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What are the health impacts of retirement? As talk of raising retirement ages in pensions and social security schemes continues around the world, it is important to know both the costs and benefits for the individual, as well as the governments’ budgets. In this paper we use the Survey of Health, Ageing and Retirement in Europe (SHARE) dataset to address this question in a multi-country setting. We use country-specific early and full retirement ages as instruments for retirement behavior. These statutory retirement ages clearly induce retirement, but are not related to an individual's health. Exploiting the discontinuities in retirement behavior across countries, we find significant evidence that retirement has a health-preserving effect on overall general health. Our estimates indicate that retirement leads to a 35 percent decrease in the probability of reporting to be in fair, bad, or very bad health, and an almost one standard deviation improvement in the health index. While the self-reported health seems to be a temporary impact, the health index indicates there are long-lasting health differences.

The notion that retirement harms health is an old and persistent hypothesis (see Minkler, 1981, for a review). Many argue that retirement itself is a stressful event (Carp, 1967, Eisdorfer and Wilkie, 1977, MacBride, 1976 and Sheppard, 1976). Retirement can also lead to a break with support networks and friends, and may be accompanied by emotional or mental impacts of “loneliness,” “obsolesce,” or “feeling old” (Bradford, 1979 and MacBride, 1976). Others believe that retirement is a health-preserving life change. Anecdotal evidence suggests that many discussions about the retirement decision include the idea that work is taxing to the individual, thus retirement would remove this stress and preserve the health of the retiree (Ekerdt et al., 1983). Despite the long-standing debate, there is little conclusive empirical evidence thus far. The inherent problem is that retirement is often a choice, and is often based on health characteristics before retirement. Many of the early studies do not address this, thus they can only infer correlation, not causality. Compounding the problem is that some of the studies find a positive correlation with health (Thompson and Streib, 1958), no correlation with health (Carp, 1967, Atchley, 1976, Kasl, 1980, Rowland, 1977, Haynes et al., 1978, Niemi, 1980 and Adams and Lefebvre, 1981), or a negative correlation with health (Casscells et al., 1980 and Gonzales, 1980). A few recent papers try to address the endogeneity of the retirement decision in examining future health. Charles (2004) and Neuman (2008) use age-specific retirement incentives provided by the U.S. Social Security regulations as instrumental variables in the U.S. context. Coe and Lindeboom (2008) also use early retirement window offers as an instrument. The results from these papers combined indicate that retirement has a positive effect on subjective measures of health, but no effect on objective measures of health in the United States. There is no a priori reason to assume that findings from the U.S. situation will hold for European countries, considering the numerous differences in the labor markets, health insurance, and social policies. Kerkhofs and Lindeboom (1997) assess the effects of work history on the health status of older Dutch workers using fixed effects regressions. This accounts for time-invariant factors that may confound the results, but it does not control for time-varying factors such as a sudden change in the individual environment. Their results suggest that health deteriorates with increased work effort and that increasing retirement ages may negatively influence later-life health outcomes. Lindeboom et al. (2002) use a fixed effect control function to assess the effect of life events, such as retirement, on the mental health of older individuals, also in the Dutch setting. They try to control for all transitory changes as well as individual fixed effects. They find no statistical effect of loss of work on mental health two years later. Their approach does not address any physical health effects of retirement. In fact, they control for all physical health deterioration that is observed in the data. Thus, this result may fail to measure the total impact of retirement on overall health. Bound and Waidmann (2007) examine the health effects of retirement in the U.K. using one wave of the English Longitudinal Study of Aging (ELSA). They examine both self-reported measures of health and objective measures of health measured through blood samples. They find some evidence of a positive health effect of retirement, although temporarily, for men, and no corresponding relationship for women. Three recent papers examine the relationship between cognitive functioning and retirement. Adam et al. (2006) find a strong association between cognitive decline and retirement, but do not test for causality. Coe et al. (2009) find no causal relationship between cognitive function and retirement in the United States, while Rohwedder and Willis (2010) use cross-country variation in retirement ages and find a strong relationship between retirement and cognitive decline. We examine the effect retirement has on contemporaneous health and cognitive function in a multi-country setting using within-country variation in retirement behavior using the SHARE dataset. In addition to demographic information, the survey collects detailed information concerning retirement behavior. The health information is rich, and includes self-reported health, diagnoses of diseases, the Euro-D depression index, as well as newer, more powerful predictors of mortality, such as grip strength. We have supplemented the data with information on early and full statutory retirement ages in 11 countries. We use a single cross-section of data from multiple countries and use the differing retirement ages across countries as exogenous instruments for the retirement decision. Unlike single-country analysis, we can exploit the exogenous variation in retirement policies to explore the effect of retirement on health at different ages, not just age 65, as in the U.K. and U.S. studies. To our knowledge, no other paper in the literature has examined if there are different relationships between retirement and health based on age of retirement. The paper proceeds as follows. Section 2 discusses the empirical model, while the data and the definition of key variables are introduced in Section 3. In Section 4 we present the results and conclude in Section 5.

We find that there is a statistically significant and economically important effect of retirement on general health. We also illustrate the importance of looking for the causal effect, instead of just raw correlations, between retirement and health status, since we find no evidence of a causal link between work status and depression or cognitive function. Our estimates indicate that planned retirement induced by government social security systems leads to a 35 percent decrease in the probability of reporting in fair, bad, or very bad health, and an almost one standard deviation improvement in the health index. It is, however, difficult to quantify these results. Self-reported health has been found to be an important predictor for mortality, especially for death due to diabetes, infection, or respiratory diseases. Benjamins et al. (2004) finds that individuals who rate themselves in fair (poor) health are four- (six-) times more likely to die from diabetes than those who report they are in excellent health, respectively. Further research is needed to determine if these health improvements lead to quality-of-life improvements, and how to quantify the relationship between labor market activity and health care expenditures. A full welfare analysis could be useful in order to determine relative gains to those who benefit from early retirement against the costs to society of too early of a retirement of those who could work longer without a health impact. Next, we would like to explore the underlying mechanisms for how and why health is increasing after retirement. It is important to determine if individuals are using the extra time to make further health investments, and which health investments are being made. This could help direct public policy measures to decrease the effect of working on health, and potentially increasing the retirement age without experiencing the declines in health that are suggested by the results of this paper. Acknowledgements We gratefully acknowledge funding for this project from the Marie Curie International Fellowship (Coe), the Roybal Center for Health Policy Simulation, funded by the National Institute of Aging (5P30 AG024968-02) (Zamarro), and grant number P01 AG022481-01A1 from the National Institute of Aging (Zamarro). We thank Anamaria Camacho for research assistance. We would like to thank Arie Kapteyn, participants of seminars from RAND Corporation, Tilburg University, Michigan Retirement Research Center, the Workshop on the Economics of Aging (Turin), the Netspar Health Workshop (Maastricht), and three anonymous referees for very helpful comments. Any errors are our own.