Does Retirement Make you Happy? A Simultaneous Equations Approach

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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.

Key Findings

  • Depressive symptoms are negatively related to retirement. In other words retirement reduces the probability of depression.
  • Life satisfaction is positively related to retirement.
  • Household wealth, being married, educational attainment, are all positively related to life satisfaction and reduce the probability of depression.
  • Major health conditions increase the probability of depression and reduce life satisfaction.
  • 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.

Citation

Fonseca, Raquel, Arie Kapteyn, Jinkook Lee, and Gema Zamarro. 2014. "Does Retirement Make you Happy? A Simultaneous Equations Approach." University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2014-310. Ann Arbor, MI. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp310.pdf

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Project

Paper ID

WP 2014-310

Publication Type

Working Paper

Publication Year

2014
pavement-enterprise