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Retirement and Wealth

  • Alan L. Gustman

    (Dartmouth College and NBER)

  • Thomas L. Steinmeier

    (Texas Tech University)

This paper analyzes the relationship between retirement and wealth. In a simple model where the only heterogeneity is in leisure preference, other things the same, those who retire early accumulate more wealth while still working, enabling them to support themselves over their longer retirement period. Moreover, characteristics that encourage earlier retirement also encourage additional saving. If there were heterogeneity in both leisure and time preference, however, this simple relation is broken. Early retirees do not necessarily save more. Using data from the first four waves of the longitudinal Health and Retirement Study, a cohort of individuals born from 1931 to 1941, we estimate reduced form retirement and wealth equations. Linked employer provided pension plan descriptions and social security administrative records are central to the analysis. The value of the pension and social security beyond current period accrual is measured by the difference between the present value of the benefit stream resulting from additional work until the date of retirement and the present value of a stream of benefits equal each year to the value of benefit accrual in the initial period. This measure, which we call the premium value, captures any excess value from the spikes at early and normal retirement age in a defined benefit plan. But it also has zero value in the case of a defined contribution plan. Calculating benefit increments on the assumption that benefits are claimed as soon as eligible after retiring, and that respondents link delayed benefit claiming with delayed retirement, the estimated retirement equation indicates that a higher future reward from pensions and social security encourages postponed retirement. Factors leading to early retirement do not systematically generate higher saving. Many independent variables do not have symmetric effects in the retirement and wealth equations. Unobservables from the retirement and wealth equations are only weakly correlated. A related finding, not easily reconciled with a simple life cycle model of saving, is that higher pension wealth and social security wealth do not substitute for other forms of wealth, but add to total wealth. In addition, other findings support a more complicated view of the underlying behavior. Most importantly, despite a significant payoff to waiting, retirees do not time the acceptance of their social security benefits so as to maximize expected value. Most respondents take their social security benefits as soon as eligible after retirement. This raises questions about the way social security and pensions are calculated as explanatory variables in reduced form retirement equations. These and other findings, e.g., on measuring retirement and on the role of partial retirement, raise doubts about the value of using reduced form retirement equations to estimate the effects of changing such social security policies as the early retirement age. Reduced form retirement equations must be used with great caution in situations where they are analyzing new policy initiatives. Unobserved heterogeneity interacts with observable variables to produce the estimated coefficients in these equations, but these interactions are not necessarily the same if the policy changes in new ways.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp002.

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Length: 48 pages
Date of creation: Mar 2001
Date of revision:
Handle: RePEc:mrr:papers:wp002
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  1. Gustman, Alan L. & Steinmeier, Thomas L., 1999. "Effects of pensions on savings: analysis with data from the health and retirement study," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 271-324, June.
  2. Alan L. Gustman & Thomas L. Steinmeier, 1984. "Partial retirement and the analysis of retirement behavior," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 37(3), pages 403-415, April.
  3. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-99, April.
  4. James H. Stock & David A. Wise, 1988. "Pensions, The Option Value of Work, and Retirement," NBER Working Papers 2686, National Bureau of Economic Research, Inc.
  5. Martin Feldstein & Andrew Samwick, 1992. "Social Security Rules and Marginal Tax Rates," NBER Working Papers 3962, National Bureau of Economic Research, Inc.
  6. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
  7. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  8. Alan L. Gustman & Olivia S. Mitchell & Andrew A. Samwick & Thomas L. Steinmeier, . "Pension and Social Security Wealth in the Health and Retirement Study," Pension Research Council Working Papers 97-3, Wharton School Pension Research Council, University of Pennsylvania.
  9. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1980. "Reconsidering the Work Disincentive Effects of Social Security," NBER Working Papers 0562, National Bureau of Economic Research, Inc.
  10. Courtney Coile & Peter Diamond & Jonathan Gruber & Alain Jousten, 1999. "Delays in Claiming Social Security Benefits," NBER Working Papers 7318, National Bureau of Economic Research, Inc.
  11. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
  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. 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.
  14. Alan Gustman & Olivia S. Mitchell & Thomas L. Steinmeier, . "Retirement Measures in the Health and Retirement Survey," Pension Research Council Working Papers 94-2, Wharton School Pension Research Council, University of Pennsylvania.
  15. Alan L. Gustman & Thomas L. Steinmeier, 1999. "What People Don't Know About Their Pensions and Social Security: An Analysis Using Linked Data from the Health and Retirement Study," NBER Working Papers 7368, National Bureau of Economic Research, Inc.
  16. Kahn, James A., 1988. "Social security, liquidity, and early retirement," Journal of Public Economics, Elsevier, vol. 35(1), pages 97-117, February.
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