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Interactions Between Financial Incentives and Health in the Early Retirement Decision

Listed author(s):
  • Pilar Garcia-Gomez

    ()

    (Erasmus University Rotterdam, the Netherlands)

  • Titus J. Galama

    ()

    (University of Southern California, US)

  • Eddy van Doorslaer

    ()

    (Erasmus University Rotterdam, the Netherlands)

  • Angel Lopez-Nicolas

    ()

    (Universidad Politecnica de Cartagena, Spain)

We present a theory of the relation between health and retirement that generates testable predictions regarding the interaction of health, wealth and financial incentives in retirement decisions. The theory predicts (i) that wealthier individuals (compared to poorer individuals) are more likely to retire for health reasons(affordability proposition), and (ii) that health problems make older workers more responsive to financial incentives encouraging retirement (reinforcement proposition). We test these predictions using administrative data on older employees in the Dutch healthcare sector for whom we link adverse health events, proxied by unanticipated hospitalizations, to information on retirement decisions and actual incentives from administrative records of the pension funds. Exploiting unexpected health shocks and quasi-exogenous variation in nancial incentives for retirement due to reforms, we account for the endogeneity of health and financial incentives. Making use of the actual individual pension rights diminishes downward bias in estimates of the effect of pension incentives. We find support for our affordability and reinforcement propositions. Both propositions require the benefits function to be convex, as in our data. Our theory and empirical findings highlight the importance of assessing financial incentives for their potential reinforcement of health shocks and point to the possibility that differences in responses to financial incentives and health shocks across countries may relate to whether the benefit function is concave or convex.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 17-044/V.

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Date of creation: 27 Apr 2017
Handle: RePEc:tin:wpaper:20170044
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  1. Ronald Hagan & Andrew M. Jones & Nigel Rice, 2008. "Health Shocks and the Hazard Rate of Early Retirement in the ECHP," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(III), pages 323-335, September.
  2. Caputo,Michael R., 2005. "Foundations of Dynamic Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521842723, December.
  3. repec:eee:joecag:v:1-2:y:2013:i::p:60-71 is not listed on IDEAS
  4. Belloni, Michele & Alessie, Rob, 2009. "The importance of financial incentives on retirement choices: New evidence for Italy," Labour Economics, Elsevier, vol. 16(5), pages 578-588, October.
  5. Rob Euwals & Elisabetta Trevisan, 2011. "Early Retirement and Financial Incentives: Differences Between High and Low Wage Earners," CPB Discussion Paper 195, CPB Netherlands Bureau for Economic Policy Analysis.
  6. Kerkhofs, Marcel & Lindeboom, Maarten & Theeuwes, Jules, 1999. "Retirement, financial incentives and health," Labour Economics, Elsevier, vol. 6(2), pages 203-227, June.
  7. Michael Grossman, 1972. "The Demand for Health: A Theoretical and Empirical Investigation," NBER Books, National Bureau of Economic Research, Inc, number gros72-1, December.
  8. Ehrlich, Isaac & Chuma, Hiroyuki, 1990. "A Model of the Demand for Longevity and the Value of Life Extension," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 761-782, August.
  9. Stock, James H & Wise, David A, 1990. "Pensions, the Option Value of Work, and Retirement," Econometrica, Econometric Society, vol. 58(5), pages 1151-1180, September.
  10. Titus Galama, 2011. "A Contribution to Health Capital Theory," Working Papers 831, RAND Corporation.
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