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Pension plan heterogeneity and retirement behavior

Neha Bairoliya

European Economic Review, 2019, vol. 116, issue C, 28-59

Abstract: This paper examines the role of Social Security policy changes and the shift in pension plans — from annuity based retirement plans like Defined Benefit to account based plans like Defined Contribution — in explaining the recent increase in labor force participation of older workers. A structural retirement model of consumption, savings, Social Security, health insurance and pension plan heterogeneity is estimated using data from the Health and Retirement Study. The model captures key differences in pension wealth evolution across Defined Benefit and Defined Contribution pension plans and accounts for differences in out-of pocket medical spending across different health insurance groups. As a result, it produces variation in labor supply, both across different pension plan groups and health insurance types at older ages, as observed in the data. After controlling for any changes in the population age distribution and health insurance plans over time, model simulations indicate that changes in pension plan composition can explain 30.5 percent of the increase in labor force participation of the age group 65 to 69. Changes in Social Security normal retirement age and earnings test can each explain 19 and 45% of the increase in labor supply respectively for this age group.

Keywords: Defined Benefit; Defined Contribution; Social Security; Retirement behavior; Savings; Health insurance (search for similar items in EconPapers)
JEL-codes: J14 J26 J32 E21 H55 (search for similar items in EconPapers)
Date: 2019
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