This article analyzes the relationship between retirement and wealth. Using data from the first four waves of the longitudinal Health and Retirement Study-a cohort of individuals born from 1931 to 1941-we estimate reduced-- form retirement and wealth equations. Our results show that those who retire earlier do not necessarily save more and that even if one's primary interest is in the relationship between Social Security policy and the decision to retire, it is important to incorporate saving behavior and other key decisions into the analysis.
The decision to retire is related to the decision to save and to a number of other decisions, including decisions of when to claim Social Security benefits and what share of assets to hold as pensions, Social Security, and in other forms. This article explores the relationships among these various decisions and then explains why it is important to take them into account when attempting to understand the effects of changing Social Security and related policies on retirement outcomes.
To understand how Social Security benefits affect retirement behavior, and the implications of changing such features as the Social Security early retirement age, the Social Security Administration and others have begun to estimate and use single-equation models of retirement. We explain why the kind of simple model they use is likely to provide a misleading guide for policy. Even if one's primary interest is in the relationship between Social Security policy and the decision to retire, it is important to incorporate other key decisions into the analysis.
These simple models relate the probability of retiring to measures of changes in the value of Social Security benefits when retirement is postponed. The basic problem is that because the omitted factors are related systematically both to retirement outcomes and to the measured reward. to postponing retirement, a simple retirement equation credits the effects of the omitted factors to the included measures of changes in Social Security benefits. New policies will change the relationship between retirement and the increase in the value of Social Security benefits with postponed retirement, resulting in incorrect predictions of the effects of new policies.
When we fit single-equation retirement models, we find a variety of evidence that important behaviors have been omitted. These models include variables measuring the age of the respondent. These age variables suggest there is a sharp increase in the probability of retirement at age 62. This is a sign that even though the equations include measures of the increase in the value of Social Security with delayed retirement, the cause of the increased retirement behavior at age 62 has not been included in the model. In addition, the estimated effect of a variable measuring the future value of Social Security and pensions on retirement suggests that if the Social Security early retirement age were to be abolished, more people would retire earlier rather than later-a counterintuitive prediction.
There is even more direct evidence of the need for a more comprehensive model of behavior. We show that if individuals' preferences for leisure time were unrelated to their preferences for saving, then a simple retirement equation would yield an unbiased estimate of the effects of Social Security on retirement. An implication of such a model is that those who retire earlier for particular reasons would also save more for those same reasons. But when we estimate an equation with wealth accumulated through 1992 as a dependent variable, together with the simple retirement equation, we do not observe that the factors associated with earlier retirement are also associated with higher saving. These and related findings suggest that those who wish to retire earlier also have a weaker preference for saving, a relationship that is ignored in the simple model and can only be measured in a more complex model. …