Macroeconomic Determinants of Retirement Timing

Published: 2013


We analyze lifetime earnings histories of white males during 1960-2010 and categorize the labor force status of every worker as either working full-time, partially retired or fully retired. We find that the fraction of partially retired workers has risen dramatically (from virtually zero to 15 percent for 60-62 year olds), and that the duration of partial retirement spells has been steadily increasing. We estimate the response of retirement timing to variations in unemployment rate, inflation and house prices. Flows into both full and partial retirement increase significantly when the unemployment rate rises. Workers around normal retirement age are especially sensitive to variations in unemployment rate. Workers who are partially retired show a differential response to a high unemployment rate: younger workers increase their partial retirement spell, while older workers accelerate their transition to full retirement. We also find that high inflation discourages full-time work and encourages partial and full retirement. House prices do not have a significant impact on retirement timing.

Key Findings

    • We find a general decline in full employment of older workers during 1960-1990; older workers are increasingly exiting career jobs to work in lower-paying “bridge jobs.”
    • The full-time employment rate has stayed relatively stable for the bottom 80 percent of earners since 1990. Workers with the lowest earnings have the lowest full employment rate: only 40 percent of 60 year olds and 20 percent of 65 year olds are employed full time. However, 65-67 year old workers with the highest lifetime earnings not only have a higher full employment rate, but it is also increasing.
    • We find robust evidence that flows from full employment to both partial and full retirement rise significantly in recessions.  When the unemployment rate is high, partially retired workers younger than 63 tend to stay partially retired while those older than 63 tend to choose full retirement.
    • High inflation is associated with exit from the labor force through partial and full retirement. However, housing prices do not have a significant effect on retirement timing.
    • The impact of the unemployment rate and inflation on retirement decisions is quite similar for workers of all lifetime earnings levels, with wealthier individuals being only somewhat less impacted.