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Occupational Retirement and Social Security Reform: the Roles of Physical and Cognitive Health

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  • Jiayi Wen

    () (Xiamen University)

Abstract

Under skill-biased technical change, jobs are becoming less physically demanding whereas require increasing cognitive abilities. However, existing research does not pay sufficient attention on the role of cognitive health in older people's labor supply, nor to the occupation-dependent labor supply effects of physical and cognitive health. This paper reveals several facts about the heterogeneity of physical and cognitive health, as well as their relationship with older people's labor supply across occupations. Based on these facts, this paper proposes and estimates a dynamic programming structural model of individual retirement and saving decisions. The model allows labor supply effects of physical and cognitive health to differ across occupations via four channels respectively: disutility of working, wage, medical expenditure and life expectancy . I estimate the model with the U.S. Health and Retirement Study data by Indirect Inference. The counterfactual experiments suggest cognitive health has little retirement effect for manual workers. However, for clerical workers, the effect is almost as large as the one of physical health. The counterfactual experiment also reveals the mechanisms through which physical and cognitive health affects labor supply respectively. Finally, this paper quantifies the distributional effects of proposed Social Security changes on retirement, benefits and welfare across occupations.

Suggested Citation

  • Jiayi Wen, 2018. "Occupational Retirement and Social Security Reform: the Roles of Physical and Cognitive Health," Working Papers 2018-12-04, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
  • Handle: RePEc:wyi:wpaper:002390
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    References listed on IDEAS

    as
    1. Capatina, Elena, 2015. "Life-cycle effects of health risk," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 67-88.
    2. Mazzonna, Fabrizio & Peracchi, Franco, 2012. "Ageing, cognitive abilities and retirement," European Economic Review, Elsevier, vol. 56(4), pages 691-710.
    3. Kathleen McGarry, 2004. "Health and Retirement: Do Changes in Health Affect Retirement Expectations?," Journal of Human Resources, University of Wisconsin Press, vol. 39(3).
    4. 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.
    5. Bingley, Paul & Martinello, Alessandro, 2013. "Mental retirement and schooling," European Economic Review, Elsevier, vol. 63(C), pages 292-298.
    6. Bound, John & Schoenbaum, Michael & Stinebrickner, Todd R. & Waidmann, Timothy, 1999. "The dynamic effects of health on the labor force transitions of older workers," Labour Economics, Elsevier, vol. 6(2), pages 179-202, June.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    Cognition; Retirement; Social Security;

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