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This paper analyses the effect of retirement on cognitive functioning using a longitudinal survey among older Americans, which allows controlling for individual heterogeneity and endogeneity of the retirement decision by using the eligibility age for social security as an instrument. The results highlight a significant negative effect of retirement on cognitive functioning. Our findings suggest that reforms aimed at promoting labour force participation at an older age may not only ensure the sustainability of social security systems but may also create positive health externalities for older individuals.

In most developed countries, the proportion of older individuals has substantially increased over the last few decades. This demographic shift has increased the focus on health in ageing. At the same time, increased life expectancy combined with a decline in average retirement age has increased the proportion of an individual's life spent in retirement. This structural change imposes many challenges for the financial sustainability of social security systems. Moreover, this extended retirement period raises questions about its potential consequences on the physical and mental health of the elderly, which may in turn affect long-term care expenditures (Dave et al., 2008). In a recent study using cross-sectional data from the United States and Europe,1Adam et al. (2007a) found that retirees attained lower cognitive functioning than working individuals. Furthermore, using a stochastic frontier methodology, the authors showed that the longer the retirement period, the lower the cognitive test score, and this suggests an acceleration of cognitive decline during retirement. However, the difference observed between workers and retirees may have explanations other than a causal effect between retirement and cognition. First, impairments in cognitive functioning may prevent people from working, may increase disutility from work, or may lower productivity. Moreover, unobservable factors associated with cognitive functioning and retirement may be interrelated with both. Individuals with higher innate ability (and thus cognitive functioning) may invest more in human capital and retire at a later age than individuals with low innate ability. Based on the descriptive evidence from Adam et al. (2007a), Coe and Zamarro (2011), Mazzonna and Peracchi (2010), and Rohwedder and Willis (2010) have also investigated the relationship between retirement and cognitive functioning. In order to address potential endogeneity bias, they used cross-national data2 and the differences in the legal age of retirement across countries as instruments for the retirement decision. The results were mixed: while Rohwedder and Willis (2010), and Mazzonna and Peracchi (2010) found a significant and quantitatively important negative effect of retirement on cognitive functioning,3Coe and Zamarro (2011) did not find a significant effect. Although using cross-country differences in the eligibility age for retirement benefits as instruments can provide a powerful empirical strategy in order to identify the causal effect of retirement, it is not without its limitations. Individuals from different countries face different institutional settings, constraints and cultural differences beyond retirement schemes. This heterogeneity is likely to partly shape the level and the age-related profile of cognitive functioning, and to be correlated with the institutional settings of retirement schemes. For instance, there is a clear North-South gradient for many health outcomes beyond cognitive test scores, with Northern countries usually performing better than Southern countries (Börsch-Supan et al., 2005). At the same time, eligibility age for retirement tends to be higher in Northern than in Southern European countries. It is unlikely that the cross-country differences in retirement rules fully explain this pattern across European countries. Those differences might thus invalidate the exclusion restrictions and result in an over-estimation of the effect of retirement on cognitive functioning. In this paper we estimate the causal impact of retirement on cognitive functioning using panel data from the Health and Retirement Study (HRS), a longitudinal survey among individuals aged 50+ living in the United States. These data allow us to control for individual heterogeneity and to circumvent the issue of the endogenous retirement decision by using the eligibility age for social security as an instrument. The panel dimension of the data allows us to control for time-invariant heterogeneity, such as the cohort effect, and thus strengthens the validity of the conditional independence and exclusion restrictions underlying instrumental variable (IV) estimation. Moreover, contrary to the previous studies investigating the effect of retirement on cognitive functioning, our analysis focuses on data from a single country with individuals facing basically the same institutional settings and constraints. Furthermore, we find suggestive evidence that the effect of retirement on cognitive functioning is not instantaneous, but appears with a lag. The paper is organised as follows. Section 2 presents a review of the neuropsychological literature regarding cognitive ageing and the relationship between activities and cognitive functioning. Section 3 describes the econometric approach used to address the empirical issues and Section 4 presents the data and our measure of cognitive functioning, used in the empirical model. Section 5 details the results from the empirical analysis. Finally, Section 6 concludes and draws out implications from the analysis.

This paper has analysed the effect of retirement on cognitive functioning, measured by a word learning and recall test, using longitudinal data on older Americans from 1998 to 2008 (HRS). The empirical results highlight a significant negative causal impact of retirement on cognitive functioning, in accordance with the findings of Rohwedder and Willis (2010) and Mazzonna and Peracchi (2010). This negative effect remains even when controlling for individual heterogeneity and the endogeneity of the retirement decision. We show, by using eligibility for social security as an instrument for retirement, that this relationship is unlikely to be due to reverse causality. Our results highlight a significant negative effect of retirement on cognitive functioning, close to 10%. They also suggest that the effect of retirement on cognitive functioning is not instantaneous but appears with a lag and this might thus provide an explanation for the mixed findings from previous studies. Our results also suggest that, although the effect of retirement on cognitive functioning is not instantaneous, most of the drop occurs at the beginning of the retirement period and tends to stabilise afterwards. This finding thus suggests that, even though reforms aimed at delaying the legal age of retirement could lead to some positive externalities in terms of improved cognitive functioning, we should not expect that an increase in retirement age will have a large impact on the dependency of the elderly (i.e. the long-term retired) because of cognitive impairment at older age. From a theoretical point of view, all these results support the disuse perspective (Salthouse, 1991), which assumes that decreases in activity patterns result in atrophy of cognitive skills, while stimulating mental activities increase them (the “use it or lose it” hypothesis), and suggest that retirement plays a significant role in explaining cognitive decline at older age. However, further studies would be necessary to specify the effect of professional activities on cognition (and more particularly on memory functioning). Indeed, the first question to be investigated is whether the impact of the retirement on cognitive functioning depends on the type of professional activity undertaken while employed: physical versus intellectual work; light versus heavy workload; stressful work or not. For example, some studies have shown that intellectually demanding jobs during adulthood are associated with better cognitive functioning in later life, whereas manual labour is associated with worse cognitive functioning (Jorm et al., 1998 and Potter et al., 2008). A second important question is to determine whether the relationship between retirement and cognition is direct and/or whether there are some intermediate variables between retirement and cognition. Indeed, work is known to increase social interaction and a sense of self-efficacy, both variables being considered as important factors contributing to the maintenance of the cognitive reserve (Rowe and Kahn, 1998). Our findings have implications that go beyond the consequences of retirement on cognitive functioning. They show that individuals have some control over the evolution of their cognitive functioning through the activities they undertake and thus that there is scope for policy interventions to affect the pattern of cognitive ageing. They provide support for active ageing policies, particularly in the field of participation. Let us indicate here the three key policy proposals in this field highlighted by the World Health Organization (WHO, 2002): “(1) Provide education and learning opportunities throughout the life course; (2) Recognize and enable the active participation of people in economic development activities, formal and informal work and voluntary activities as they age, according to their individual needs, preferences and capacities; and (3) Encourage people to participate fully in family community life, as they grow older.” Finally, it should be emphasised that memory loss and dementia among the elderly represent a major public health burden, especially in the current context of population ageing. Cognitive impairments, even those not reaching the threshold for dementia diagnosis, are associated with a loss of quality of life, increased disability, and higher health-related expenditures (Albert et al., 2002, Ernst and Hay, 1997, Lyketsos et al., 2002 and Tabert et al., 2002). Our findings suggest that reforms aimed at promoting labour force participation at an older age may not only ensure the sustainability of social security systems but may also create positive health externalities.