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The social security early entitlement age in a structural model of retirement and wealth

  • Gustman, Alan L.
  • Steinmeier, Thomas L.

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

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 2-3 (February)
Pages: 441-463

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:2-3:p:441-463
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 03-95, Wharton School Rodney L. White Center for Financial Research.
  2. Alan L. Gustman & Thomas L. Steinmeier, 2001. "Retirement and Wealth," NBER Working Papers 8229, National Bureau of Economic Research, Inc.
  3. Robin L. Lumsdaine & Olivia S. Mitchell, . "New Developments in the Economic Analysis of Retirement," Pension Research Council Working Papers 98-8, Wharton School Pension Research Council, University of Pennsylvania.
  4. 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.
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  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. Alan L. Gustman & Thomas L. Steinmeier, 2004. "Personal Accounts and Family Retirement," Working Papers wp067, University of Michigan, Michigan Retirement Research Center.
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  11. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
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  13. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
  14. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
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  18. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, August.
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