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Pensions, The Option Value of Work, and Retirement

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  • James H. Stock
  • David A. Wise

Abstract

The paper develops a model of retirement based on the option value of continuing to work. Continuing to work maintains the option of retiring on more advantageous terms later. The model is used to estimate the effects on retirement of firm pension plan provisions. Typical defined benefit pension plans in the United States provide very substantial incentives to remain with the firm until some age, often the early retirement age, and then a strong incentive to leave the firm thereafter. (This may be a major reason for the rapidly declining labor force participation rates of older workers in the United States.) The model fits firm retirement data very well; it captures very closely the sharp discontinuous jumps in retirement rates at specific ages. The model is used to simulate the effect on retirement of potential changes in pension plan provisions. Increasing the age of early retirement from 55 to 60, for example, would reduce firm departure rates between ages 50 and 59 by almost forty percent.

Suggested Citation

  • James H. Stock & David A. Wise, 1988. "Pensions, The Option Value of Work, and Retirement," NBER Working Papers 2686, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2686
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    References listed on IDEAS

    as
    1. James H. Stock & David A. Wise, 1990. "The Pension Inducement to Retire: An Option Value Analysis," NBER Chapters, in: Issues in the Economics of Aging, pages 205-230, National Bureau of Economic Research, Inc.
    2. Laurence J. Kotlikoff & David A. Wise, 1987. "The Incentive Effects of Private Pension Plans," NBER Chapters, in: Issues in Pension Economics, pages 283-340, National Bureau of Economic Research, Inc.
    3. Steven F. Venti & David A. Wise, 1989. "Aging, Moving, and Housing Wealth," NBER Chapters, in: The Economics of Aging, pages 9-54, National Bureau of Economic Research, Inc.
    4. Laurence J. Kotlikoff & David A. Wise, 1985. "Labor Compensation and the Structure of Private Pension Plans: Evidence for Contractual versus Spot Labor Markets," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 55-88, National Bureau of Economic Research, Inc.
    5. Bodie, Zvi & Shoven, John B. & Wise, David A. (ed.), 1987. "Issues in Pension Economics," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226062846, August.
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    8. Michael D. Hurd & John B. Shoven, 1983. "The Economic Status of the Elderly," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 359-398, National Bureau of Economic Research, Inc.
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    12. Venti, Steven F. & Wise, David A., 1984. "Moving and housing expenditure: Transaction costs and disequilibrium," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 207-243.
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    16. Jonathan Feinstein & Daniel McFadden, 1989. "The Dynamics of Housing Demand by the Elderly: Wealth, Cash Flow, and Demographic Effects," NBER Chapters, in: The Economics of Aging, pages 55-92, National Bureau of Economic Research, Inc.
    17. Zvi Bodie & John B. Shoven & David A. Wise, 1987. "Issues in Pension Economics," NBER Books, National Bureau of Economic Research, Inc, number bodi87-1.
    18. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1980. "Reconsidering the Work Disincentive Effects of Social Security," NBER Working Papers 0562, National Bureau of Economic Research, Inc.
    19. Wise, David A., 1985. "Pensions, Labor, and Individual Choice," National Bureau of Economic Research Books, University of Chicago Press, number 9780226902937, August.
    20. Edward P. Lazear, 1983. "Pensions as Severance Pay," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 57-90, National Bureau of Economic Research, Inc.
    21. Olivia S. Mitchell & Gary S. Fields, 1981. "The Effects of Pensions and Earnings on Retirement: A Review Essay," NBER Working Papers 0772, National Bureau of Economic Research, Inc.
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    29. repec:hoo:wpaper:e-88-29 is not listed on IDEAS
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    Full references (including those not matched with items on IDEAS)

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