Social Security Benefits, Life Expectancy and Early Retirement

Qi Li, Juan Pantano, Daifeng He and Maria Casanova
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Juan Pantano: Washington University in St. Louis
Maria Casanova: UCLA

No 824, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: The Social Security Administration computes individual pension benefits using the average survival in the population. However, less educated individuals, and those with lower lifetime incomes, have lower life expectancies than their more educated and richer counterparts. We investigate how heterogeneity in longevity interacts with homogenous social security rules in shaping retirement patterns. In particular, the increase in Social Security benefits for each additional year of work after early retirement age is approximately actuarially fair for individuals with the average longevity. Thus, it is less than actuarially fair for individuals whose life expectancy is lower than average. As a result, individuals with below-average longevity have lower incentives to delay retirement past early retirement age. We estimate a structural dynamic programming model of retirement using microdata from the Health and Retirement Study. We then use the estimated model to simulate retirement behavior under a counterfactual social security system in which individual specific survival odds are used to compute individual benefits. This allow us to investigate the role of actuarial unfairness plays in shaping the observed patterns of early retirement.

Date: 2014
New Economics Papers: this item is included in nep-age, nep-dge and nep-ias
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