Health problems as determinants of retirement: Are self-rated measures endogenous?

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Abstract

We explore alternative measures of unobserved health status in order to identify effects of mental and physical capacity for work on older men's retirement. Traditional self-ratings of poor health are tested against more objectively measured instruments. Using the Health and Retirement Study (HRS), we find that health problems influence retirement plans more strongly than do economic variables. Specifically, men in poor overall health expected to retire one to two years earlier, an effect that persists after correcting for potential endogeneity of self-rated health problems. The effects of detailed health problems are also examined in depth.

Introduction

Poor health can affect preferences for work, wage opportunities, and the time horizon workers face, and may therefore play an important role in the decision to retire. Previous research on this topic suggests that health problems do influence older workers' labor force participation, but the magnitude of their effect has yet to be precisely determined. The few measures available in most prior datasets tend to be subjective proxies measured with error and endogenous to labor supply choices. This paper uses the Health and Retirement Study (HRS), a new nationally representative survey of people age 51–61 in 1992 and their spouses. The data set offers a rich variety of economic and personal information including two distinct types of health measures which are the central focus of the analysis. We expect to minimize measurement error in health by using good objective measures of work capacity and exogenous health determinants as instruments.

In what follows we first provide background and offer a conceptual model, and then describe our empirical specification. The data set used and findings for measurement error models are reported, followed by an examination of the effects of specific conditions. Section 5 concludes.

Section snippets

The framework

Identifying the effects of health and economic variables on retirement is complicated because people's health status is not directly observable. Surveys tend to record respondents' subjective self-assessments of their physical capacity for work, and researchers have used these to capture the effect of health capacity on work potential. However, estimated health effects using these subjective measures may be mis-estimated if individuals use health as a justification for leaving the labor force

Alternative empirical formulations

In order to ascertain precisely how health problems influence retirement, an empirical model must be formulated. Econometric issues arise because a worker's `true' health status is not known precisely; that is, the health measures observed in surveys may be incomplete or even biased indicators. For instance, if the justification hypothesis is accurate, people wanting to retire may exaggerate their bad health conditions. As a consequence, health effects will be overstated, and self-rated poor

Data and empirical results

The empirical analysis uses the first wave of responses to the Health and Retirement Study (HRS), focusing on men age 51 to 61 in 1992. Because most of the HRS sample had not yet retired by 1992, the dependent variable we used is the worker's expected age of retirement.

Discussion

We have used the Health and Retirement Study to evaluate the impact of health problems on men's retirement plans. Though estimated health effects vary with measures used, health problems always have a potent influence on encouraging earlier retirement. Specifically, people self-reporting poor health, or indicating they suffer functional limits, planned retirement between one and two years earlier than average. Further, we find that self-rated health measures are not endogenously determined with

Acknowledgements

The paper was written while Dwyer was a Research Associate at the Center for Policy Research at Syracuse University. Mitchell is the International Foundation of Employee Benefits Plans Professor of Insurance and Risk Management at the Wharton School. Research support was provided by the National Institute on Aging (grant # 1 R03 Ag14220-01) and Cornell University, the Wharton School, and Syracuse University's Maxwell School. The authors are grateful for comments from John Abowd, Larry Blume,

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