Optimal retirement decision

PhD Thesis# 329
Author:
Dr. Grzegorz (G.J.) Kula
Supervisor(s):
prof.dr. C.N. Teulings
Date:
2004-02-06

Abstract

Aging, retirement and decreasing labor supply of elderly have become one of the main problems faced by the present day world. This thesis addresses the most important economic problem related to retirement: what makes people retire. We look at the retirement decision, which maximizes lifetime utility in two different retirement schemes: perfect insurance and self-insurance. Retirement is defined as the optimal stopping problem in continuous time, and incomes are assumed to follow geometric Brownian motion with drift. The results show that better insurance, i.e. insurance that provides more secure income and reduces risk, increases probability of retirement, and motivates people to retire earlier. The observed fall in labor force participation of elderly may indeed be attributed to more efficient insurance schemes.

Publisher of the TI-theses is: Rozenberg Publishing Services