The Welfare Cost of Retirement Uncertainty
Uncertainty about the timing of retirement is a major financial risk with implications for decision making and welfare over the life cycle. We estimate that the standard deviation of the difference between retirement expectations and actual retirement dates ranges from 4.28 to 6.92 years. We develop a quantitative model to assess the impact of this risk. Individuals would give up 2.6%-5.7% of total lifetime consumption to fully insure this risk and 1.9%-4.0% of lifetime consumption simply to know their actual retirement date at age 23. While social insurance programs could be designed to hedge this risk, current programs in the U.S. (OASI and SSDI) provide very little timing insurance.
We thank Mariacristina De Nardi, Eric French, Carlos Garriga, John Jones, Yuzhe Zhang, and seminar audiences at the MRRC research workshop, the QSPS summer workshop, the SEA annual meetings, Keio University, the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of St. Louis, and Clemson University. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
In addition to my compensation from George Mason University, during the past three years, I have received compensation exceeding $500 from Stanford University, the American Enterprise Institute, the National Bureau of Economic Research, and the Mercatus Center. During the past three years, my research has been supported by grants from the Sloan Foundation, the National Institute on Aging, the Social Security Administration, the Koch Foundation, the Mercatus Center, and Stanford University, and I have received access to proprietary data from Towers Watson, a benefits consulting firm.