Forward Thinking and Family Support: Explaining Retirement and Old-Age Labor Supply in Indonesia

Douglas McKee, University of Pennsylvania

In the developing world, where little formal institutional support exists, older individuals rely on their own labor income and on family support in the form of transfer payments, coresidence, and participation in family businesses. However, the dramatic gains in life expectancy and declines in family size and coresidence that accompany development suggest that these traditional forms of support may break down. In this paper, I estimate a structural dynamic model of labor supply for older men in Indonesia that incorporates these mechanisms, and I find evidence for families and health playing key roles in these choices. Using the model, I then conduct simulations that show that implementation of a Latin-American-style defined-contribution pension program for government and private sector workers would provide modest welfare gains in Indonesia at a reasonable cost. I also find that these gains might not offset the welfare losses brought by potential declines in family support.