Social Security, Retirement and Wealth: Theory and Implications
by Miles S. Kimball and Matthew D. Shapiro
The effect of Social Security rules on the age people choose to retire can be critical in
evaluating proposed changes to those rules. This research derives a theory of retirement
that views retirement as a special type of labor supply decision. This decision is driven by
wealth and substitution effects on labor supply, interacting with a fixed cost of working
that makes low hours of work unattractive.
The theory is tractable analytically, and therefore well-suited for analyzing proposals that
affect Social Security. This research examines how retirement age varies with generosity
of Social Security benefits. A ten-percent reduction in the value of benefits would lead
individuals to postpone retirement by between one-tenth and one-half a year. Individuals
who are relatively buffered from the change—because they are wealthier or because they
are younger and therefore can more easily increase saving to offset the cut in benefits—
will have smaller changes in their retirement ages.
Full Paper (PDF)