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The Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks

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  • John Karl Scholz

    (University of Wisconsin-Madison)

  • Ananth Seshadri

    (University of Wisconsin-Madison)

Abstract

We develop a model of health investments and consumption over the life cycle where health affects longevity, provides flow utility, and retirement is endogenous. We develop a rich, numerical life-cycle model to study the complex interrelationship between health and wealth and the age of retirement. The decision to retire depends on a number of factors including earnings and health shocks, demographic characteristics, preferences, pensions, and social security. We incorporate these features in a computational model of optimal wealth and retirement decisions, solving the model household-by-household using data from the HRS. We use the model to study how workers would respond to an increase in the early eligibility age of retirement (EEA), and to what extent will the bad economy alter retirement plans. We find that increasing the EEA results in sizeable responses to the age of retirement but does not affect health outcomes very much. A 20 percent reduction in wealth induces households to delay retirement by one year, on average, with poor households being relatively unaffected.

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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp271.

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Length: 39 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:mrr:papers:wp271

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  1. David Card & Carlos Dobkin & Nicole Maestas, 2007. "Does Medicare Save Lives?," NBER Working Papers 13668, National Bureau of Economic Research, Inc.
  2. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series WP-09-02, Federal Reserve Bank of Chicago.
  3. Joseph J. Doyle Jr., 2005. "Health Insurance, Treatment and Outcomes: Using Auto Accidents as Health Shocks," NBER Working Papers 11099, National Bureau of Economic Research, Inc.
  4. Sherwin Rosen, . "The Value of Changes in Life Expectancy," University of Chicago - Population Research Center 87-14, Chicago - Population Research Center.
  5. John Laitner & Dan Silverman, 2005. "Estimating Life—Cycle Parameters from Consumption Behavior at Retirement”," Working Papers wp099, University of Michigan, Michigan Retirement Research Center.
  6. Raquel Fonseca & Pierre-Carl Michaud & Titus Galama & Arie Kapteyn, 2009. "On the Rise of Health Spending and Longevity," Working Papers 722, RAND Corporation Publications Department.
  7. Joseph J. Doyle, 2005. "Health Insurance, Treatment and Outcomes: Using Auto Accidents as Health Shocks," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 256-270, May.
  8. 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.
  9. Grossman, Michael, 1972. "On the Concept of Health Capital and the Demand for Health," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 223-55, March-Apr.
  10. Finkelstein, Amy & McKnight, Robin, 2008. "What did Medicare do? The initial impact of Medicare on mortality and out of pocket medical spending," Journal of Public Economics, Elsevier, vol. 92(7), pages 1644-1668, July.
  11. Gordon B.T. Mermin & Richard W. Johnson & Dan Murphy, 2006. "Why Do Boomers Plan to Work So Long?," Working Papers, Center for Retirement Research at Boston College wp2006-19, Center for Retirement Research, revised Nov 2006.
  12. Danziger, Sheldon & Haveman, Robert & Plotnick, Robert, 1981. "How Income Transfer Programs Affect Work, Savings, and the Income Distribution: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 19(3), pages 975-1028, September.
  13. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, July.
  14. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
  15. Kevin M. Murphy & Robert H. Topel, 2005. "The Value of Health and Longevity," NBER Working Papers 11405, National Bureau of Economic Research, Inc.
  16. Kathleen McGarry, 2004. "Health and Retirement: Do Changes in Health Affect Retirement Expectations?," Journal of Human Resources, University of Wisconsin Press, vol. 39(3).
  17. Janet Currie & Jonathan Gruber, 1997. "The Technology of Birth: Health Insurance, Medical Interventions, and Infant Health," NBER Working Papers 5985, National Bureau of Economic Research, Inc.
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Cited by:
  1. Alan L. Gustman & Thomas L. Steinmeier, 2013. "Effects of Social Security Policies on Benefit Claiming, Retirement and Saving," NBER Working Papers 19071, National Bureau of Economic Research, Inc.

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