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Precautionary retirement and precautionary saving

Author

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  • Marco Magnani

    (Università degli Studi di Parma)

Abstract

The paper analyzes the lifetime utility maximization problem of an agent who chooses her saving and timing of retirement in the presence of labor income risk in a simple setting where a pure redistributive pension scheme is in place. In this context, a precautionary motive for retirement, which pushes old workers to replace an uncertain labor income with certain pension payments, and to retire early is identified. The conditions for precautionary retirement and saving to arise are then characterized and interpreted in two settings. In the first setting, utility only depends on income, and a sufficiently low level of absolute prudence is necessary for precautionary retirement. A sufficiently high level is necessary however for precautionary saving, which can coexist with precautionary retirement only for intermediate values of absolute prudence. In the second setting, agent utility also depends on leisure, and three conditions allow the precautionary motive for retirement and saving to jointly operate: prudence, an index of absolute prudence sufficiently low and cross-prudence in leisure.

Suggested Citation

  • Marco Magnani, 2020. "Precautionary retirement and precautionary saving," Journal of Economics, Springer, vol. 129(1), pages 49-77, January.
    • Handle: RePEc:kap:jeczfn:v:129:y:2020:i:1:d:10.1007_s00712-019-00668-6
    DOI: 10.1007/s00712-019-00668-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Precautionary retirement; Precautionary saving; Retirement decision; Labor income risk;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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