Labour force participation and retirement of older New Zealanders

1. Labour force participation and retirement of older New Zealanders Emma Gorman, Grant M. Scobie (NZ Treasury) Andy Towers (Massey University) A presentation to the Population Ageing and Labour Market International Research Workshop University of Waikato 02 Feb 2012

2. Disclaimer The views, opinions, findings, and conclusions or recommendations expressed in this presentation are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

3. Overview • Introduction • Motivations • Data • Descriptive statistics and definitions • Methods and results • Conclusions and discussion • Further work?

4. Introduction • New Zealand’s population is ageing • Health costs + superannuation = fiscal pressures • Increasing labour force participation • Alleviate fiscal pressures • Health and well-being • Growth and productivity • Our primary research question: what factors are associated with labour force participation, in particular the role of health.

5. Keep working – your country needs you! Rapid increase in participation of 65+ (aggregate data) • Participation rates of older New Zealanders are high and increasing (relative to other OECD countries) • - Increasing participation of females • - Increase in age of eligibility for NZS • Upward trend projected to continue. Source: HLFS and StatsNZ medium projections

6. 2. Motivations • Literature identifies poor health, financial incentives (disability insurance, pensions), financial security to encourage exit from labour force; continued employment of spouse associated with further participation. • Enright and Scobie (2010) found health and marital status to be important factors, using first wave of Health, Work and Retirement survey (cross-section). • Extends current literature by utilising longitudinal data.

7. Three approaches 1. Transitions to retirement • Full-time to part-time • Full-time to retirement • (relative to remaining in full-time employment) 2. Retirement vs. participation 3. Effects of chronic disease on participation

8. Data • The datasets used are the Health, Work and Retirement (HWR) survey (run by Massey University, funded by Health Research Council). • Aged 54-70 in baseline survey in 2006, followed up in 2008. • Baseline sample randomly selected from electoral roll, with oversampling of Maori to combat expected attrition • ...and the first wave of its successor study, the New Zealand Longitudinal Study of Ageing (NZLSA) run by Massey University, and Enhancing Wellbeing in an Ageing Society (EWAS): a research collaboration between the the Family Centre Social Policy Unit and Waikato University.

9. Data • NZLSA is funded by Ministry of Science and Innovation for 2010 and 2012. • Three wave panel: 2006, 2008 (HWR) and 2010 (NZLSA) of approximately 1,800 New Zealanders surveyed three times on their health, wealth and social well-being.

10. 4. DESCRIPTIVE STATISTICS AND DEFINITIONS

11. Expected ages of complete retirement increase over time

12. s indicates an underlying sample size too small for meaningful inference. Approximately 20% of retired individuals indicate they would prefer to be in part-time employment. Barriers to participation?

13. Demand – mismatch of skills with industry demand, lack of suitably flexible or part-time jobs, unwillingness to re-train or up skill older individuals, age-based discrimination?Supply –health and disability constraints, care giving responsibilities, leisure preferences, social norms?

14. Reasons for reducing or stopping work ...health and NZ Superannuation Notes: 1. Respondents can indicate multiple categories.

15. PARTICIPATION AND RETIREMENT

16. Participation and retirement • We construct two mutually exclusive categories for analysis: • 1. Participating (working or seeking work) • 2. Retired (retired, no paid work) • Students, homemakers and those with no identifiable labour force status are excluded from the analysis. • Only consider those who respond to all three waves (approx 1800).

17. Measuring health • Self-rated health (poor, fair, good, very good, excellent) • SF-12. summarises physical and mental health into two indices (mean 50, SD 10, range 1-100). • Chronic disease indicators.

