Social Security, Endogenous Retirement and Intrahousehold Cooperation

This paper studies the retirement incentives induced by the U.S. Social Security system in a framework which allows for different degrees of cooperation and strategic interaction between spouses. We develop a model in which spouses maximize joint household utility, subject to the additional constraint that neither partner finds it optimal to deviate from the best constrained household allocation. We show that accounting for "non-cooperative" behavior through this additional constraint can rationalize various choices of older couples observed in the 1932-42 cohort of the Health and Retirement Study. In particular non-cooperative behavior helps with two recurring puzzles in the retirement literature: (i) the clustering of benefit claiming at the early age of 62 despite significant gains associated to delayed claiming by husbands; and (ii) the joint benefit claiming of couples. We contrast our findings to those from a standard unitary model of the household, extended to include a process for declining health, and show that the latter can rationalize neither early nor joint claiming behavior if individuals can independently make benefit and labor force participation decisions.