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A Life Cycle Model of Health and Retirement: The Case of Swedish Pension Reform

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.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 741.

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Length: 30 pages
Date of creation: 06 Mar 2012
Date of revision:
Publication status: Published as Laun, Tobias and Johanna Wallenius, 'A Life Cycle Model of Health and Retirement: The Case of Swedish Pension Reform' in Journal of Public Economics, 2015, pages 127-136.
Handle: RePEc:hhs:hastef:0741
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  1. Laun, Tobias & Wallenius, Johanna, 2015. "A life cycle model of health and retirement: The case of Swedish pension reform," Journal of Public Economics, Elsevier, vol. 127(C), pages 127-136.
  2. Berkovec, James & Stern, Steven, 1991. "Job Exit Behavior of Older Men," Econometrica, Econometric Society, vol. 59(1), pages 189-210, January.
  3. Silvana Pozzebon & Olivia S. Mitchell, 1986. "Married Women's Retirement Behavior," NBER Working Papers 2104, National Bureau of Economic Research, Inc.
  4. Jonathan Gruber & David A. Wise, 2002. "Social Security Programs and Retirement Around the World: Micro Estimation," NBER Working Papers 9407, National Bureau of Economic Research, Inc.
  5. Hamish Low & Costas Meghir & Luigi Pistaferri, 2010. "Wage Risk and Employment Risk over the Life Cycle," American Economic Review, American Economic Association, vol. 100(4), pages 1432-67, September.
  6. Jönsson, Lisa & Palme, Mårten & Svensson, Ingemar, 2010. "Disability Insurance, Population Health and Employment in Sweden," Research Papers in Economics 2010:25, Stockholm University, Department of Economics.
  7. Svend E. Hougaard Jensen & Morten I. Lau & Panu Poutvaara, 2004. "Efficiency and Equity Aspects of Alternative Social Security Rules," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 325-, September.
  8. Jonathan Gruber & Kevin Milligan & David A. Wise, 2009. "Social Security Programs and Retirement Around the World: The Relationship to Youth Employment, Introduction and Summary," NBER Working Papers 14647, National Bureau of Economic Research, Inc.
  9. Eric French, 2005. "The Effects of Health, Wealth, and Wages on Labour Supply and Retirement Behaviour," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 395-427.
  10. Laun, Tobias, 2012. "Optimal Social Insurance with Endogenous Health," SSE/EFI Working Paper Series in Economics and Finance 742, Stockholm School of Economics, revised 28 Apr 2012.
  11. Wallenius, Johanna, 2013. "Social security and cross-country differences in hours: A general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2466-2482.
  12. Richard Rogerson, 2007. "Taxation and Market Work: Is Scandinavia an Outlier?," NBER Working Papers 12890, National Bureau of Economic Research, Inc.
  13. Courtney C. Coile & Phillip B. Levine, 2007. "Labor market shocks and retirement: Do government programs matter?," NBER Chapters, in: Trans-Atlantic Public Economics Seminar (TAPES), Public Policy and Retirement, pages 1902-1919 National Bureau of Economic Research, Inc.
  14. Eric French & Jae Song, 2014. "The Effect of Disability Insurance Receipt on Labor Supply," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 291-337, May.
  15. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
  16. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  17. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-80, September.
  18. Alan L. Gustman & Thomas L. Steinmeier, 1983. "A Structural Retirement Model," NBER Working Papers 1237, National Bureau of Economic Research, Inc.
  19. Courtney Coile & Jonathan Gruber, 2007. "Future Social Security Entitlements and the Retirement Decision," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 234-246, May.
  20. Richard Rogerson & Johanna Wallenius, 2013. "Nonconvexities, Retirement, and the Elasticity of Labor Supply," American Economic Review, American Economic Association, vol. 103(4), pages 1445-62, June.
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