Economic Theories of Retirement

This chapter presents an economist's analysis of how households decide when to retire. It lays out a dynamic model of household behavior in which age of retirement and year-by-year saving/consumption decisions are choice variables. We describe necessary conditions for a solution and suggest interpretations. The model highlights the roles of growth in household consumption expenditures with age, and the age trajectory of earnings, as determinants of the optimal time of retirement. We explain how key parameters might be estimated-and note a set of recent estimates. Then we present two illustrative applications: we derive the model's forecast of the effect of greater longevity on retirement ages, and we examine the consequences for retirement of a stylized Social Security system. Finally, we reference a number of papers that extend and generalize the basic framework that we present.