Economic Theories of Retirement

John Laitner and Amanda Sonnega

in The Oxford Handbook of Retirement

Published in print October 2012 | ISBN: 9780199746521
Published online November 2012 | | DOI:

Series: Oxford Library of Psychology

Economic Theories of Retirement

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This chapter presents an economist’s analysis of how households decide when to retire. It lays out a dynamic model of household behavior in which age of retirement and year-by-year saving/consumption decisions are choice variables. We describe necessary conditions for a solution and suggest interpretations. The model highlights the roles of growth in household consumption expenditures with age, and the age trajectory of earnings, as determinants of the optimal time of retirement. We explain how key parameters might be estimated—and note a set of recent estimates. Then we present two illustrative applications: we derive the model’s forecast of the effect of greater longevity on retirement ages, and we examine the consequences for retirement of a stylized Social Security system. Finally, we reference a number of papers that extend and generalize the basic framework that we present.

Keywords: retirement; optimal age of retirement; economic theories of retirement; Social Security and retirement; Social Security; longevity and retirement; compression of morbidity; life-cycle model

Article.  9267 words. 

Subjects: Psychology ; Organizational Psychology ; Social Psychology

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