Sunday, May 28, 2006

The Benefits of Later Retirement

In a previous post, I proposed raising the age of eligibility for government-provided retiree benefits. A recent NBER Working Paper suggests that raising the retirement age may have benefits beyond those for the government's finances. Here is the abstract:
While numerous studies have examined how health affects retirement behavior, few have analyzed the impact of retirement on subsequent health outcomes. This study estimates the effects of retirement on health status as measured by indicators of physical and functional limitations, illness conditions, and depression. The empirics are based on six longitudinal waves of the Health and Retirement Study, spanning 1992 through 2003. To account for biases due to unobserved selection and endogeneity, panel data methodologies are used. These are augmented by counterfactual and specification checks to gauge the robustness and plausibility of the estimates. Results indicate that complete retirement leads to a 23-29 percent increase in difficulties associated with mobility and daily activities, an eight percent increase in illness conditions, and an 11 percent decline in mental health. With an aging population choosing to retire at earlier ages, both Social Security and Medicare face considerable shortfalls. Eliminating the embedded incentives in Social Security and many private pension plans, which discourage work beyond some point, and enacting policies that prolong the retirement age may be desirable, ceteris paribus. Retiring at a later age may lessen or postpone poor health outcomes for older adults, raise well-being, and reduce the utilization of health care services, particularly acute care.