Labor market shocks and retirement: Do government programs matter?

This paper argues that labor market conditions are an important and often overlooked determinant of retirement transitions. In our analysis, we examine how the unemployment rate affects retirement and whether the Social Security (SS) system and Unemployment Insurance (UI) system influence how older workers respond to labor market shocks. We use pooled cross-sectional data from the March Current Population Survey (CPS) in our analysis. We find that downturns in the labor market increase retirement transitions and that the magnitude of this effect is comparable to that associated with moderate changes in financial incentives to retire and to the threat of a health shock facing older workers. Interestingly, retirements only increase in response to an economic downturn once workers become SS-eligible, suggesting that retirement benefits may help to alleviate the income loss associated with a weak labor market. We also estimate the impact of UI generosity on retirement and find little consistent evidence of an effect. This suggests that in some ways SS may serve as a more effective form of unemployment insurance for older workers than UI. (c) 2007 Elsevier B.V. All rights reserved.