DOES POOR HEALTH INDUCE EARLIER RETIREMENT

THROUGH LEISURE PREFERENCE?

April 15th, 2014

Department of Economics, National Tsing Hua University

Yu-I Peng, Tsai-Ching Liu and Chin-Shyan Chen

National Taipei University

Background

For older workers, retirement is a composite lifetime decision involving a variety of considerations, such as financial conditions, work capacity, family situation, and institutional rules.

In the literature, financial and health statuses are found to be the main factors for retirement decisions.

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Background

In a traditional economic model of labor-leisure choices under a life-cycle framework, in which an individual chooses lifetime work/consumption and the length of retirement to maximize lifetime utility, health could affect retirement through three channels (Sammartino,1987):

1. Preference 2. Constraint 3. Lifespan

The effect of health on retirement is theoretically ambiguous.

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Literature

In a long list of empirical studies, poor heath has been found to negatively influence the labor force participation, lead to earlier retirement (e.g., Anderson & Burkhauser, 1985; Bazzoli, 1985; Bound, 1991; Disney et al., 2006; Doshi et al., 2008; Olesen and Butterworth, 2012), and induce earlier expected retirement (e.g., Dwyer & Mitchell, 1999; McGarry, 2004; Datta Gupta and Larsen, 2010).

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Literature

Empirical studies generally agrees with the direction of the effect of health on retirement behavior of older workers, but has been debating over the magnitude with respect to:

Measurement error of survey-based self-rated health proxy;

Endogeneity of health measure to retirement decisions.

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Literature

The research on the determinants of actual and anticipated choices of retirement timing has received a considerable amount of attention in the literature. However, little is known about the driving forces behind them (except in studies using structural models such as Gordon & Blinder, 1980; Gustman & Steinmeier, 1986).

Theoretically, health could affect retirement timing through several channels; empirically, it remains unclear which forces drive the results and whether the forces act as predicted by theory.

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Objectives

The Survey of Health and Living Status of the Middle Aged and Elderly (SHLS), a longitudinal survey of middle aged and elderly in Taiwan, contains a unique set of questionnaires regarding attitudes toward retirement life.

The potential upsides and downsides of retirement life are evaluated by older workers as to how much they care about.

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Some people think that retirement (i.e., a complete withdrawal from work) comes with the following advantages:

• Having a more laid-back life; having more time to participate social services or activities; having more time to travel; having time for what one would like to do.

• How important is each of the advantages to you? Not important at all (0), somewhat unimportant (1), somewhat important (2), or very important (3).

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Some people think that retirement (i.e., after completely stopping work) comes with the following drawbacks.

• Having too much time and being bored; being unable to do anything useful or constructive; being more likely to have an illness or body deteriorating; not having sufficient income; savings will depreciate and living expenses will upsurge.

• How much are you concerned about each of the drawbacks? Not worried at all (0), of little worry (1), somewhat worried (2), or very worried (3).

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Objectives

The data of SHLS provide opportunities to directly examine how individual health status along with financial and demographic backgrounds relates to individual preference for retirement leisure and worry for retirement life among older workers in Taiwan.

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Demographic Background

Taiwan has been an aging society since the proportion of its population aged 65 and over exceeded 7% in 1993.

The proportion has been going up very fast over the past two decades, from 6.53% in 1991 to 8.81% in 2001 and to 10.89% in 2011.

Life expectancy has also increased over time from 74.26 years in 1991, to 76.75 in 2001, and to 79.15 in 2011.

(Council for Economic Planning and Development, 2012)

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Demographic Background

The labor force participation rate of workers aged 65 and over decreased from 9.93% in 1991 to 7.39% in 2001, but slightly rose to 7.93% in 2011.

(Directorate-General of Budget, Accounting and Statistics, 2012)

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Institutional Background

In Taiwan, there has been a universal health insurance system (National Health Insurance, NHI) since 1995. People suffering from sudden, poor health are covered by the national insurance, irrespective of their work status.

