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

Listed author(s):
  • John Karl Scholz

    (University of Wisconsin-Madison)

  • Ananth Seshadri

    (University of Wisconsin-Madison)

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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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp271.pdf
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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
Handle: RePEc:mrr:papers:wp271
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  1. 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.
  2. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
  3. John Laitner & Dan Silverman, 2005. "Estimating Life-Cycle Parameters from Consumption Behavior at Retirement," NBER Working Papers 11163, National Bureau of Economic Research, Inc.
  4. David Card & Carlos Dobkin & Nicole Maestas, 2009. "Does Medicare Save Lives?," The Quarterly Journal of Economics, Oxford University Press, vol. 124(2), pages 597-636.
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  7. Rosen, Sherwin, 1988. "The Value of Changes in Life Expectancy," Journal of Risk and Uncertainty, Springer, vol. 1(3), pages 285-304, September.
  8. Kathleen McGarry, 2004. "Health and Retirement: Do Changes in Health Affect Retirement Expectations?," Journal of Human Resources, University of Wisconsin Press, vol. 39(3).
  9. Robert E. Hall & Charles I. Jones, 2007. "The Value of Life and the Rise in Health Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 39-72.
  10. Mariacristina De Nardi & Eric French & John B. Jones, 2010. "Why Do the Elderly Save? The Role of Medical Expenses," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 39-75, 02.
  11. 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 223-255, March-Apr.
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  13. 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.
  14. 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.
  15. Fonseca, Raquel & Michaud, Pierre-Carl & Galama, Titus & Kapteyn, Arie, 2009. "On The Rise of Health Spending and Longevity," IZA Discussion Papers 4622, Institute for the Study of Labor (IZA).
  16. Kevin M. Murphy & Robert H. Topel, 2006. "The Value of Health and Longevity," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 871-904, October.
  17. 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.
  18. Gouveia, Miguel & Strauss, Robert P., 1994. "Effective Federal Individual Tax Functions: An Exploratory Empirical Analysis," National Tax Journal, National Tax Association, vol. 47(2), pages 317-339, June.
  19. 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.
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