Wealth Shocks and Retirement Timing: Evidence from the Nineties

Abstract

This paper explores whether the timing of retirement responds to unexpected changes in wealth. Although the normality of leisure is a standard assumption in economic models, econometric support for it has not been consistent. The period of the 1990s allows a reexamination of this question because of the large and unexpected capital gains realized by many households. Using the 1992 to 1998 waves of the Health and Retirement Study, and two different identification strategies, I find evidence consistent with the theoretical expectations of wealth effects. Difference-indifferences estimates suggest that a $50,000 wealth shock would lead to a 1.9 percentage point increase in retirement probability among individuals ages 55 to 60. Estimates using panel data on savings and wealth find the elasticity of retirement flows between 1996 and 1998 with respect to wealth is between 0.39 and 0.50 for men.

The Market Crash and Mass Layoffs: How the Current Economic Crisis May Affect Retirement

“…al., 2006). For instance, Farber (2008) found that job loss among older workers has long-lasting negative consequences for employment and wages (Chan and Stevens 1999, 2001von Wachter, 2007). Chan and Stevens (1999) estimate that the employment rate of displaced older workers two years after a job loss is 25 percentage points lower than that of similar non-displaced workers and that the median reemployed worker earns 20 percent less than at his old job.…”

The Effect of Inheritance Receipt on Retirement

“…Even when authors use similar sources of wealth variation, the prior literature finds contrasting evidence. For example, Coronado and Perozek (2003) and Sevak (2001) find that unanticipated stock market gains led workers to retire earlier, while Coile and Levine (2006) find no effect of stock market fluctuations on retirement.…”

Three retirement decision models for defined contribution pension plan members: A simulation study

“…In a study that tested wealth shocks on retirement timing, Sevak (2002) This has not yet been examined in the literature" (pg. 2).…”

“…Sevak (2002) showed that workers in the 1990s reacted to the positive wealth shocks by retiring earlier. Arriving at the same conclusion, Coronado and Perozek (2001) also proposed that the likely cause of the delay in retirement among workers following the 1990s was the poor equity performance.…”