The Economics of Retirement: A Nontechnical Guide

Summary

---

Concern about the economic consequences of the aging of the United States population has prompted considerable research activity during the past two decades. Economists have carefully examined retirement patterns and trends, and sought to identify and measure the determinants of the timing of retirement by older workers. Much of the published retirement research is fairly technical by nature and is somewhat inaccessible to nonspecialist audiences. This article provides a nontechnical overview of this research. In contrast to other reviews of the retirement literature, this exposition emphasizes the basic ideas and reasoning that economists use in their research. In the course of recounting how economists' views about retirement have evolved in recent years, the article highlights landmark pieces of research, points out the specific advances made by the various researchers, and assesses what has been learned along the way.

See the full content of this document

Extract

---

The Economics of Retirement: A Nontechnical Guide

The Economics of Retirement: A Nontechnical Guide

Concern about the economic consequences of the aging of the United States population has prompted considerable research activity during the past two decades. Economists have carefully examined retirement patterns and trends, and sought to identify and measure the determinants of the timing of retirement by older workers. Much of the published retirement research is fairly technical by nature and is somewhat inaccessible to nonspecialist audiences. This article provides a nontechnical overview of this research. In contrast to other reviews of the retirement literature, this exposition emphasizes the basic ideas and reasoning that economists use in their research. In the course of recounting how economists' views about retirement have evolved in recent years, the article highlights landmark pieces of research, points out the specific advances made by the various researchers, and assesses what has been learned along the way.

*Division of Economic Research, Office of Research, Statistics and Evaluation, Social Security Administration.

This article appears as Chapter 11, "Econofnic Model of Work-Leisure Choice," in Handbook on Employment of the Elderly, edited by William H. Crown, published in 1996. It is reprinted (with minor modifications and updating) with permission from Greenwood Press, Westport, CT.

Acknowledgments: The author thanks Linda Del Bene for producing the article's charts, and Benjamin Bridges, William Crown, Selig Lesnoy, David Pattison, David Weaver, and Peter Wheeler for helpful comments on earlier drafts.

Social Security Bulletin Vol. 59, No. 4. Winter

l

Since the 1970's there has been a considerable resurgence of interest among economists in the study of older workers' labor supply and retirement issues. Much of the impetus for this research has been generated by public concern about a set of issues surrounding the aging of American society that will occur over the next several decades. These issues include the probable impact of an aging workforce on American productivity and living standards, the continued financial soundness of Social Security and private pension plans in the face of large increases in the number of retirees, and the changes in the economy and society that will be necessitated by the demands of a larger elderly population (for example, increased demand for health services, or changes in living accommodations).

Empirical research on retirement issues has also been stimulated by the development of databases that provide much of the information needed to explore aging issues. Most prominent among these was the Social Security Administration's Retirement History Study, a 1 O-year study of approximately 11,000 Americans who were aged 58-63 in 1969. During the 1969-79 survey period, in which the respondents were interviewed every 2 years, most of the sample members retired, permitting researchers to collect and analyze a large amount of data on the circumstances surrounding the timing of retirement. Much of what is currently understood about the labor supply and retirment behavior of older workers derives from studies based on this very rich database.'

The purpose of this article is to provide a nontechnical explanation of the basic ideas that underpin economists' thinking about work and retirement decisions, and also to discuss and elaborate on the basic economic model of retirement. The plan of the article is to begin with a simple economic model of an individual's work decision, to explain the construction and logic of this model, and to show how the model can be used to make basic predictions

1996 29

about factors that might plausibly affect the timing of retirement. From this starting point-which essentially describes the economic retirement models before the late 1970's-the article then explains how the model has been extended during the past two decades. The increasing sophistication and complexity of the models reflect scientific progress in which new retirement research incorporates the findings of previous efforts, the desire to incorporate more realism into the models, and the availability of improved data. The progress in economic modeling is emphasized as the contributions of various influential studies are reviewed.

The Lubor Supply of Older Workers: An Overview

Before recounting the standard economic approach to the analysis of work and retirement decisions, it is helpful to point out several well-documented facts about the work activity patterns of older Americans that any sound theory of work and retirement behavior should address.

l Nearly all United States full-time workers with strong lifelong labor-force attachment retire from the labor force between the ages of 55 and 70. Chart the 1995 labor-force participation rates* for women in this age interval. The 1995 graphs qualitatively similar to those for most recent men's (women's) graph shows a pronounced participation rates from 83.4 (62....

See the full content of this document

---