Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 741: A Life Cycle Model of Health and Retirement: The Case of Swedish Pension Reform

Tobias Laun () and Johanna Wallenius ()
Additional contact information
Tobias Laun: Department of Economics, Uppsala University, Postal: Department of Economics, Uppsala University, Box 513, 751 20 Uppsala
Johanna Wallenius: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: In this paper we develop a life cycle model of labor supply and retirement to study the interactions between health and the labor supply behavior of older workers, in particular disability insurance and pension claiming. In our framework, individuals choose when to stop working and, given eligibility criteria, when/if to apply for disability and pension benefits. Individuals care about their health and can partially insure against health shocks by investing in health. We use the model to study the labor supply implications of the recent Swedish pension reform. We find that the new pension system creates big incentives for the continued employment of older workers. In particular, the model predicts an increase in the average retirement age of more than two years.

Keywords: life cycle; retirement; pension reform; disability insurance; health

JEL-codes: E24; J22; J26

30 pages, March 6, 2012

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