Interactions Between Financial Incentives and Health in the Early Retirement Decision

Pilar Garcia-Gomez, Titus Galama, Eddy Van Doorslaer and Angel Lopez-Nicolas ()
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Angel Lopez-Nicolas: Universidad Politecnica de Cartagena, Spain

No 17-044/V, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: 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.

Keywords: pensions; health; retirement; disability; health investment; lifecycle model; health capital (search for similar items in EconPapers)
JEL-codes: C33 D91 H55 I10 I12 J00 J24 J26 J45 (search for similar items in EconPapers)
Date: 2017-04-27
New Economics Papers: this item is included in nep-age, nep-eur, nep-hea, nep-lma and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Interactions between Financial Incentives and Health in the Early Retirement Decision (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20170044

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