Abstract

The American population is aging rapidly and individuals are living longer. Yet Americans are saving less and older workers are leaving the labor force at younger and younger ages. The accelerated drop in labor force participation corresponds roughly to the introduction of Social Security and the adaption of employer-provided pension plans. I have illustrated that Social Security and employer-provided pension plans provide substantial incentive to leave the labor force early. The quantitative effect of this inducement is illustrated by simulating the effects of changes in pension plan and Social Security provisions on the retirement decisions of employees in a large firm, who are covered by a typical defined benefit pension plan. Scheduled Social Security changes would have little effect on the retirement decisions of employees with a typical defined benefit pension plan like the one considered here. But if the pension plan provisions were changed to correspond to the Social Security changes, the effect would be very large. And, although not contemplated by current legislation, it is clear that an increase in the Social Security early retirement age would have a substantial effect on the early retirement rates of the large number of employees not covered by a pension plan.

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