This article first appeared in the spring 2002 issue of the Expert Witness.
When forecasting the earnings streams of individuals over 50, one of the most important factors is predicted age of retirement. For example, changing the projected retirement age from 63 to 60, when the individual is currently 57, will decrease the future loss of earnings by approximately 50 percent.
It is often argued that one indicator of likely retirement age among individuals in this age group is the retirement decision of the plaintiff’s spouse. If a 57 year-old woman’s husband has already retired, that could indicate that she will retire earlier than would otherwise have been predicted.
Economists have observed three factors that might suggest a correlation between the retirement ages of spouses. These we refer to as: similarity of profiles, sharing of household finances, and complementarity of leisure.
Similarity of Profiles
Sociologists, psychologists, and economists have long observed that individuals choose mates who have socio-economic profiles similar to their own. If professionals marry professionals or high school leavers marry high school leavers, then the retirement ages of spouses will be similar, not because the retirement decision of one spouse affected the retirement decision of the other, but because the spouses’ decisions were affected by similar work-related influences.
Spouses who both worked in physically demanding jobs might both retire earlier than the population average, for example. Or spouses who were both self-employed – say, doctors or lawyers – might both retire later than average. In such cases, one might be tempted to conclude that because one retired soon after the other that the retirement of the first had “caused” the retirement of the second when, in fact, what had happened is that they had both been affected by the same external factors.
Sharing of Income
It has long been recognised in the economics literature that the likelihood that one spouse will leave the labour market will increase as the income of the other spouse increases. That is, the spouses of high income earners are more likely to be retired at any age than are the spouses of low income earners.
This observation suggests two hypotheses. The first of these is that if one spouse’s social security benefits increase, the “other” spouse will be more likely to retire. Evidence for this hypothesis has recently been obtained in two studies. Both Coile (1999) and Baker (2002) found that both wives and husbands were more likely to retire when the wives were eligible for income supplements than when the wives were not. It appears that wives’ retirement ages, however, were not strongly influenced by husbands’ availability of income supplements.
The second implication of “sharing of income” is that spouses’ retirement ages will be negatively correlated. That is, if one spouse has retired, the other will be less likely to retire. The reason for this is that when one spouse retires, that spouse’s income decreases (often, dramatically), thereby decreasing the probability that the other spouse will leave the labour force.
Complementarity of Leisure
A third hypothesis is that spouses will obtain greater pleasure from retirement if they retire together. In economic terminology, the benefits that one spouse obtains from leisure are complementary to the amount of leisure enjoyed by the other. For example, if the wife plans to spend her retirement travelling, she may expect to obtain more pleasure from her retirement if she anticipates that her husband will also be retired and will travel with her.
Clearly, this hypothesis suggests that spouses’ retirement ages will be positively correlated. That is, if one spouse retires, the other will be more likely to retire, as the second spouse will expect to obtain greater benefits from retirement leisure than if the first spouse had not retired.
Blau (1998) has recently provided evidence that this complementarity is an important factor in determining spouses’ retirement ages. His study examines the joint labour force behaviour of older married couples in the United States.
Using the Retirement History Survey (RHS), a longitudinal study that followed men and women who were age 58-63 in 1969, Blau constructs labour force histories for each married couple from the time the husband turned 55. The joint labour force status of the couple in any given time period is characterized by four possible states: both employed, neither employed, husband employed but wife not, wife employed but husband not.
The data set has some interesting features. Foremost among them is that the labour force transitions of one spouse are strongly associated with the labour force status of the other spouse. The wife’s exit rate from the labour force is 63 percent higher when the husband is not employed than when he is employed. Similarly, the husband’s exit rate when his wife is not working is 53 percent higher than when she is employed. Conversely, quarterly entry rates for both husband and wife are larger if the other spouse is employed rather than not employed.
Another feature is that the incidence of joint retirement is quite large. Between 11.4 percent and 15.7 percent of all couples exit the labour force in the same quarter and between 30.3 percent and 40.6 percent exit in the same year.
The key conclusion from this paper is that there is strong evidence of the preference to share leisure. This sample from the 1960s and 1970s shows a high incidence of joint retirement and a positive effect of non-employment of one spouse on the other spouse’s labour force exit rate, as well as a negative influence of non-employment of one spouse on the other’s entry (or re-entry) rate.
Economists have put forward three hypotheses concerning the likelihood that the retirement ages of spouses will be correlated. The first of these – similarity of profiles – suggests that, on average, spouses will retire at similar times because spouses tend to have similar socio-economic profiles. That is, the factors that act on retirement age independently of marital status will affect husbands and wives in similar manners.
The second hypothesis is that individuals will be more likely to retire, the higher is their spouse’s income. This hypothesis suggests that there will be a negative correlation between spouses’ retirement ages. When one spouse retires, family income will decrease and the second spouse will be provided with an incentive to remain in the labour force.
Finally, if the leisure activities of husband and wife are complementary, there will be a positive correlation between spouses’ retirement ages. Recent evidence suggests that this effect has been a significant determinant of retirement ages in the United States.