Retirement decision under uncertainty: the role of irreversibility

Abstract

The purpose of this paper is to analyze the effect of the irreversibility of the retirement decision on labour supply after 60. According to the theory, when the retirement decision is an absorbing state, people tend to remain longer on the labour market to be able to benefit from changes in preferences or economic environment favourable to participation. Simulations performed on a sample of individuals with heterogeneous careers illustrate this result. When pensions schemes are actuarially fair, the irreversibility of the retirement decision leads to higher participation rates in the first years when retirement is allowed. Moreover labour supply around 60 increases with uncertainty. Simulations show that the impact of an increase in uncertainty on participation rates highly depends on the pension schemes. Whereas the effect is sensitive with actuarially fair systems, it is almost insignificant in the French Institutional setting where individual choices are highly constrained by the rules.Irreversibility, Retirement Decision, Pension Schemes