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Effects of Raising the Social Security Retirement Ages on Retirement and Disability

Effects of Raising the Social Security Retirement Ages on Retirement and Disability,Michael Hurd,David Loughran,Constantijn Panis

Effects of Raising the Social Security Retirement Ages on Retirement and Disability  
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This paper develops models that explain when workers retire and whether and when they enroll in Disability Insurance (DI). It estimates those models on data from the Health and Retirement Study (HRS), an rich household survey with merged-in information on private pensions and earnings histories. The HRS thus provides a detailed picture of workers' health and their financial incentives. We apply the model estimates to simulate the effects of raising Social Security's normal retirement age (NRA) and early entitlement age (EEA) on retirement and disability claiming behavior and, ultimately, the financial outlook of Social Security's Old-Age and Survivors and Disability Insurance programs. The models include the standard peak value and option value models of retirement, plus a newly developed generalization of the option value model to account for the joint three-way choice between continued work, disability claiming, and retirement. We find that labor force and disability claiming responses to a higher NRA are very mild, implying the absence of strong incentives that distort workers' behavior. An increase of the NRA, which is essentially a benefit reduction, will generate savings of approximately five percent of lifetime Social Security liabilities for every year the NRA is raised. By contrast, raising the EEA is likely to worsen the financial outlook of Social Security.
Published in 2003.
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