Social Security and Retirement Decisions
One of the most striking features of the postwar U.S. economy has been the rapid decrease in the labor force participation of the elderly at a time when the health of this group has been improving. In spite of this, previous research, based on retrospective interviews with the retired population, usually concludes that poor health accounts for the overwhelming majority of retirements. The current results suggest that nothing could be further from the truth. Using data from the Panel Study of Income Dynamics, we follow a cohort of white married males through their sixties to estimate a model of retirement behavior. Using several definitions of retirement suggested in the literature, the results suggest that the two key policy parameters of the social security system â€" the income guarantee and the implicit tax on earnings â€" exert an enormous influence on retirement decisions. For example, our results suggest that a decrease in the implicit tax rate on earnings from one-half to one-third would reduce the annual probability of retirement by almost sixty percent! Applying the coefficient estimates to time series data on the labor force participation of the elderly implies that the social security sys-tem has been the major factor in the explosion in earlier retirement.
|Date of creation:||Oct 1975|
|Date of revision:|
|Publication status:||published as Economic Inquiry (January 1977).|
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- Brittain, John A, 1971. "The Incidence of Social Security Payroll Taxes," American Economic Review, American Economic Association, vol. 61(1), pages 110-25, March.
- Campbell, Colin D, 1969. "Social Insurance in the United States: A Program in Search of an Explanation," Journal of Law and Economics, University of Chicago Press, vol. 12(2), pages 249-65, October.
- Feldstein, Martin S, 1972. "The Incidence of the Social Security Payroll Tax: Comment," American Economic Review, American Economic Association, vol. 62(4), pages 735-38, September.
- Arnold Harberger, 1964. "Taxation, Resource Allocation, and Welfare," NBER Chapters, in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80 National Bureau of Economic Research, Inc.
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