Abstract: Paper No. 18

Estimating the Income Effect on Retirement

Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen

April 1999

Abstract: One of the most important issues in the debate over Social Security is how various changes in the system would change retirement behavior. A critical parameter in this context is the income effect on retirement-how a change in income affects retirement behavior, ceteris paribus. To estimate the income effect, we examine tax-return generated data on the labor force activity of a group of older people before and after they receive inheritances. The results are consistent with the notion that income effects are small. Neither retirement decisions nor the magnitude of earnings conditional on working seem to be affected very much by the receipt of an inheritance.

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