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Rational Inattention and Oversensitivity of Retirement to the State Pension Age

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  • Jamie Hentall MacCuish

    (University College London)

Abstract

This paper presents evidence that incorporating costly thought, modelled with rational inattention, solves two well-established puzzles in the retirement literature. The first puzzle is that, given incentives, the extent of bunching of labour market exits at legislated state pension ages (SPA) seems incompatible with rational expectations (e.g. Cribb, Emmerson, and Tetlow, 2016). Adding to the evidence for this puzzle, this paper includes an empirical analysis focusing on whether liquidity constraints can account for this bunching and finds they cannot. The nature of this puzzle is clarified by exploring a life-cycle model with rational agents that does match aggregate profiles. This model succeeds in matching these aggregates only by overestimating the impact of the SPA on poorer individuals whilst underestimating its impact on wealthier people. The second puzzle is that people are often mistaken about their own pension provisions (e.g. Gustman and Steinmeier, 2001). Concerning this second puzzle, I incorporate rational inattention to the SPA into the aforementioned life-cycle model, thus allowing for mistaken beliefs. To the best of my knowledge, this paper is the first to incorporate rational inattention into a life-cycle model. Rational inattention not only improves the aggregate fit of the data but better matches the response of participation to the SPA across the wealth distribution, hence simultaneously offering a resolution to the first puzzle. This paper researches these puzzles in the context of the ongoing reform to the UK female state pension age

Suggested Citation

  • Jamie Hentall MacCuish, 2019. "Rational Inattention and Oversensitivity of Retirement to the State Pension Age," 2019 Meeting Papers 336, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:336
    as

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    File URL: https://economicdynamics.org/meetpapers/2019/paper_336.pdf
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    References listed on IDEAS

    as
    1. Staubli, Stefan & Zweimüller, Josef, 2013. "Does raising the early retirement age increase employment of older workers?," Journal of Public Economics, Elsevier, vol. 108(C), pages 17-32.
    2. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    3. repec:oup:restud:v:82:y:2015:i:4:p:1502-1532. is not listed on IDEAS
    4. Luc Behaghel & David M. Blau, 2012. "Framing Social Security Reform: Behavioral Responses to Changes in the Full Retirement Age," American Economic Journal: Economic Policy, American Economic Association, vol. 4(4), pages 41-67, November.
    5. Jakub Steiner & Colin Stewart & Filip Matějka, 2017. "Rational Inattention Dynamics: Inertia and Delay in Decision‐Making," Econometrica, Econometric Society, vol. 85, pages 521-553, March.
    6. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," Review of Economic Studies, Oxford University Press, vol. 82(4), pages 1502-1532.
    7. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    8. Mariacristina De Nardi, 2004. "Wealth Inequality and Intergenerational Links," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 743-768.
    9. Cribb, Jonathan & Emmerson, Carl & Tetlow, Gemma, 2016. "Signals matter? Large retirement responses to limited financial incentives," Labour Economics, Elsevier, vol. 42(C), pages 203-212.
    10. Jonathan Cribb & Carl Emmerson & Gemma Tetlow, 2013. "Incentives, shocks or signals: labour supply effects of increasing the female state pension age in the UK," IFS Working Papers W13/03, Institute for Fiscal Studies.
    11. Jonathan Gruber & David A. Wise, 2004. "Social Security Programs and Retirement around the World: Micro-Estimation," NBER Books, National Bureau of Economic Research, Inc, number grub04-1, September.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Rational Inattention and Oversensitivity of Retirement to the State Pension Age
      by Christian Zimmermann in NEP-DGE blog on 2019-10-10 19:02:20

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