Interactions between Financial Incentives and Health in the Early Retirement Decision

41 Pages Posted: 20 May 2017  

Pilar Garcia-Gomez

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Titus J. Galama

USC Center for Economic and Social Research; The RAND Corporation

Eddy van Doorslaer

Erasmus University Rotterdam (EUR) - Institute of Health Policy and Management

Ángel López Nicolás

Universitat Pompeu Fabra

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 2017

Abstract

We present a theory of the relation between health and retirement that generates testable predictions regarding the interaction of health, wealth and financial incentives in retirement decisions. The theory predicts (i) that wealthier individuals (compared to poorer individuals) are more likely to retire for health reasons (affordability proposition), and (ii) that health problems make older workers more responsive to financial incentives encouraging retirement (reinforcement proposition). We test these predictions using administrative data on older employees in the Dutch healthcare sector for whom we link adverse health events, proxied by unanticipated hospitalizations, to information on retirement decisions and actual incentives from administrative records of the pension funds. Exploiting unexpected health shocks and quasi-exogenous variation in financial incentives for retirement due to reforms, we account for the endogeneity of health and financial incentives. Making use of the actual individual pension rights diminishes downward bias in estimates of the effect of pension incentives. We find support for our affordability and reinforcement propositions. Both propositions require the benefits function to be convex, as in our data. Our theory and empirical findings highlight the importance of assessing financial incentives for their potential reinforcement of health shocks and point to the possibility that differences in responses to financial incentives and health shocks across countries may relate to whether the benefit function is concave or convex.

Keywords: pensions, health, retirement, disability, health investment, lifecycle model, health capital, optimal control

JEL Classification: C33, D91, H55, I10, I12, J00, J24, J26, J45, D91

Suggested Citation

Garcia-Gomez, Pilar and Galama, Titus J. and van Doorslaer, Eddy and López Nicolás, Ángel, Interactions between Financial Incentives and Health in the Early Retirement Decision (April 27, 2017). CESR-Schaeffer Working Paper No. 2017-004. Available at SSRN: https://ssrn.com/abstract=2971285 or http://dx.doi.org/10.2139/ssrn.2971285

Pilar Garcia Gomez

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Titus J. Galama (Contact Author)

USC Center for Economic and Social Research ( email )

Playa Vista, CA
United States
+310 430 6358 (Phone)

The RAND Corporation ( email )

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

Eddy Van Doorslaer

Erasmus University Rotterdam (EUR) - Institute of Health Policy and Management

Netherlands

Ángel López Nicolás

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-3) 542 27 08 (Phone)
(34-3) 542 17 46 (Fax)

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