The Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks

Abstract

We develop a model of health investments and consumption over the life cycle where health affects longevity, provides flow utility, and retirement is endogenous. The decision to retire depends on a number of factors including earnings and health shocks, demographic characteristics, preferences, pensions, and Social Security. We incorporate these features in a computational model of optimal wealth and retirement decisions. We use the model to study how workers would respond to an increase in the early eligibility age of retirement (EEA), and to what extent would the bad economy alter retirement plans. We find that increasing the EEA results in sizeable responses to the age of retirement but does not affect health outcomes very much. A 20 percent reduction in wealth induces households to delay retirement by one year, on average, with poor households being relatively unaffected.

Effects of social security policies on benefit claiming, retirement and saving

“…In Shoven and Slavov (2012b), claiming is a dependent variable, while retirement and wealth, jointly determined outcomes, are treated as explanatory variables. In a more recent paper, Scholz and Seshadri (2012) introduce retirement into their model of saving, but they define retirement as irreversible and do not allow either for partial retirement or for reversals from states of greater to lesser retirement.…”

Health Inequalities through the Lens of Health Capital Theory: Issues, Solutions, and Future Directions

“…See Galama, Hullegie, Meijer and Outcault (2012) for a first attempt at estimating a linearized equation derived from the more general (non-degenerate) version of the Grossman model. A more recent literature has solved and estimated dynamic formulations (sometimes loosely) based on health-capital theory using dynamic programming techniques, and taking into account a health investment process that is subject to decreasing returns to scale (e.g., Gilleskie, 1998;Ehrlich and Yin, 2005;Yogo, 2009;Khwaja, 2010;Scholz and Seshadri, 2012;Fonseca et al 2013;Hugonnier et al 2013). …”

Effects of Social Security Policies on Benefit Claiming, Retirement and Saving

“…In Shoven and Slavov (2012b), claiming is a dependent variable, while retirement and wealth, jointly determined outcomes, are treated as explanatory variables. In a more recent paper, Scholz and Seshadri (2012) introduce retirement into their model of saving, but they define retirement as irreversible and do not allow either for partial retirement or for reversals from states of greater to lesser retirement. These simplifications may or may not affect the reliability of these models to describe the behavior of interest, but they do mean that the models are less useful than they might be for understanding the joint determination of retirement, saving, and claiming, and how Social Security policies might affect those outcomes.…”