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Pensions and the Retirement Decision

In: Pensions, Labor, and Individual Choice

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  • Barry J. Nalebuff
  • Richard J. Zeckhauser

Abstract

Pensions influence retirement decisions. The analysis provides a framework for assessing the phenomenon. The qualitative features of most defined benefit pension plans in the United States, as the first section demonstrates, can be used to induce optimal retirement choices. Pensions are viewed as a form of forced savings; their purposeis to enable the worker to "commit himself" by making it in his own self-interest to retire at an appropriate age. The remaining sections examine the use of pensions in populations that are heterogeneous with respect to such features as disutility of work or expected lifespan.Given heterogeneity, a major policy concern is whether pensions are actuarially fair to different groups, retirement cohorts,etc. It is proven that optimal pension plans cannot be actuarially more than fair, in the sense that someone who retires later must impose a smaller cost on the pension pool than he would were he to retire earlier. However, there are differences in life expectancy among cohorts defined by retirement age: late retirees generallyl ive longer. Late retirees may thus impose a greater expected cost on the pension fund under an optimal plan; interestingly, they do impose a higher cost than those retiring earlier under most common pension funds.In a first-best world, a separate pension plan would be designed for each group of workers. But, government-mandated retirement programs and legislation regulating private pensions require common treatment of different workers. Such homogenization is shown to work to the possible detriment of workers as a whole. Pensions are a workhorse compensation mechanism. They provide an additional instrument beyond wages for attracting, motivating, sorting, and retaining workers, while facilitating appropriate retirement decisions.

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This chapter was published in:

  • David A. Wise, 1985. "Pensions, Labor, and Individual Choice," NBER Books, National Bureau of Economic Research, Inc, number wise85-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7137.

    Handle: RePEc:nbr:nberch:7137

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    Cited by:
    1. Robin L. Lumsdaine & David A. Wise, 1994. "Aging and Labor Force Participation: A Review of Trends and Explanations," NBER Chapters, in: Aging in the United States and Japan: Economic Trends, pages 7-42 National Bureau of Economic Research, Inc.
    2. David Neumark & Wendy A. Stock, 1997. "Age Discrimination Laws and Labor Market Efficiency," NBER Working Papers 6088, National Bureau of Economic Research, Inc.
    3. repec:wop:syecwp:9903 is not listed on IDEAS
    4. Kingston, Geoffrey H., 1999. "Efficient Timing of Retirement," Working Papers 03, University of Sydney, School of Economics.
    5. Christian E. Weller, 2011. "What Does the Literature Tell Us About the Possible Effect of Changing Retirement Benefits on Public Employee Effectiveness?," Working Papers wp270, Political Economy Research Institute, University of Massachusetts at Amherst.
    6. Heidler, Matthias & Raffelhüschen, Bernd & Leifels, Arne, 2006. "Heterogenous life expectancy, adverse selection, and retirement behaviour," FZG Discussion Papers 13, Research Center for Generational Contracts (FZG), University of Freiburg.
    7. Gustman, A.L. & Mitchell, O.S. & Steinmeier, T.L., 1993. "The Role of Pensions in the Labor Market," Papers 93-07, Cornell - Center for Advanced Human Resource Studies.
    8. Teresa Villagarcía, 1995. "Análisis econométrico del tránsito a la jubilación para trabajadores de edad avanzada," Investigaciones Economicas, Fundación SEPI, vol. 19(1), pages 65-81, January.
    9. van der Heijden, Eline C. M., 1995. "The economics of pensions and variable retirement schemes : Oliver Fabel, (Wiley, Chichester, 1994) pp. 211," European Journal of Political Economy, Elsevier, vol. 11(3), pages 612-616, September.
    10. Geoffrey H. Kingston, 2001. "Online Appendix to Efficient Timing of Retirement," Technical Appendices kingston00, Review of Economic Dynamics.

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