The Effects of Social Security Policies and Employment Uncertainty on the Labor Supply and Claiming Behavior of Older American Workers * Hugo Ben´ ıtez-Silva † J. Ignacio Garc´ ıa-P´ erez ‡ Sergi Jim´ enez-Mart´ ın § May 30, 2011 Abstract The world economy is living one of its worse periods in recent memory. Unem- ployment rates in developed countries have reached levels not seen in a generation, and workers of all ages are facing increasing probabilities of losing their jobs, smaller re-employment probabilities and considerable losses in accumulated assets. These events likely increase the reliance that most older workers will have on public social insurance programs, exactly at a time that public finances are suffering from a large drop in contributions. Our paper explicitly accounts for employment uncertainty, something that has been relatively overlooked when analyzing retirement decisions, but that has grown in importance in recent years. We numerically solve and sim- ulate a benchmark model of the inter-temporal decisions that individuals face in the United States. Using administrative and household level data we empirically characterize the model in terms of the employment, wage, health, and mortality un- certainty faced by individuals. We find interesting and suggestive results explaining with great accuracy the strikingly high proportion of individuals who claim benefits exactly at the Early Retirement Age, while still explaining the increased claiming hazard at the Normal Retirement Age (NRA). Additionally, we discuss some policy experiments, including the removal of provisions like the earnings test, increases in the NRA, and policies that make work more attractive at older ages. Our results suggest that individuals’ claiming and labor supply decisions are quite responsive to changes in employment uncertainty, which could explain, at least in part, the trend towards early claiming of the last decades. JEL Codes: J14, J26, J65 Keywords: employment uncertainty, retirement, labor supply, dynamic pro- gramming * We gratefully acknowledge the support from projects ECO2008-06395-C05-01 and ECO2010-21706, and also the one from the Fundaci´ on Ram´on Areces. We thank participants at EALE-SOLE 2010, ASAWM 2007, SEVILLA, NBER Summer Institute 2009, and the New York Federal Reserve Bank for their helpful comments. The usual disclaimer applies. † SUNY at Stony Brook, hugo.benitez-silva@sunysb.edu ‡ Universidad Pablo de Olavide and FEDEA, jigarper@upo.es § Universitat Pompeu Fabra, Barcelona GSE and FEDEA, sergi.jimenez@upf.edu 1