The Importance of Economic Expectations for Retirement Entry

Barbara Broadway and John P. de New

Review of Income and Wealth, 2021, vol. 67, issue 1, 37-60

Abstract: We estimate hazard rates of retirement entry as a function of the option value of work. Individuals’ economic expectations about the future economy are represented as expectations about rates of return on superannuation retirement savings. These are incorporated into the option value of work, through which they can impact on the timing of retirement entry. We find that individuals have an incentive not to leave the labour force when they expect high returns on their pension savings, while still working. In a scenario where individuals expect negative returns, the average annual hazard rate of retirement entry of 6.9 percent is increased by 0.2 percentage points (or 2.9 percent) compared to a scenario where individuals expect strong positive returns. Rudimentary calculations find an implied tax revenue loss of $26.7 million. Given that the expectations in this model are short‐term and merely perceived, holding real economic conditions constant, this effect is sizable.

Date: 2021
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