & Thomas L. Steinmeier, 2004. "Social security, pensions and retirement behaviour within the family," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 723-737.
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  8. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  9. Alan L. Gustman & Thomas L. Steinmeier, 2004. "Personal Accounts and Family Retirement," Working Papers wp067, University of Michigan, Michigan Retirement Research Center.
  10. Kahn, James A., 1988. "Social security, liquidity, and early retirement," Journal of Public Economics, Elsevier, vol. 35(1), pages 97-117, February.
  11. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
  12. Alan L. Gustman & Thomas L. Steinmeier, 2001. "Retirement and Wealth," NBER Working Papers 8229, National Bureau of Economic Research, Inc.
  13. Eric French, 2000. "The effects of health, wealth, and wages on labor supply and retirement behavior," Working Paper Series WP-00-2, Federal Reserve Bank of Chicago.
  14. Alan L. Gustman & F. Thomas Juster, 1995. "Income and Wealth of Older American Households: Modeling Issues for Public Policy Analysis," NBER Working Papers 4996, National Bureau of Economic Research, Inc.
  15. Gustman, Alan L & Steinmeier, Thomas L, 2000. "Retirement in Dual-Career Families: A Structural Model," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 503-45, July.
  16. Eric M. Engen & William G. Gale & Cori R. Uccello, 1999. "The Adequacy of Retirement Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 65-188.
  17. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, May.
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