Scandinavian Working Papers in Economics

Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

No 04-7: The Impact of Health on Individual Retirement Plans: a Panel Analysis comparing Selfreported versus Diagnostic Measures

Mona Larsen () and Nabanita Datta Gupta ()
Additional contact information
Mona Larsen: Danish National Institute of Social Research, Postal: Herluf Trolles Gade 11, DK-1052 Copenhagen K
Nabanita Datta Gupta: Department of Economics, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark

Abstract: Earlier studies have concluded that the use of self-reported health in retirement models is likely to yield an unreliable impact of health on retirement due to “justification bias”. A few recent studies based on younger cohorts approaching retirement age have found little support for this hypothesis. This paper adds fresh evidence to this debate by considering the effect of health on retirement plans in samples of older workers and retirees drawn from a Danish panel survey from 1997-2002 merged to longitudinal register data. Using a wide array of alternative health measures, we compare the role of subjectively versus objectively measured health as a determinant of retirement planning. We control for unobserved heterogeneity as well as account for endogeneity and measurement error of health in retirement, and estimate separate models for women as well as men. As in the more studies, justification bias turns out not to be important. Self-rated physical and mental health are important predictors of retirement planning, in fact more important than economic factors, both among men as well as women. At a disaggregated level, back problems and myalgia significantly hasten male retirement, while back problems, osteoporosis and depression are conditions that significantly affect retirement among women. Retirement planning is in general unaffected by being hospitalised for a serious condition. Looking at health changes strengthens the conclusion that health is an important factor in retirement planning. In fact, health shocks seem to increase the propensity to retire earlier. However, health seems to be less important for retirement planning in Denmark compared to the US.

Keywords: Government Policy; Regulation; Public Health

JEL-codes: I18; J14; J26

56 pages, May 27, 2004

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