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The Pension Inducement to Retire: An Option Value Analysis

In: Issues in the Economics of Aging

  • James H. Stock
  • David A. Wise

The option value model developed in an earlier paper is used to simulate the effect on retirement of changes in a firm's pension plan compared to the effect of changes in Social Security provisions. The provisions of the firm's pension plan have a much greater effect than Social Security regulations on the retirement decisions of the firm's employees. The analysis supports the following conclusions: (1) Increasing the firm's early retirement age from 55 to 60, for example, would reduce by almost 40 percent, from .48 to .30, the fraction of employees that is retired by age 60. (2) The effect of changes in Social Security rules, on the other hand, would be small. Raising the Social Security retirement ages by one year, for example, has very little effect on employee retirement rates. The proportion retired by age 62 is reduced by only about 4 percent. (3) Changes in Social Security provisions that would otherwise encourage workers to continue working can easily be offset by countervailing changes in the provisions of the firm's pension plan. Firm responses, like delaying the Social Security offset to correspond to m later Social Security retirement age, may simply be m logical revision of current firm plan provisions.

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This chapter was published in:
  • David A. Wise, 1990. "Issues in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise90-1, August.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7118.
    Handle: RePEc:nbr:nberch:7118
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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