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Ch. 7: LIFE-CYCLE ASPECTS OF LABOR SUPPLY.

Ch. 7: LIFE-CYCLE ASPECTS OF LABOR SUPPLY. Choice of retirement age. Choice of retirement age. Steepness of I-curve reflects willingness to postpone retirement for additional income. Steepness of budget constraint determined by earnings profile Social Security formula

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Ch. 7: LIFE-CYCLE ASPECTS OF LABOR SUPPLY.

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  1. Ch. 7: LIFE-CYCLE ASPECTS OF LABOR SUPPLY. • Choice of retirement age

  2. Choice of retirement age • Steepness of I-curve • reflects willingness to postpone retirement for additional income. • Steepness of budget constraint determined by • earnings profile • Social Security formula • pension plan features • Wealth and substitution effects from change in budget constratint.

  3. Choice of retirement age • If the financial rewards to postponing retirement beyond age 62 are increased, the person is faced with a wealth and substitution effect. • Wealth effect: Holding retirement age constant, the person has greater wealth and will retire sooner. • Substitution Effect: Holding wealth constant, the reward to postponing retirement has increased .. substitute money for years in retirement. • Net effect: Ambiguous.

  4. Choice of retirement age • Effect of increasing rewards to postponed retirement subst efffect > Wealth effect Wealth effect > subst efffect R*

  5. Choice of retirement age • How do each of the following affect retirement age? • steepness of earnings profile? • Social Security formulae • Calculating AIME & PIA • reductions for early retirement • credits for postponed retirement.

  6. Choice of retirement age • Private pensions • Defined benefit plan • life annuity promised at retirement. • annuity payment generally tied to years of service, final salary, and a "generosity factor". • PV of defined benefit plan may eventually fall with retirement age (fewer years to collect annuity versus increase in size of annuity). • “Actuarially fair” adjustment for postponing retirement by one year keeps PV of pension independent of retirement age. • If life expectancy is 80, what is actuarially fair adjustment for a worker who can collect an annuity of $50,000 annually at age 65, assuming interest rate=0? If interest rate>0?

  7. Choice of retirement age • Private pensions • Defined Contribution Plan. • a savings account that the worker may receive as a lump sum at retirement. • PV of defined contribution plan grows with retirement age because contributions are added over time. • Over time, there has been a switch from defined benefit to defined contribution plans. • What's the effect of switching from DB to DC plans on retirement incentives?

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