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Retirement Patterns in Europe: the Effect of Health

Retirement Patterns in Europe: the Effect of Health. Agar Brugiavini Enrica Croda Franco Peracchi. Motivation. Europe is aging faster than other parts of the world: the highest proportion of population aged 65 or over (about 15%)

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Retirement Patterns in Europe: the Effect of Health

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  1. Retirement Patterns in Europe: the Effect of Health Agar Brugiavini Enrica Croda Franco Peracchi

  2. 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

  3. 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

  4. 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

  5. Theoretical Framework • Individuals maximize intertemporal Utility function: subject to the following constraints:

  6. 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)

  7. UK (ELSA) Data: SHARE SE * DK IR Korea Japan China * NL PL PL DE BE * CZ USA (HRS) FR CH AT IT SP GR First wave 2004/05: 28.000 individuals Israel

  8. Distribution of Economically Active Individuals Men

  9. Economic Activity and Physical Health

  10. 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

  11. Distribution of Social Security Wealth Median - by age and gender

  12. Social Security Wealth and Household Income Median

  13. Social Security Wealth Median - by activity status

  14. 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

  15. 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

  16. 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

  17. 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

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