New Evidence on Pensions, Social Security, and the Timing of Retirement

Abstract

Both Social Security and private pensions confront older workers with financial incentives to hasten or delay retirement. Depending on the worker's age, employment history, and earnings, there may be large gains or losses in the value of retirement benefits if retirement is delayed. These incentives vary dramatically across pension plans.

Previous studies of retirement have either ignored the financial incentives in pensions or considered the retirement behavior of workers at a limited number firms. This article is the first to estimate the effect of pensions and Social Security on retirement with both detailed pension plan information and a nationally representative cross-section of workers. The main result is that the accrual of retirement wealth from continued work significantly discourages retirement, whereas the level of retirement wealth does not affect the timing of retirement. The option value of retirement developed by Stock and Wise (1990) is shown to be a more reliable measure of retirement incentives than the one-year accrual of retirement wealth.

There are two important implications of these results. First, they show that workers respond to the financial incentives in their retirement plans. Second, the trend in pensions toward large incentives to retire at earlier ages has contributed to lower labor force participation of older workers in the postwar period.

Note: This is a description of the paper and not the actual abstract.