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Pensions and the Retirement Decision

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  • Barry 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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1285.

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Date of creation: Mar 1984
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Publication status: published as Nalebuff, Barry and Richard J. Zeckhauser. "Pensions and the Retirement Decision." Pensions, Labor, and Individual Choice, edited by David A. Wise. Chicago: University of Chicago Press, (1985), pp. 283-316.
Handle: RePEc:nbr:nberwo:1285

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Cited by:
  1. Geoffrey H. Kingston, 2001. "Online Appendix to Efficient Timing of Retirement," Technical Appendices kingston00, Review of Economic Dynamics.
  2. Teresa Villagarcía, 1995. "Análisis econométrico del tránsito a la jubilación para trabajadores de edad avanzada," Investigaciones Economicas, Fundación SEPI, Fundación SEPI, vol. 19(1), pages 65-81, January.
  3. Gustman, A.L. & Mitchell, O.S. & Steinmeier, T.L., 1993. "The Role of Pensions in the Labor Market," Papers, Cornell - Center for Advanced Human Resource Studies 93-07, Cornell - Center for Advanced Human Resource Studies.
  4. 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.
  5. Kingston, G, 1997. "Efficient Timing of Retirement," Papers, New South Wales - School of Economics 97/01, New South Wales - School of Economics.
  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. David Neumark & Wendy A. Stock, 1997. "Age Discrimination Laws and Labor Market Efficiency," NBER Working Papers 6088, National Bureau of Economic Research, Inc.
  8. 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.
  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. repec:wop:syecwp:9903 is not listed on IDEAS

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