Social Security and Retirement: Evidence from the Canada Time Series

Abstract

This study examines whether social security influences the aggregate retirement rate in Canada. The life-cycle model of individual behavior provides the foundation for this study. The model indicates how social security can affect an individual's decision to retire. Further, the model is used to specify the variable that measures this effect. This variable is social security wealth which equals the present value of the social security benefits to which an individual is entitled. The model for individual retirement decisions is used to construct a model for the aggregate retirement rate. Time series data from Canada include a measure of social security wealth that matches the specification given by the life-cycle model. The estimate of the model yields evidence that social security induces retirement. An increase in social security wealth of approximately $2300 per capita measured in 1971 dollars has been estimated to raise the retirement rate by 5 to 6 points. The effect of the creation of the Canada and Quebec Pension Plan was to raise the retirement rate by 1.5 points in 1967.