Retirement Patterns in Europe: the Effect of Health

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Retirement Patterns in Europe the Effect of
Health

• Agar Brugiavini
• Enrica Croda
• Franco Peracchi

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Motivation

• Europe is aging faster than other parts of the
  world
  
• the highest proportion of population aged 65 or
  over (about 15)
  
• The old-age dependency ratio is expected to
  increase from about 27 in 2000 to 39 in 2025,
  and to 53 in 2050
  
• Reforms throughout Europe
• Need to know more about retirement behavior

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This paper

• This paper uses SHARE (Survey of Health Ageing
  and Retirement in Europe) to investigate the
  retirement decisions of older Europeans
  
• In particular
• retirement (and labor force participation)
  decisions may depend on a number of factors,
  including health
  
• individual factors matter, but we also
  hypothesize that institutions matter as well
  

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Theoretical Framework

• Following Grossman (1972a, 1972b, 1999) and
  Currie and Madrian (1999), assume individuals
  derive utility from consumption, leisure and
  also, directly from health, i.e. have the
  following the period utility function
• Health is valued by individuals both for its own
  sake and because being sick is assumed to take
  time away from market and non-market activities

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Theoretical Framework

• Individuals maximize intertemporal Utility
  function
  
• subject to the following constraints

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Theoretical Framework

• The model yields a conditional labor supply
  function depending on (endogenous) health, and
  more generally a demand function for health
  
• Empirically, health must be treated as an
  endogenous choice
  
• Note that
• both equations are intrinsically dynamic
• causality between health outcomes and labor force
  participation can go both ways (alternative use
  of time)
  

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Data SHARE
SE

DK
IR
Korea Japan China

NL
PL
PL
DE
BE

CZ
USA (HRS)
FR
AT
CH
IT
SP
GR
Israel
First wave 2004/05 28.000 individuals
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Distribution of Economically Active Individuals
Men
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Economic Activity and Physical Health
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Generosity of Pension Systems

• Measure of Social Security and Pension Wealth
  (SSW)
  
• SSW defined as present discounted value of
  expected future benefits from social security and
  pensions, discounted by both a given interest
  rate and the conditional survival probability
• In the absence of longitudinal data, one cannot
  measure dynamic incentives of the welfare system

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Distribution of Social Security Wealth
Median - by age and gender
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Social Security Wealth and Household Income
Median
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Social Security Wealth Median - by activity statu
s
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Econometric Evidence

• Probability being Retired
• Dependent variable
• Retired indicator 1 if (self-reported as)
  currently retired
  
• 0 otherwise
• Sample Workers and Pensioners - aged 50-70
• about 13,000 observations
• IV-probit

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Econometric Evidence

• Basic regressors common to both models
• indicators for gender, marital status, indicators
  for age 60 and age 65, age, age squared, years of
  schooling
  
• With country dummies (Germany dummy omitted)
• Measure of Social Security and Pension Wealth
  SSWREL SSW/total household income
  
• IADL-Index for health
• cumulative number of failures in instrumental
  
  
• activities and activities of daily living

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Econometric Evidence

• Instrumental variables
• Social Security Wealth (SSW)
• Instrumented with occupational indicators
• IADL index
• Retrospective questions (ever smoked, ever
  been depressed, age of parents at death or if
  parent survived a target age), material inputs
  for health (vigorous physical activity) plus
  subjective survival probability

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Conclusions

• Social Security Wealth and health still relevant
  after including a whole battery of dummies still
  of the expected sign with IV estimate
  
• Institutions matter, even after controlling for
  other factors
  
• Future plans model labor supply (hours of work)
  and labor demand