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Integrating Retirement Models

  • Alan L. Gustman
  • Thomas Steinmeier

This paper advances the specification and estimation of models of retirement and saving in two earner families. The complications introduced by the interaction of retirement decisions by husbands and wives have led researchers to adopt a number of simplifications to increase the feasibility of estimating family retirement models. Our model relaxes these restrictions. It includes the extended choice set created when each spouse makes an independent retirement decision. It also includes the full range of complexity found in dynamic-stochastic models of retirement decision making, so far analyzed only in the context of single earner households. Retirement outcomes include full retirement, partial retirement and full-time work. Reverse flows from states of lesser to greater work are also included. The preference structure incorporates heterogeneity in time preference, varying taste parameters for full-time and part-time work, and the possibility of changes in preferences after retirement. The opportunity set reflects the full range of nonlinearities created by pensions and Social Security. Financial returns are stochastic. Exogenous shocks such as layoffs are also included. Estimation is based on data from the Health and Retirement Study. The solution method is based on backward induction. We show that this method is superior to a method based on a Nash equilibrium, providing plausible behavioral predictions when Nash equilibrium criteria fall silent. In contrast to some recent studies, the findings suggest the flow of wives into the labor force in the last few decades has probably reduced the amount of husbands' work. The model also provides plausible responses to various policies. For example, we find that any effort to promote opportunities for partial retirement as a means to increase overall work is likely to be unsuccessful as any induced decline in full retirements is offset by a decrease in full-time work.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15607.

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Date of creation: Dec 2009
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Handle: RePEc:nbr:nberwo:15607
Note: AG LS PE
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  1. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2009. "Opening the Black Box of Intrahousehold Decision Making: Theory and Nonparametric Empirical Tests of General Collective Consumption Models," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 1074-1104, December.
  2. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • 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.
  3. Coile Courtney, 2004. "Retirement Incentives and Couples' Retirement Decisions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-30, July.
  4. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
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  6. Eric French, 2004. "The Effects of Health, Wealth and Wages on Labor Supply and Retirement Behavior," 2004 Meeting Papers 96, Society for Economic Dynamics.
  7. Hugo Ben�tez-Silva & Moshe Buchinsky & Hiu Man Chan & Sofia Cheidvasser & John Rust, 2004. "How large is the bias in self-reported disability?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 649-670.
  8. Michaud, P.C., 2003. "Joint Labour Supply Dynamics of Older Couples," Discussion Paper 2003-69, Tilburg University, Center for Economic Research.
  9. 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.
  10. Alan Krueger & Jorn-Steffen Pischke, 1989. "The Effect of Social Security on Labor Supply: A Cohort Analysis of the Notch Generation," Working Papers 635, Princeton University, Department of Economics, Industrial Relations Section..
  11. Donna B. Gilleskie & David M. Blau, 2006. "Health insurance and retirement of married couples," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 935-953.
  12. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
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  14. Benitez-Silva, Hugo & Buchinsky, Moshe & Chan, Hiu Man & Rust, John & Sheidvasser, Sofia, 1999. "An empirical analysis of the social security disability application, appeal, and award process," Labour Economics, Elsevier, vol. 6(2), pages 147-178, June.
  15. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 607-643, August.
  16. Michael D. Hurd, 1990. "The Joint Retirement Decision of Husbands and Wives," NBER Chapters, in: Issues in the Economics of Aging, pages 231-258 National Bureau of Economic Research, Inc.
  17. Berkovec, James & Stern, Steven, 1991. "Job Exit Behavior of Older Men," Econometrica, Econometric Society, vol. 59(1), pages 189-210, January.
  18. Blau, David M., 1997. "Social security and the labor supply of older married couples," Labour Economics, Elsevier, vol. 4(4), pages 373-418, December.
  19. Wilbert van der Klaauw & Kenneth I. Wolpin, 2005. "Social Security and the Retirement and Savings Behavior of Low Income Households," PIER Working Paper Archive 05-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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