The Pension Inducement to Retire: an Option Value Analysis

39 Pages Posted: 16 Jul 2004 Last revised: 1 Sep 2008

See all articles by James H. Stock

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

David A. Wise

National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: July 1988

Abstract

The option value model developed in an earlier paper is used to simulate the effect on retirement of changes in a firm's pension plan compared to the effect of changes in Social Security provisions. The provisions of the firm's pension plan have a much greater effect than Social Security regulations on the retirement decisions of the firm's employees. The analysis supports the following conclusions: (1) Increasing the firm's early retirement age from 55 to 60, for example, would reduce by almost 40 percent, from .48 to .30, the fraction of employees that is retired by age 60. (2) The effect of changes in Social Security rules, on the other hand, would be small. Raising the Social Security retirement ages by one year, for example, has very little effect on employee retirement rates. The proportion retired by age 62 is reduced by only about 4 percent. (3) Changes in Social Security provisions that would otherwise encourage workers to continue working can easily be offset by countervailing changes in the provisions of the firm's pension plan. Firm responses, like delaying the Social Security offset to correspond to m later Social Security retirement age, may simply be m logical revision of current firm plan provisions.

Suggested Citation

Stock, James H. and Wise, David A., The Pension Inducement to Retire: an Option Value Analysis (July 1988). NBER Working Paper No. w2660. Available at SSRN: https://ssrn.com/abstract=439585

James H. Stock (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-0502 (Phone)
617-496-5960 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

David A. Wise

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS)

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
22
Abstract Views
699
PlumX Metrics