The Effect of Social Security on Retirement in the United States

Abstract

This chapter examines the impact of Social Security (SS) on retirement, taking advantage of newly available data on retirement behavior and methodological advances in retirement modeling over the past decade. The data set, the Health and Retirement Study, follows a sample of near-retirement-age individuals starting in 1992 and contains detailed information on demographic and job characteristics, labor force attachment, earnings histories, health, and private pensions. The study has two major findings. First, retirement appears to respond much more to SS incentive variables defined with reference to the entire future stream of retirement incentives than to the accrual in retirement wealth over the next year alone, indicating that it is important to include forward-looking measures such as peak value or option value in retirement models. Second, simulations of the effect of two possible policy changes—raising the early and normal retirement ages by three years or moving to a system with a flat benefit of 60 percent of earnings—show that these policy changes could have significant effects on retirement behavior.

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