Does Retirement Make You Happy? A Simultaneous Equations Approach

30 Pages Posted: 19 Feb 2015

See all articles by Raquel Fonseca

Raquel Fonseca

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG); Rand Corporation; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California; IZA Institute of Labor Economics

Jinkook Lee

University of Southern California - Center for Economic & Social Research; Program on Global Aging, Health & Policy, Center for Economic & Social Research; RAND Corporation

Gema Zamarro

University of Arkansas - Department of Education Reform; Center for Economic and Social Research (CESR)

Date Written: September 2014

Abstract

Continued improvements in life expectancy and fiscal insolvency of public pensions have led to an increase in pension entitlement ages in several countries, but its consequences for subjective well-being are largely unknown.

Financial consequences of retirement complicate the estimation of effects of retirement on subjective well-being as financial circumstances may influence subjective well-being, and therefore, the effects of retirement are likely to be confounded by the change in income. At the same time, unobservable determinants of income are probably related with unobservable determinants of subjective well-being, making income possibly endogenous if used as control in subjective well-being regressions. To address these issues, we estimate a simultaneous model of retirement, income, and subjective well-being while accounting for time effects and unobserved individual effects. Public pension arrangements (replacement rates, eligibility rules for early and full retirement) serve as instrumental variables. We use data from HRS and SHARE for the period 2004-2010.

We find that depressive symptoms are negatively related to retirement while life satisfaction is positively related. Remarkably, income does not seem to have a significant effect on depression or life satisfaction. This is in contrast with the correlations in the raw data that show significant relations between income and depression and life satisfaction. This suggests that accounting for the endogeneity of income in equations explaining depression or life satisfaction is important.

Keywords: Pension reform, well-being, Financial consequences of retirement, depressive symptoms, life satisfaction

Suggested Citation

Fonseca Benito, Raquel and Kapteyn, Arie and Lee, Jinkook and Zamarro, Gema, Does Retirement Make You Happy? A Simultaneous Equations Approach (September 2014). Michigan Retirement Research Center Research Paper No. 2014-310, Available at SSRN: https://ssrn.com/abstract=2566755 or http://dx.doi.org/10.2139/ssrn.2566755

Raquel Fonseca Benito (Contact Author)

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG) ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada

Rand Corporation ( email )

P.O. Box 2138
1776 Main Street
Santa Monica, CA 90407-2138
United States

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) ( email )

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States
310-448-5383 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Jinkook Lee

University of Southern California - Center for Economic & Social Research ( email )

CA
United States

Program on Global Aging, Health & Policy, Center for Economic & Social Research ( email )

635 Downey Way
Suite 312
Los Angeles, CA 90089-0191
United States

HOME PAGE: http://p2aging.org

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Gema Zamarro

University of Arkansas - Department of Education Reform ( email )

201 Graduate Education Building
Fayetteville, AR 72701
United States

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

HOME PAGE: http://works.bepress.com/gema_zamarro/

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