Retirement Behavior in Indonesia

Douglas McKee, University of California, Los Angeles

Over the last two decades, social scientists have made substantial advances in understanding the labor supply and retirement decisions of older people in the developed world using dynamic models that capture forward-looking behavior and uncertainty about health, productivity, and income. Much less is known, however, about retirement decisions in developing countries, where government-based social security systems and private pensions rarely exist. Although here too individuals smooth consumption over the life cycle, the mechanisms and constraints are quite different from those observed in the developed world. In the absence of significant formal institutional support, older individuals in developing countries rely on their own labor income, private savings, and family support in the form of transfer payments, coresidence, and participation in family businesses. In this paper, I build and estimate a structural dynamic model of labor supply for older individuals in Indonesia that incorporates these mechanisms.