Pension Reductions and Retirement Delays

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Pension Reductions and Retirement Delays

• Author Marie-Eve Lachance
• Discussant Casey Rothschild, Middlebury College

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Stripped-Down Model

• Individuals choose retirement date t and
  consumption ct to maximize lifetime utility
• Subject to a lifetime budget constraint

Depends on t via disutility of effort/utility of
leisure
Pre-existing wealth
Labor Income
Pension Wealth
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Stripped Down Model (2)

• Solve for optimal ct, for each given t.
  Simplified problem
• Solving gives lifetime utility V and optimal
  retirement date t.

Direct Dependence on t from Disutility of Labor
PV of lifetime earnings
PV of Pension Wealth
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What happens when A decreases?

• Utility decreases from V to V.
• Key Question How much lower is V?
• Naïve answer
• Naïve because fails to recognize endogeneity of
  t.
• More sophisticated delaying retirement can help
  offset the utility shock from AltA.
• But by how much?

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Stylized gist (2)

• Earlier literature (loosely)
• Delay of a few years can completely offset
  financial consequences of a 10 fall in A.
• So perhaps VVgtgt VNaive.
• Lachances Paper NO.
• Utility cost of working longer essentially
  undermines the whole benefit of delay.

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Conclusions

• Lachance V VNaive ltlt V
• Numerically a 10 decrease in retirement
  benefits
• Decreases welfare by 23,897 (Wealth Equiv) if
  dont adjust retirement date
• Decreases welfare by 23,582 if does.
• Only a 315 difference!
• Intuition Envelope theorem

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Comment 1 the fly and the maul?

• Lachances model is sophisticated
• A riskless and a (Brownian) risky asset.
• An exogenously imposed and stochastic retirement
  date t Exo.
• Makes solving for lifetime utility an extremely
  challenging (technical appendix plus
  supplementary material).
• Kudos for the technical prowess. Some insight on
  what it adds would help.

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Comment (2) Exogenous Retirement

• Papers policy recommendations focus on
  increasing the exogenous retirement age.
• Is this orthogonal to the key issues?
• Relaxing the exogenous retirement age is a
  response to inefficiently early exogenous
  retirement dates, not reductions in pension
  generosity per se.
• Perhaps a model of optimal exogenous retirement
  dates to make the connection?
• Potential concern optimality -gt envelope theorem
  again?

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Comment (3) Symmetric treatment of pension and
earned wealth

• Pension income is treated as a riskless bond
• Single lifetime budget constraint implicitly
  allows borrowing against pension income at the
  market interest rate.
• Advantage Analytically solvable.
• Disadvantage realism?
• Typical assumption no borrowing against pension
  income.