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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://128.118.178.162

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  1. Robin L. Lumsdaine & David A. Wise, 1994. "Aging and Labor Force Participation: A Review of Trends and Explanations," NBER Chapters, in: Aging in the United States and Japan: Economic Trends, pages 7-42 National Bureau of Economic Research, Inc.
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  3. James H. Stock & David A. Wise, 1988. "Pensions, The Option Value of Work, and Retirement," NBER Working Papers 2686, National Bureau of Economic Research, Inc.
  4. 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..
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  8. Alan L. Gustman & Thomas L. Steinmeier, 1994. "Employer-Provided Health Insurance and Retirement Behavior," ILR Review, Cornell University, ILR School, vol. 48(1), pages 124-140, October.
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  13. Bernheim, B Douglas & Bagwell, Kyle, 1988. "Is Everything Neutral?," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 308-38, April.
  14. John Rust, 1987. "A Dynamic Programming Model of Retirement Behavior," NBER Working Papers 2470, National Bureau of Economic Research, Inc.
  15. Benjamin M. Friedman & Mark Warshawsky, 1988. "Annuity Prices and Saving Behavior in the United States," NBER Chapters, in: Pensions in the U.S. Economy, pages 53-84 National Bureau of Economic Research, Inc.
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  19. Joseph F. Quinn & Richard V. Burkhauser & Daniel A. Myers, 1990. "Passing the Torch: The Influence of Economic Incentives on Work and Retirement," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number pt, March.
  20. 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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  23. 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.
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  32. repec:att:wimass:9106 is not listed on IDEAS
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