(UM01-09) - The Impact of Social Security and Medicare on Retirement Incentives: Exploiting Variation in Coverage
Steven J. Haider and Beth Asch
We examine the retirement behavior of federal civil service workers. This research contributes to the literature that more generally examines how retirement behavior responds to financial incentives. The civil service workers in our study provide an interesting case study because they do not participate in the Social Security system, they are only covered by a defined benefit pension plan, and this pension plan is significantly different from the Social Security system in the structure of its incentives. Moreover, there is widespread concern among policy makers of a pending retirement crisis in the federal civil service. Relying on an option value framework, our main results suggest that federal civil service workers respond to their retirement incentives in a manner that is quite similar to the responses that others have found looking at much different retirement systems. Such a result provides important additional evidence regarding the generality of previous results. On the other hand, unlike previous studies, we find little evidence of a spike in the retirement rate at age 65, nor do we find much evidence of “excess retirements” or a large fraction of retirements at age 65 that are unexplained by our financial incentive model. While past studies have attributed this age 65 effect to “social norms,” those norms do not seem important to the federal civil service workers we study.