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The Social Security Early Entitlement Age in a Structural Model of Retirement and Wealth

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  • Alan L. Gustman

    (Dartmouth College and NBER)

  • Thomas L. Steinmeier

    (Texas Tech University)

Abstract

This paper specifies and estimates a structural life cycle model of retirement and wealth and applies that model both to understand the role of the social security early entitlement age in creating a peak in retirements at age 62, and to simulate the effects of postponing the Social Security early entitlement age from 62 to 64. The model includes a set of budget equations and a utility function. Data are from the first five waves of the Health and Retirement Study and are confined to married men. The budget equations fully incorporate the complex incentives from social security (relying mainly on respondents’ earnings records), wage offers for full and partial retirement work, the incentives created by pensions (measured from employer provided plan descriptions), as well as the influence on retirement and saving of health status, family structure, and constraints from the firm side, such as layoffs and inability to reduce hours on the main job. Parameters of the utility function reflect the influences of time and leisure preference and vary among individuals. Estimation is based on the general method of moments. 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 have a substantial effect on the social security system and its finances.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp029.pdf
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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp029.

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Length: 44 pages
Date of creation: Jun 2002
Date of revision:
Handle: RePEc:mrr:papers:wp029

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  1. Lumsdaine, Robin L. & Mitchell, Olivia S., 1999. "New developments in the economic analysis of retirement," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 49, pages 3261-3307 Elsevier.
  2. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
  3. Kahn, James A., 1988. "Social security, liquidity, and early retirement," Journal of Public Economics, Elsevier, vol. 35(1), pages 97-117, February.
  4. Alan L. Gustman & Thomas L. Steinmeier, 1986. "A Structural Retirement Model," NBER Working Papers 1237, National Bureau of Economic Research, Inc.
  5. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-94, March.
  6. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  7. Alan L. Gustman & Thomas L. Steinmeier, 2004. "Personal Accounts and Family Retirement," Working Papers wp067, University of Michigan, Michigan Retirement Research Center.
  8. 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.
  9. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
  10. Coile, Courtney & Diamond, Peter & Gruber, Jonathan & Jousten, Alain, 2002. "Delays in claiming social security benefits," Journal of Public Economics, Elsevier, vol. 84(3), pages 357-385, June.
  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 & 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.
  13. Alan L. Gustman & Thomas L. Steinmeier, 2001. "Retirement and Wealth," Working Papers wp002, University of Michigan, Michigan Retirement Research Center.
  14. 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.
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