The institutional setting of the NHI in Taiwan could reduce institutional interferences to the health-retirement link and help identify the pure associations between health and retirement.

Private and public sector workers are under different systems of old-age social insurance and employer-provided pensions.

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Related Studies in Taiwan

Despite a rapidly growing body of studies examining the relationship between NHI implementation and health of the elderly, little attention has been paid to the linkage between health and retirement of the elderly under the NHI system.

Mete and Schultz (2002), using the SHLS from 1989 to 1996, found a significant association between poor health and reduced labor force participation by the elderly. Using the same survey data, Chang and Yen (2011) presented a similar finding that mental illness reduces the likelihood of employment among the elderly.

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Data

The Survey of Health and Living Status of the Middle Aged and Elderly in Taiwan (SHLS) – A longitudinal survey of representative middle aged and elderly people, conducted by the Bureau of Health Promotion, Department of Health in Taiwan.

6 survey waves: 1989, 1993, 1996, 1999, 2003, and 2007.

3 cohorts: 4049 respondents who were 60 years old and higher in 1989; 2462 individuals aged 50-66 in 1996; 1599 individuals aged 50-56 in 2003.

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Empirical Model

The estimation equation:

RA: Retirement attitudes H: A measure of poor health W: A set of financial variables X: A vector of personal and household

characteristics u: Error term

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iiiii uXWHRA 3210

Empirical Model

Retirement attitudes Positive attitude: retirement leisure preference

(0-12) Negative attitude: retirement worry (0-15)

Health measures Self-reported poor overall health (1-5) Count of diagnosed diseases (0-15) Count of activity limitations (0-8) CES-D score of depressive symptoms (0-30)

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Empirical Model

Other covariates Financial variables: Homeownership,

household wealth, and employment type. Personal and household characteristics:

Gender, ethnicity, education, spouse and children, area of residence, etc.

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Sample & Estimation Methods

The youngest cohort in the SHLS: 1599 individuals aged 50-56 in 2003.

1004 current workers, 211 retirees, and those who never worked or retired before age 50.

Estimation methods: 1. OLS model: 1004 pre-retirees 2. Heckman two-step selection model: 1004

pre-retirees plus 211 retirees (Exclusion restriction applied.)

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Descriptive Statistics

20Sample Sample A

Current workers [N=1004]

Sample B

Previous workers [N=211]

Variable Mean S.D. Mean S.D.

Retirement leisure preference 8.039 2.866 -- --

Retirement worry 5.301 3.786 -- --

Self-reported poor health 2.211 0.982 2.649 1.163

Number of diagnosed diseases 0.891 1.162 1.261 1.402

Number of activity limitations 0.327 0.959 1.137 1.853

CES-D score 3.064 4.088 5.327 5.863

Age 53.161 1.962 54.417 1.970

Male 0.620 0.486 0.464 0.500

Mainlander 0.081 0.272 0.081 0.273

High school 0.376 0.485 0.351 0.478

Urban 0.593 0.492 0.616 0.487

Having no spouse 0.134 0.341 0.227 0.420

Having a non-working spouse 0.374 0.484 0.431 0.496

Having a working spouse 0.492 0.500 0.341 0.475

Number of children 2.759 1.130 2.682 1.272

Private employee 0.443 0.497 0.607 0.490

Self-employed 0.413 0.493 0.242 0.429

Government employee 0.143 0.351 0.152 0.360

Homeownership 0.894 0.308 0.886 0.318

Household wealth:

NTD 50,000~500,000 0.360 0.480 0.336 0.474

Household wealth:

NTD 500,000 and over 0.184 0.388 0.137 0.345

Estimation Results

The first-stage selection equation

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Dependent variable: Selection=1 if currently working; =0 if being retired.

