Economic Incentives to Retire: A Qualitative Choice Approach

Abstract

This paper addresses two questions:(1) Are older persons' retirement ages significantly affected by the opportunities for income from earnings,private pensions, and Social Security and for leisure at alternative retirement ages?; and (2) How large are the estimated responses? Our approach to modeling the retirement problem is a forward-looking one, in which the explanatory variables include present discounted values of expected lifetime income from earnings, private pensions, and Social Security at all future retirement ages. Such data have been constructed using a unique archive on 390 workers covered by a large union pension plan. A previous paper (Fieldsand Mitchell, 1982) used these data to show that retirement ages are significantly associated with the present discounted value of income at age 60, and with the gain in income from deferring retirement. The current paper develops two different qualitative choice models of the retirement decision. We find: retirement ages do indeed respond significantly to future income and leisure opportunities; an ordered logit model is more suited to the data than is a multinomial logit model; and the estimated responses to changes in future income opportunities differ across model specifications, where the preferred ordered logit model exhibits larger estimated responses.