Chapter 8. Retirement Incentives and Labor Supply

In this chapter, we review the evidence on retirement and study the role of incentives in the retirement decision. The key patterns of withdrawal from the labor market are presented and some of the factors that might explain the large and discrete drops in hours of work at the point of “retirement” are presented. We study the main retirement incentives that individuals face and place these financial and other incentives in the context of a structural approach to modeling retirement. We use this approach to frame issues of how government and private pension schemes affect retirement behavior. Noting that the typical household nearing retirement today in most developed economies is one in which both husband and wife work, we examine the theory and evidence on modeling incentives in couples and for joint decision-making. We conclude with a discussion of some of the gaps in our understanding of the employment of the elderly and raise some central questions that should be addressed by future research.