Social security, liquidity, and early retirement

This paper investigates the effect of Social Security on retirement decisions. It argues that it is important to take realistic account of how recipients evaluate potential benefit flows. The paper presents a simple retirement model in which liquidity constraints prompt individuals to use higher than market discount rates in evaluating future pension benefits. As a consequence, even an apparently actuarially fair early retirement benefit could (on average) discourage continued work. Using data on individual retirement decisions, I find support for the argument that this phenomenon contributes to some of the observed increase in early retirement.