Occupational Retirement and Pension Reform: The Roles of Physical and Cognitive Health

TL;DR

This paper develops a dynamic model of retirement considering both physical and cognitive health, revealing how health dimensions influence retirement decisions differently across occupations and age groups.

Contribution

It introduces a novel model incorporating multiple health dimensions into retirement decisions, highlighting their differential impacts across occupations and age groups.

Findings

Cognitive health declines exponentially after age 65.

Cognitive health significantly affects employment in demanding occupations.

Physical health constraints mainly affect manual workers' retirement timing.

Abstract

Despite increasing cognitive demands of jobs, knowledge about the role of health in retirement has centered on its physical dimensions. This paper estimates a dynamic programming model of retirement that incorporates multiple health dimensions, allowing differential effects on labor supply across occupations. Results show that the effect of cognitive health surges exponentially after age 65, and it explains a notable share of employment declines in cognitively demanding occupations. Under pension reforms, physical constraint mainly impedes manual workers from delaying retirement, whereas cognitive constraint dampens the response of clerical and professional workers. Multidimensional health thus unevenly exacerbate welfare losses across occupations.