Modeling Individuals' Behavior: Evaluation of a Policymaker's Tool

With a continuous decline in the cost of manipulating data and a continuous increase in the richness of data banks, policymakers have increasing opportunities to build and apply so-called micro-simulation models--modelsthat attempt to simulate the behavior of the individuals in a large population under a specified program. The efforts of the Department of Labor to use a model in evaluating proposed changes in the unemployment insurance system point up both the power and the weaknesses of such models. Any user who applies these models without attempting to understand which of their strengths and weaknesses are most important for analyzing the problem at hand is asking for trouble. Easy to use or not,these models are not user friendly.

Personal Accounts and Family Retirement

This paper constructs a model of retirement and saving by two earner couples. The model includes three dimensions of behavior: the joint determination of retirement and saving; heterogeneity in time preference; and the interdependence of retirement decisions of husbands and wives. Estimation is based on panel data from the Health and Retirement Study covering the period 1992 to 2000. When husbands postpone their retirement so they can retire together with their typically younger wives, the spike in retirement at age 62 is smeared to later ages. Thus retirements differ between one and two earner families. We find both an asymmetry in which husbands prefer their wife to be retired before they retire, and a clear distaste of many husbands to retiring when their wives are in poor health, while the wives are willing to stay at home with sickly husbands. We simulate a system of personal Social Security accounts based on a 10.6 percent contribution rate over the lifetime. One version allows individuals to make lump sum withdrawals at retirement instead of annuitizing. This program would increase the retirement rates of husbands at age 62 by about 15 percentage points compared to the current system. Adding a lump sum option, by itself, would increase retirements at 62 by about 6 percentage points.

The social Security Retirement Earnings Test, Retirement and Benefit Claiming

This paper introduces the age at which Social Security benefits are claimed as an additional outcome in a structural model of retirement and wealth. The model is then used to simulate the effects of abolishing the remainder of the Social Security earnings test, between age 62 and the full retirement age. Estimates are based on data for married men from the first six waves of the Health and Retirement Study. From age 62 through the full retirement age, the earnings test reduces the share of married men who work full time by about four percentage points, which entails a reduction of about ten percent in the number of married men of that age at full time work. In terms of the cash flow of the system, abolishing the earnings test would have an adverse effect, at least initially. If the earnings test were abolished between the early and full retirement ages, the share of married men claiming Social Security benefits would increase by about 10 percentage points, and the average benefit payments would increase by about $1,800 per recipient. The initial increase in benefit payments would eventually be reversed, over a time span of decades, because the annual benefit amounts would eventually be reduced by more than an actuarially fair amount due to the earlier collection of benefits. One can increase the employment of older persons either by abolishing the earnings test or by increasing the early entitlement age under Social Security. A major difference on the funding side is that abolishing the earning test results in an earlier flow of benefit payments from Social Security, worsening the cash-flow problems of the system, while increasing the early entitlement age delays the flow of benefit payments from the system, improving its liquidity.

A Model for Analyzing Youth Labor Market Policies

This paper formulates a model of the youth labor market. At the heart of the model is a minimum wage restriction which causes some youths to become unemployed and prevents others from training. Labor is assumed to be heterogeneous in performance on skilled iobs and is less productive as youths than as adults simply because of immaturity. The model is applied to analyze the effects of three representative policies: a youth subminimum wage, subsidies paid to firms that hire youths, and training subsidies that offset the costs of on-the-job training.

Personal Accounts and Family Retirement

This paper constructs a model of retirement and saving by two earner couples. The model includes three dimensions of behavior: the joint determination of retirement and saving; heterogeneity in time preference; and the interdependence of retirement decisions of husbands and wives. Estimation is based on panel data from the Health and Retirement Study covering the period 1992 to 2000. When husbands postpone their retirement so they can retire together with their typically younger wives, the spike in retirement at age 62 is smeared to later ages. Thus retirements differ between one and two earner families. We find both an asymmetry in which husbands prefer their wife to be retired before they retire, and a clear distaste of many husbands to retiring when their wives are in poor health, while the wives are willing to stay at home with sickly husbands. We simulate a system of personal Social Security accounts based on a 10.6 percent contribution rate over the lifetime. One version allows individuals to make lump sum withdrawals at retirement instead of annuitizing. This program would increase the retirement rates of husbands at age 62 by about 15 percentage points compared to the current system. Adding a lump sum option, by itself, would increase retirements at 62 by about 6 percentage points.

