Social Security and the Decision to Retire

Abstract

This study examines empirically whether social security influences the retirement decisions of individuals. The framework for this study is the life-cycle model of individual behavior. The life-cycle model shows that there are two main ways in which social security can affect behavior. One way is through the change in an individual's lifetime income that social security can bring about. The other way has to do with how the system changes compensation for work. Social security's income and substitution effects are included in a model for examining retirement decisions. This model is based on the model of labor force participation that has become standard in the literature on labor supply. The data used in this study come from the Social Security Administration and are particularly well suited for this study. Retirement models are estimated separately for samples of 62-64 and 65-70 year old men. The empirical results support the conclusion that social security influences the decision to retire. The magnitude of behavioral responses to changes in social security benefits are reported and implications for future behavior are discussed.