A Simple Intertemporal Model of Retirement Estimated on Italian Cross-Section Data

We develop and estimate a simple structural intertemporal model of retirement, using cross-section Italian data. Under certain assumptions, the condition for being in retirement or alternatively in employment status at a certain date reduces to a static comparison between the instantaneous utility as employed and the instantaneous utility as retired (minus the future opportunity cost of retiring) at that date. Forward-looking versus myopic versions of the model are obtained by including or dropping the term measuring the future loss of retiring. The model can easily be formulated under two opposite hypotheses - no savings and no borrowing versus perfect credit market (perfect consumption smoothing). The implications of the estimates are illustrated by simulating the effects of changes in the parameters of the pension system or in the demographic variables. In particular, the elasticity of the number of individuals in retirement status with respect to the pension turns out to be small but not irrelevant from the perspective of the long-term design and evaluation of the pension system