Specification Heck1 Heck2 Heck3 Heck4

Poor health measure -0.194*** -0.115*** -0.219*** -0.048***

(0.045) (0.035) (0.034) (0.010)

Age -0.179*** -0.178*** -0.176*** -0.175***

(0.023) (0.023) (0.024) (0.024)

Male 0.355*** 0.373*** 0.320*** 0.372***

(0.095) (0.094) (0.096) (0.096)

Mainlander 0.090 0.054 0.049 0.059

(0.175) (0.174) (0.177) (0.174)

High school -0.152 -0.143 -0.111 -0.158

(0.116) (0.115) (0.117) (0.117)

Urban resident -0.040 -0.011 -0.055 -0.033

(0.100) (0.099) (0.101) (0.100)

Having no spouse -0.379*** -0.415*** -0.399*** -0.346**

(0.135) (0.135) (0.137) (0.137)

Having a non-working -0.269*** -0.267** -0.260** -0.231**

spouse (0.104) (0.104) (0.106) (0.105)

Estimation Results

The first-stage selection equation

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Dependent variable: Selection=1 if currently working; =0 if being retired.

Specification Heck1 Heck2 Heck3 Heck4

Number of children 0.031 0.031 0.029 0.032

(0.043) (0.043) (0.044) (0.043)

Self-employed 0.460*** 0.461*** 0.462*** 0.466***

(0.107) (0.107) (0.109) (0.108)

Government employee 0.147 0.154 0.122 0.118

(0.141) (0.140) (0.142) (0.141)

Homeownership -0.034 -0.021 -0.054 -0.089

(0.150) (0.149) (0.152) (0.153)

Household wealth: 0.007 0.035 -0.005 -0.049

NTD 50,000~500,000 (0.111) (0.110) (0.112) (0.112)

Household wealth: 0.049 0.076 0.020 -0.007

NTD 500,000 and over (0.149) (0.148) (0.151) (0.150)

Constant 10.824*** 10.379*** 10.343*** 10.366***

(1.266) (1.257) (1.286) (1.279)

N 1160 1160 1156 1156

Estimation Results

The OLS & Heckman estimations of retirement leisure preference

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(1) Self-reported

poorl health

(2) Diagnosed

diseases

(3) Activity

limitations

(4) CES-D

score

OLS -0.281***

(0.090)

0.006

(0.075)

-0.008

(0.091)

-0.066**

(0.022)

Heckman two-step -0.221**

(0.103)

0.048

(0.083)

0.120

(0.116)

-0.054**

(0.027)

Inverse Mills ratio

-0.802

(0.664)

-0.836

(0.669)

-1.263*

(0.705)

-0.534

(0.692)

Standard errors in parentheses. * p<0.1, ** p<0.05, *** p<0.01.

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Heck1 Heck2 Heck3 Heck4

Male -0.434** -0.387* -0.388* -0.397*

(0.201) (0.204) (0.202) (0.203) Mainlander 0.059 0.024 -0.053 0.065

(0.338) (0.339) (0.344) (0.336) High school 1.116*** 1.152*** 1.140*** 1.101***

(0.209) (0.210) (0.211) (0.208) Urban resident 0.370** 0.380** 0.398** 0.381**

(0.184) (0.185) (0.187) (0.183) Spouse

Working spouse (reference)

No spouse -0.767** -0.789** -0.760** -0.823***

(0.304) (0.310) (0.312) (0.301) Non-working spouse -0.333 -0.325 -0.336 -0.335*

(0.204) (0.205) (0.207) (0.201) Number of children 0.012 0.007 0.004 0.004

(0.085) (0.086) (0.086) (0.085) Employment type

Private employee (reference)

Self-employed -0.222 -0.241 -0.295 -0.168

(0.212) (0.214) (0.216) (0.214) Government employee 0.418 0.396 0.406 0.398

(0.273) (0.275) (0.276) (0.271) Homeownership 0.679** 0.664** 0.698** 0.621**

(0.284) (0.285) (0.288) (0.284) Household wealth

NTD 0~50,000 (reference)

