How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets

This paper provides an empirical analysis of how the U.S. Social Security and Medicare system affects the labor supply of older males in the presence of incomplete markets. The authors estimate a dynamic programming model of the joint labor supply and Social Security acceptance decision. The model is able to account for a wide variety of phenomena observed in the data, including the pronounced peaks in the distribution of retirement ages at sixty-two and sixty-five. Overall, the authors' model suggests that several puzzling aspects of retirement behavior can be viewed as artifacts of particular details of the Social Security rules.