The Impact of Income and Health on the Economic Decision to Retire (Early)

Abstract

The economic decision to cease working is traditionally based on standard life-cycle models, where individuals trade-off between market work versus home production or leisure. In this paper, we study such transitions out of work for 26 EU countries over the period 2004-2011 in order to investigate the determinants of retirement: income and health, in particular. Control- ling for these factors, we do not find any significant differences in the retire- ment pattern between the average euro area and EU non-euro area countries. Moreover, we find that shifts into retirement have increased during the onset of the 2008-09 economic and financial crisis. Income, together with flexible working arrangements, as well as private pension plans, are found to be im- portant as regards early retirement decisions, compared to retiring on (or beyond) the legal retirement age. Concerning health measures, we show that institutional factors (such as, state / health benefits, minimum retirement age) could not be sufficient alone if individuals withdraw earlier from the la- bor market due to a weakening of their health. Especially, these latter results can be of importance for structural and macroeconomic policy, for instance, in increasing the employment of both people and hours worked against the background of population aging.