Discoveries in the Economics of Aging

David A. Wise, David A. Wise

• Publisher: University of Chicago Press
• Year: 2014
• ISBN:
  9780226146126
• Topic: Business
• Subtopic: Business General
• Index: Business

The oldest members of the Baby-Boomer generation are now crossing the threshold of eligibility for Social Security and Medicare with extensive and significant implications for these programs' overall spending and fiscal sustainability. Yet the aging of the Baby Boomers is just one part of the rapidly changing landscape of aging in the United States and around the world.The latest volume in the NBER's Economics of Aging series, Discoveries in the Economics of Aging assembles incisive analyses of the most recent research in this expanding field of study. A substantive focus of the volume is the well-documented relationship between health and financial well-being, especially as people age. The contributors explore this issue from a variety of perspectives within the context of the changing demographic landscape. The first part of the volume explores recent trends in health measurement, including the use of alternative measurement indices. Later contributions explore, among other topics, alternate determinants of health, including retirement, marital status, and cohabitation with family, and the potential for innovations, interventions, and public policy to improve health and financial well-being.

III

Determinants of Health

6

Early Retirement, Mental Health, and Social Networks

Axel Börsch-Supan and Morten Schuth

6.1 Introduction

This chapter explores the interrelationships between early retirement, mental health—including cognition and subjective well-being—and the size and composition of social networks among older individuals in the Survey of Health, Ageing and Retirement in Europe (SHARE). We argue that early retirement has negative side effects on the size and intensity of the retirees’ social networks. These side effects appear to explain part of the accelerated cognitive aging that occurs after early retirement.

Early retirement is popular in Europe. It is seen as a much appreciated social achievement that increases personal well-being, particularly among employees who suffer from work-related health problems. First introduced in the 1970s and 1980s, generous early retirement provisions in most European countries were instituted with few actuarial adjustments, if any (Gruber and Wise 1999). But times have changed since then. In response to the growth of the older segment of the population and to the precarious financial state of the public pension system, the costs of early retirement have come under increased scrutiny. This has led to a string of pension reforms in Europe since the 1990s, reducing pay-as-you-go pension benefits and introducing multipillar pension systems with supplemental occupational and individual pensions, in addition to the traditional unfunded retirement insurance (Börsch-Supan 2012).

Despite the enormous increase in life expectancy all over Europe, policymakers are still largely unwilling to challenge the widely popular early and normal retirement ages. Politically speaking, reducing the generosity of early retirement is often seen as “touching the third rail,” with a fatal shock delivered at the next election. A case in point is France, where a timid increase in the retirement age, from sixty to sixty-two years, was partially reverted after the most recent presidential elections.

While many studies have addressed the macro connotations of early retirement, particularly its large costs, another body of literature has looked at the individual implications of early retirement. An immediate benefit from early retirement is the receipt of income support without the necessity to continue working, enabling individuals to enjoy more leisure. Moreover, early retirement relieves workers who feel constrained in their place of work, whether due to stressful job conditions or to work-impeding health problems. For such individuals, early retirement should manifest itself in an improvement of well-being and, potentially, also health. On the other hand, early retirement might also be harmful, because individuals who stop working may lose a purpose in life. This might, in turn, decrease subjective well-being and mental health. Early retirement may after all not be the bliss that many individuals hope for.

Börsch-Supan and Jürges (2006), using the German Socio-Economic Panel data, found that individuals were less happy in the year of early retirement than in the years before and after retirement. Moreover, individuals generally attained their preretirement satisfaction levels relatively soon after retirement. Hence, the early retirement effect on well-being appears to be negative and short lived rather than positive and long lasting, similar to what occurs in the set point model of happiness by Clark et al. (2003). Charles (2002) studied the effect of retirement on depression, and Lindeboom, Portrait, and van den Berg (2002) studied the effect of retirement and other factors (a significant decrease in income, death of the spouse, disability, and a move to a nursing home) on the mental health of individuals, using data from the Longitudinal Aging Study Amsterdam (LASA).

A seminal paper by Adam et al. (2007) based on SHARE found that cognition—measured mainly by memory abilities such as delayed word recall—declined during retirement. This controversial finding has sparked an entire literature. While there are a few papers with the opposite result (Coe and Lindeboom 2008; Coe et al. 2012) based on US data exploiting variation in occupational pension plans, studies based on European data confirm the early findings (Bonsang, Adam, and Perelman 2010; Kuhn, Wuellrich, and Zweimüller 2010; Rohwedder and Willis 2010; and Mazzonna and Peracchi 2012) and show that the negative effect on cognition increases with the time in retirement. For a given age, these studies suggest that early retirees suffer more from cognitive and health decline than later retirees.

Research on these often emotional and highly contested issues is complicated by the fact that the measures of well-being, cognition, and health that are commonly avail...