Partial Retirement and the Analysis of Retirement Behavior

This paper examines the phenomenon of partial retirement . Topics covered include: (1) the quantitative importance of partial retirement, (2) institutional constraints in addition to mandatory retirement which limit the opportunity to retire partially in the main job, (3) the effect of these constraints on the specification of the relevant structural equations in a life cycle retirement model, (4) the impact of standard explanatory variables on four outcomes -- complete retirement, partial retirement both in and outside the main job, and non-retirement, (5) the importance of partial retirement even for those who do not face mandatory retirement, are not covered by a pension and are healthy, (6) the sensitivity of results based on a dichotomous retirement variable to whether the partially retired are classified as retired or not retired. A number of studies have either treated partial retirement inappropriately or have adopted unrealistic assumptions about the opportunity set facing potential retirees. Our findings call their results into question.

Projecting Behavioral Responses to the Next Generation of Retirement Policies

This paper examines retirement and related behavioral responses to policies that on average are actuarially neutral. Many conventional models predict that actuarially neutral policies will not affect retirement behavior. In contrast, our model allows those with high time preference rates to find that the promise of an actuarially fair increase in future rewards does not balance the loss from foregone current benefits. Using data from the Health and Retirement Study, we find that from age 62 through full retirement age, the earnings test reduces full-time work by married men by about four percentage points, or by about ten percent of married men at full-time work. Abolishing the requirements on many jobs that an individual work full-time or not at all, what we term a minimum hours constraint on employment, would induce more than twice as many people to enter partial retirement as would leave full-time work, so that total full-time equivalent (FTE) employment would increase, although by a modest amount. If all benefits from personal accounts could be taken as a lump sum, the fraction not retired at age 62 would fall by about 5 percentage points compared to a system where there is mandatory annuitization of benefits.

Retirement Outcomes in the Health and Retirement Study

This study examines retirement outcomes in the first four waves of the Health and Retirement Study. Measured retirement is seen to differ, sometimes substantially, with the definition of retirement used and among various groups analyzed. Moreover, these differences vary with the wave of the survey as respondents age. Retirement is comprised of a complex set of flows among states representing full time work, partial retirement and complete retirement. Seventy seven percent of transitions continue in the same or equivalent states between adjoining waves of the HRS; 17 percent involve a move from greater to lesser labor force participation, and 6 percent involve a move from states of lesser to greater labor force participation. Twenty two percent of the sample report they were partially retired at some time in the first four waves, and by age 65, over a fifth of the population is partially retired. Altogether, 14 percent of the sample experienced a reversal in the course of the survey, moving from a state of less work to a state of more work. Comparing retirement flows for men between the HRS and the 1969-1979 Retirement History Study, the large spike in the population leaving full time work at age 65 observed in the RHS is reduced to half its original size in the HRS, while the share leaving full time work at age 62 has almost doubled over time. The results presented here should help researchers to improve their understanding of the structure of the dependent variable in retirement studies.

Pensions and Retiree Health Benefits in Household Wealth: Changes from 1969 to 1992

By 1992, pensions and retiree health insurance represented one quarter of the wealth of families on the verge of retirement. Our simulations suggest that between 1969 and 1992, abstracting from the effects of changes in wages and years of covered work on pension benefit amounts, changing pension coverage and changing pension plan provisions would have raised the total wealth of each household in the Health and Retirement Study by $67,000 in 1992 dollars, raising wealth from employer provided pension benefits per household by 150 percent in real terms. Changes in retiree health benefits, which have only about 7 percent of the value of pensions, experienced similar real growth, increasing in value by$3,700 in 1992 dollars. Most of the increase in pension values and in the value of retiree health insurance plans was due to improvements in real benefits among covered workers. All classes of wealth holders enjoyed increased wealth from employer provided retirement plans, but those in the top half of the wealth distribution enjoyed increases that were much larger in absolute terms and also were larger in relation to their total wealth than were the increases experienced by those in the bottom half of the wealth distribution.

Pensions, Efficiency Wages, and Job Mobility

This paper finds that compensation premia and not pension backloading are responsible for the low mobility rates from jobs with pensions. Compensation premia, which may represent efficiency wages, are calculated as the difference in compensation between the current job and the best alternative job, allowing for the fact that such premia are observed only for job changers. The amount of pension backloading is calculated from data provided by employers to the Survey of Consumer Finances, greatly improving the precision of measurement over past efforts. This finding has important implications for labor market analysis and for policies concerning pension regulation.