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How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets

  • John Rust

    (Yale University)

  • Christopher Phelan

    (Northwestern University)

This paper provides an empirical analysis of how the U.S. Social Security and Medicare insurance system affect the labor supply of older males in the presence of incomplete markets for loans, annuities, and health insurance. Using data from the Retirement History Survey, we estimate a detailed dynamic programming (DP) model of the joint labor supply and Social Security acceptance decision, focusing on a sample of males in the low to middle income brackets whose only pension is Social Security. Comparisons of actual vs. predicted behavior show that the DP model is able to account for wide variety of phenomena observed in the data, including the pronounced peaks in the distribution of retirement ages at 62 and 65 (the ages of early and normal eligibility for Social Security benefits, respectively). The peak at 62 is a result of borrowing constraints that prevent individuals with relatively little tangible net worth from retiring prior to the age of first eligibility for early retirement benefits. The peak at age 65 is a result of incomplete markets for annuities and health insurance and the fact that Social Security benefit formula is actuarially unfair for retirements after age 65.

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Paper provided by EconWPA in its series Public Economics with number 9406005.

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Length: 47 pages
Date of creation: 30 Jun 1994
Date of revision: 06 Jul 1994
Handle: RePEc:wpa:wuwppe:9406005
Note: TeX file, Postscript version submitted 47 pages
Contact details of provider: Web page: http://econwpa.repec.org

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  1. B. Douglas Bernheim, 1990. "How Do the Elderly Form Expectations? An Analysis of Responses to New Information," NBER Chapters, in: Issues in the Economics of Aging, pages 259-286 National Bureau of Economic Research, Inc.
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  6. John P. Rust, 1990. "Behavior of Male Workers at the End of the Life Cycle: An Empirical Analysis of States and Controls," NBER Chapters, in: Issues in the Economics of Aging, pages 317-382 National Bureau of Economic Research, Inc.
  7. Boskin, Michael J. & Hurd, Michael D., 1978. "The effect of social security on early retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 361-377, December.
  8. Ruhm, Christopher J, 1990. "Bridge Jobs and Partial Retirement," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 482-501, October.
  9. Lundberg, Shelly J, 1985. "Tied Wage-Hours Offers and the Endogeneity of Wages," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 405-10, August.
  10. Bound, John, 1989. "The Health and Earnings of Rejected Disability Insurance Applicants," American Economic Review, American Economic Association, vol. 79(3), pages 482-503, June.
  11. Alan B. Krueger & Jorn-Steffen Pischke, 1991. "The Effect of Social Security on Labor Supply: A Cohort Analysis of the Notch Generation," NBER Working Papers 3699, National Bureau of Economic Research, Inc.
  12. Gustman, Alan L & Steinmeier, Thomas L, 1986. "A Structural Retirement Model," Econometrica, Econometric Society, vol. 54(3), pages 555-84, May.
  13. Michael D. Hurd, 1993. "The Effect of Labor Market Rigidities on the Labor Force Behavior of Older Workers," NBER Working Papers 4462, National Bureau of Economic Research, Inc.
  14. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1992. "Three Models of Retirement: Computational Complexity versus Predictive Validity," NBER Chapters, in: Topics in the Economics of Aging, pages 21-60 National Bureau of Economic Research, Inc.
  15. 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.
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  18. Benjamin M. Friedman & Mark Warshawsky, 1985. "Annuity Prices and Saving Behavior in the United States," NBER Working Papers 1683, National Bureau of Economic Research, Inc.
  19. 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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  21. Jonathan Gruber & Brigitte Madrian, 1993. "Health Insurance and Early Retirement: Evidence from the Availability of Continuation Coverage," NBER Working Papers 4594, National Bureau of Economic Research, Inc.
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  24. Burtless, Gary, 1986. "Social Security, Unanticipated Benefit Increases, and the Timing of Retirement," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 781-805, October.
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  36. repec:att:wimass:9106 is not listed on IDEAS
  37. Hurd, Michael D, 1990. "Research on the Elderly: Economic Status, Retirement, and Consumption and Saving," Journal of Economic Literature, American Economic Association, vol. 28(2), pages 565-637, June.
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