Late Career Unemployment and the Decision to Retire

Irina Merkuryeva, University of Wisconsin-Madison

I study how unemployment experienced late in working life affects the timing of retirement, withdrawal of Social Security benefits, and retirement income. I estimate a dynamic life cycle model of work and retirement using method of simulated moments and data from Health and Retirement Study. The model incorporates the process of job search, layoffs, uncertainty about survival, medical expenses, and earnings. Because job search is costly and takes a long time relative to the remaining career span, unemployment at pre-retirement age results in premature withdrawal from the labor force. I find that this effect dominates the incentives to work longer arising from depletion of savings and penalties for early withdrawal of Social Security benefits. I use the model to predict the time of retirement under a variety of policy experiments that involve changes in job finding and layoff probabilities, return on assets and Social Security rules.