Mental Retirement and Non-Contributory Pensions for the Elderly Poor in Peru

Abstract

This paper analyses the effects of retirement on cognitive abilities for the elderly poor on the basis of the “mental retirement” effect that accompanies retirement. Given the recent emergence and expansion of non-contributory pension programs to alleviate poverty in old-age across low and middle income countries, attention should be given to the potential acceleration of cognitive decline when individuals retire, i.e. when there is a decrease in their engagement of cognitive demanding activities. We use a unique and recent survey of the elderly poor in Peru (ESBAM), which includes a cognitive test and serves as the baseline for a non-contributory pension program. We find a significant negative effect of retirement on cognitive ability after controlling for a number of demographics and objective health measures and even after dealing with the potential endogeneity of retirement.

Keywords: cognitive abilities; old-age poverty; retirement; non-contributory pensions; Peru

JEL Classification: H55, J14, J24, J26