18. Participation and health • Retirees of both gender have lower physical health than those participating.

19. Health transitions • Those who move into retirement in next period are in worse physical health initially than those who are always participating

20. Participation and health • Justification bias: rationalisation of retirement. • Changing social norms, no empirical consensus • Measuring health – differing reference points, relevance for participation? • Reverse causality – effect of retirement on health • Unobservables factors, may affect both health and participation • Health stock - (Grossman, 1972)

21. New Zealand Superannuation (NZS) • Paid to all residents aged 65 or over • Flat rate indexed to average weekly earnings • No income, asset or work test • Aims to prevent poverty in old age • Spending on NZS projected to increase from 4% of GDP in 2009 to 8% in 2050.

22. Methods and results

23. Methods 1. Transitions to retirement • Full-time to part-time • Full-time to retirement • (relative to remaining in full-time employment) 2. Retirement vs. participation 3. Effects of chronic disease on participation

24. 1. Transitions • Y= • = f ( health, net wealth, other household income, ethnicity, region, migrant status, highest qualification, gender, financial incentives (NZS), number of financial dependents, marital status, participation status of spouse, attitude toward retirement, age, survey year) • Measured at time t Full-time(t)– retirement(t+2) Full-time(t) – part-time(t+2) Full-time(t) – full-time(t+2)

25. 1. Results • Females more likely than males to move into part-time rather than remain in full-time work. • Better physical and mental health associated with lower probability of direct transition to retirement, measured by both SF-12 and self-rated. • Age – older individuals more likely to move out of full-time work. • Examine role of health using more data, i.e. including those who are always retired or always in work.

26. 2. Retirement vs. participation • Y= 1 if participating 0 if retired

27. Pr(labour force participation) 2006 2008 2010 Low health Medium health High health Health

28. 2. Retirement vs. participation • Aim to account for unobservable individual specific effects, using logit with random effects. Explanatory variables Individual specific effect Random error • Likely to be correlation between unobservables and covariates (e.g health), so bias from omitted variables remains.

29. 2. Retirement vs. participation • Parameterise this correlation between covariates and unobservables (Mundlak, 1978). • The final specification includes terms intended to capture time invariant differences between people (unobserved heterogeneity); as well as a term which captures the effect of changes within individuals over time. • i.e. Identify direct effect of health through within person variation. • Estimate models separately for males and females.

30. 2. Results • Other controls are age, region, ethnicity, other superannuation, benefit receipt, migrant status, attitude toward retirement, log of other household income. • - (***) 10% (**) 5% (*) 1%

31. Results • After accounting for unobserved heterogeneity, physical health remains a significant determinant of participation for males, however for females this effect disappears. • Direct effect of physical health on male labour supply? • Females less likely to be employed in physically demanding occupations? • Individual specific heterogeneity explains a substantial proportion of variation. • Decisions by households and individuals are complex, and influenced by factors unobserved and unreported in a survey.

32. Results • Continued employment of spouse – higher participation for males. • No effect for females – more likely to be secondary earner. • Dissolution of marriage – separation, divorce, widow – higher participation for females. • Large effects of New Zealand Superannuation and financial dependents. • Positive effects of education found for females only.

33. 3. Chronic illness • Epilepsy • Diabetes • Blood pressure • Heart • Asthma • Respiratory • Ulcer • Stroke • Liver • Bowel • Hernia • Kidney • Skin • Arthritis • Sight • Hearing • Cancer • Hepatitis

34. Prevalence of chronic disease by labour force status

35. 3. Chronic illness • Y= • =f ( indicators for each chronic disease, demographics and economics controls as in previous models) • Estimated separately for males and females. • Marginal effects weighted by prevalence, implied effect on aggregate participation. 1 if participating 0 if retired

37. In summary • Poor physical and mental health associated with retirement, and transitions to retirement. • After accounting for unobserved heterogeneity, physical health remains important determinant of retirement for males only. • Heart problems and high blood pressure most critical chronic diseases for participation. • Other factors: NZS, marital status.

38. Further work • Insight into retirement transitions • Labour market returns to health investment • Further realism of assumptions around retirement in age in modelling

39. ...Questions? Thank you