NTD 50,000~500,000

0.569*** 0.644*** 0.628*** 0.603***

(0.207) (0.207) (0.209) (0.206) NTD 500,000 and over

0.889*** 0.958*** 0.943*** 0.901***

(0.263) (0.264) (0.266) (0.262)

Estimation Results

The OLS & Heckman estimations of retirement worry

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(1) Self-reported

poor health

(2) Diagnosed

diseases

(3) Activity

limitations

(4) CES-D

score

OLS 0.487***

(0.121)

0.431***

(0.100)

0.456***

(0.122)

0.251***

(0.028)

Heckman two-step 0.300**

(0.142)

0.313***

(0.113)

0.225

(0.157)

0.220***

(0.035)

Inverse Mills Ratio

2.504***

(0.896)

2.268**

(0.893)

2.252**

(0.943)

1.330

(0.885)

Standard errors in parentheses. * p<0.1, ** p<0.05, *** p<0.01.

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Heck1 Heck2 Heck3 Heck4

Male 0.043 -0.032 0.008 -0.008

(0.279) (0.279) (0.276) (0.266) Mainlander 1.080** 1.148** 1.137** 0.967**

(0.468) (0.463) (0.467) (0.438) High school -1.162*** -1.119*** -1.171*** -1.017***

(0.295) (0.293) (0.292) (0.276) Urban resident -0.266 -0.317 -0.276 -0.300

(0.257) (0.254) (0.255) (0.240) Spouse

Working spouse (reference)

Having no spouse 0.323 0.419 0.344 0.488

(0.425) (0.427) (0.430) (0.398) Having a non-working spouse -0.181 -0.208 -0.155 -0.146

(0.285) (0.282) (0.283) (0.264) Number of children 0.147 0.156 0.152 0.165

(0.119) (0.118) (0.118) (0.112) Employment type

Private employee (reference)

Self-employed -0.161 -0.179 -0.190 -0.414

(0.296) (0.294) (0.295) (0.280) Government employee -0.046 -0.071 -0.034 0.011

(0.381) (0.378) (0.378) (0.357) Homeownership 0.067 0.095 0.134 0.309

(0.397) (0.393) (0.397) (0.375) Household wealth

NTD 0~50,000 (reference)

NTD 50,000~500,000 -0.528* -0.591** -0.633** -0.453*

(0.289) (0.285) (0.286) (0.271) NTD 500,000 and over -1.681*** -1.749*** -1.775*** -1.549***

(0.371) (0.366) (0.368) (0.347)

Concluding Remarks

While the empirical studies have established the association that poor health induces earlier retirement, our results suggest that older workers with poor health actually do not prefer retirement leisure that much and are more worried about retirement life, compared to their counterparts with better health.

Given that poor health is associated with relatively lower preference for leisure than for work/consumption, the early retirement behavior of older workers with poor health might be due to factors other than preferences, namely the two other channels – poor health depressing wages (changing the constraint) and poor health as an indicator of shorter life expectancy.

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Concluding Remarks

This study is the first to investigate the relationship between health status and retirement attitudes in terms of leisure preference and worry among the pre-retirees. Taking advantage of the novel measures of retirement attitudes in the SHLS, this study offers a new perspective on the health-retirement link.

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Concluding Remarks

The limitations The information on pension and job

history in the SHLS is not complete enough to approximate older workers’ expected pension wealth, and the models are not controlled for the level of pension wealth.

The inference is based on cross-section dataset.

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Concluding Remarks

Policy implications 1. This study provides references to pension policy

makers in understanding workers’ retirement decision-making and designing relevant retirement incentives in Taiwan.

2. The government could provide assistance to specific groups of older workers with potential concerns and help them adjust well into retirement life.

3. The government may consider coordinate pension and health policies in order to balance between maintaining the funds of the two systems and promoting the overall well-being of the elderly.

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