Ch.%207:%20LIFE-CYCLE%20ASPECTS%20OF%20LABOR%20SUPPLY.

1
Ch. 7 LIFE-CYCLE ASPECTS OF LABOR SUPPLY.

• Choice of retirement age

2
Choice of retirement age

• Steepness of indifference curve reflects
  willingness to postpone retirement for additional
  income.
• Steepness of budget constraint determined by
• earnings profile
• Social Security formula
• pension plan features.
• Pure Wealth effect would result from a parallel
  shift of budget constraint (e.g. win lottery,
  inherit money)
• Wealth and substitution effect would result if
  slope of budget constraint is altered.

3
Choice of retirement age

• If the financial rewards to postponing retirement
  beyond age 62 are increased, the person with is
  faced with a wealth and substitution effect.
• Wealth effect Holding retirement age constant,
  the person has greater wealth and will retire
  sooner.
• Substitution Effect Holding wealth constant, the
  reward to postponing retirement has increased ..
  substitute money for years in retirement.
• Net effect Ambiguous.

4
Choice of retirement age

• Effect of increasing rewards to postponed
  retirement

subst efffect gt Wealth effect
Wealth effect gt subst efffect
R
5
Choice of retirement age

• How do each of the following affect retirement
  age?
• steepness of earnings profile?
• Social Security formulae
• Calculating AIME PIA
• Normal retirement reductions for early
  retirement
• Credits for postponed retirement.

6
Choice of retirement age

• Private pensions
• Defined benefit plan
• life annuity promised at retirement.
• annuity payment generally tied to years of
  service, final salary, and a "generosity factor".
  
• PV of defined benefit plan may eventually fall
  with retirement age (fewer years to collect
  annuity versus increase in size of annuity).
• Actuarially fair adjustment for postponing
  retirement by one year keeps PV of pension
  independent of retirement age.
• If life expectancy is 80, what is actuarially
  fair adjustment for a worker who collect an
  annuity of 50,000 annually at age 65, assuming
  interest rate0? If interest rategt0?

7
Choice of retirement age

• Private pensions
• Defined Contribution Plan.
• a savings account that the worker may receive as
  a lump sum at retirement.
• PV of defined contribution plan grows with
  retirement age because contributions are added
  over time.
• Over time, there has been a switch from defined
  benefit to defined contribution plans.
• What's the effect of switching from DB to DC
  plans on retirement incentives?