The Social Security Early Entitlement Age in a Structural Model of Retirement and Wealth
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Abstract
This paper specifies and estimates a structural life cycle model of retirement and wealth and applies that model both to understand the role of the social security early entitlement age in creating a peak in retirements at age 62, and to simulate the effects of postponing the Social Security early entitlement age from 62 to 64. The model includes a set of budget equations and a utility function. Data are from the first five waves of the Health and Retirement Study and are confined to married men. The budget equations fully incorporate the complex incentives from social security (relying mainly on respondents’ earnings records), wage offers for full and partial retirement work, the incentives created by pensions (measured from employer provided plan descriptions), as well as the influence on retirement and saving of health status, family structure, and constraints from the firm side, such as layoffs and inability to reduce hours on the main job. Parameters of the utility function reflect the influences of time and leisure preference and vary among individuals. Estimation is based on the general method of moments. Our estimates suggest that leisure and time preference are widely distributed among the population, with a bimodal distribution of time preference. Discount rates are either very low or very high. Those with high discount rates find the actuarial adjustments in social security benefits, which use a 3 percent real interest rate, to be inadequate. Once they reach age 62, the benefit accrual profile declines with age. This is the major explanation for the spike in retirement activity at 62. Liquidity constraints from inability to borrow on social security and pension benefits add to this effect. Simulations with the model suggest that raising the social security early entitlement age from age 62 to 64 will shift about three fifths of the bunching of retirements at age 62 to age 64. The bunching amounts to about 8 percent of the population, so raising the social security early age of entitlement will have a substantial effect on the social security system and its finances.
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Paper ID
IB 2002-029Publication Type
Research Brief