Working Paper Series no. 707: On the Retirement Effect of Inheritance: Heterogeneity and the Role of Risk Aversion

We analyze the retirement effect of private wealth by exploiting the receipt of an inheritance as a wealth shock. We find that, for any age between 55 and 65, chances of current labor market exit are about 40% higher among individuals who inherit at that age than among individuals who inherit in the next few years (Figure 1), consistent with a substantial impact of private wealth on retirement decisions.

We also show that this effect exhibits substantial heterogeneity among socio-demographic groups. The retirement effect of inheritance receipt is stronger for individuals with little education, for those with low socio-economic status, and for part-time workers, which suggests stronger effects on individuals with less attachment to the labor market. For individuals living in a couple, the effects are significant only for those whose spouse is already retired, consistent with the existence of leisure complementarities between spouses. We also investigate how the effect of inheritance receipt on retirement decisions varies with individuals' pension entitlement. As in many countries, public pensions make up most of retirees' financial resources in France, providing them with 75% of their pre-retirement income on average. An important question is whether the effect of inheritance receipt on retirement rates is concentrated on individuals who can already cash out their full pension, or on the contrary whether private wealth may act as a substitute for lower pension wealth. We find that the effect of inheritance receipt on instantaneous retirement is actually stronger for individuals who cannot yet unlock their pension. We also find strong and significant effects on individuals who happen to inherit at a moment where they have not yet worked long enough to be entitled to their full pension amount. This suggests that receiving an inheritance increases retirement rates, including for individuals whose labor market exit is costly.

Finally, we interpret our results using a simple model of retirement choice in which risk-averse agents receive an inheritance, but are uncertain about when and how much they will inherit. This model allows us to explore the respective roles of risk aversion and credit constraints in explaining our results. We show that, when agents are risk averse, or when credit constraints are binding for them, they will bring forward the date of their retirement after receiving an inheritance, even when they receive exactly the amount they expected. We show that this effect can be all the more important as individuals are risk averse, but that this depends on whether credit constraints are binding. Using several measures of risk aversion, we are able to confront this model to the data. Consistent with the model's predictions, we find that the probability of instantaneous labor force exit following the receipt of an inheritance is increasing in individuals' risk aversion. This is consistent with the idea that pension risk may be an important determinant of retirement age.