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

39 Pages Posted: 14 Dec 2012

See all articles by John Karl Scholz

John Karl Scholz

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Ananth Seshadri

University of Wisconsin - Madison - Department of Economics

Date Written: September 1, 2012

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. We develop a rich, numerical life-cycle model to study the complex interrelationship between health and wealth and the age of retirement. 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, solving the model household-by-household using data from the HRS. 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 will 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.

Keywords: retirement age, consumption, longevity, health outcomes, wealth

Suggested Citation

Scholz, John Karl and Seshadri, Ananth, The Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks (September 1, 2012). Michigan Retirement Research Center Research Paper No. WP 2012-271, Available at SSRN: https://ssrn.com/abstract=2188373 or http://dx.doi.org/10.2139/ssrn.2188373

John Karl Scholz (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
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National Bureau of Economic Research (NBER) ( email )

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Ananth Seshadri

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-262-6196 (Phone)
608-263-3876 (Fax)

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