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The Pension Inducement to Retire: An Option Value Analysis

In: Issues in the Economics of Aging

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  • James H. Stock
  • David A. Wise

Abstract

The option value model developed in an earlier paper is used to simulate the effect on retirement of changes in a firm's pension plan compared to the effect of changes in Social Security provisions. The provisions of the firm's pension plan have a much greater effect than Social Security regulations on the retirement decisions of the firm's employees. The analysis supports the following conclusions: (1) Increasing the firm's early retirement age from 55 to 60, for example, would reduce by almost 40 percent, from .48 to .30, the fraction of employees that is retired by age 60. (2) The effect of changes in Social Security rules, on the other hand, would be small. Raising the Social Security retirement ages by one year, for example, has very little effect on employee retirement rates. The proportion retired by age 62 is reduced by only about 4 percent. (3) Changes in Social Security provisions that would otherwise encourage workers to continue working can easily be offset by countervailing changes in the provisions of the firm's pension plan. Firm responses, like delaying the Social Security offset to correspond to m later Social Security retirement age, may simply be m logical revision of current firm plan provisions.
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Suggested Citation

  • James H. Stock & David A. Wise, 1990. "The Pension Inducement to Retire: An Option Value Analysis," NBER Chapters, in: Issues in the Economics of Aging, pages 205-230, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:7118
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    References listed on IDEAS

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    1. Wise, David A., 1985. "Pensions, Labor, and Individual Choice," National Bureau of Economic Research Books, University of Chicago Press, number 9780226902937, December.
    2. repec:hoo:wpaper:e-88-28 is not listed on IDEAS
    3. Edward P. Lazear, 1983. "Pensions as Severance Pay," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 57-90, 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 555-584, May.
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    6. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Introduction to "Issues in Pension Economics"," NBER Chapters, in: Issues in Pension Economics, pages 1-12, National Bureau of Economic Research, Inc.
    7. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Chapters, in: Issues in Pension Economics, pages 283-340, National Bureau of Economic Research, Inc.
    8. Laurence J. Kotlikoff & David A. Wise, 1985. "Labor Compensation and the Structure of Private Pension Plans: Evidence for Contractual versus Spot Labor Markets," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 55-88, National Bureau of Economic Research, Inc.
    9. John P. Rust, 1989. "A Dynamic Programming Model of Retirement Behavior," NBER Chapters, in: The Economics of Aging, pages 359-404, National Bureau of Economic Research, Inc.
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    14. Douglas W. Phillips & David A. Wise, 1987. "Military versus Civilian Pay: A Descriptive Discussion," NBER Chapters, in: Public Sector Payrolls, pages 19-46, National Bureau of Economic Research, Inc.
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