Does Declining Health Affect the Responsiveness of Retirement Decisions to Financial Incentives?

Abstract

Both the impacts of financial incentives and health on transitions into retirement and inactivity by older workers have been studied extensively in a variety of contexts but far less is known about their interaction. Guided by the option value framework, we use Spanish data from the European Community Household Panel to compare the impact of the public pension system incentives on the retirement behaviour of workers who experienced health shocks and those who remained in good health. Our evidence suggests that the impact on retirement of forward-looking incentive measures such as the peak value is conditional on being in good health. These findings imply that many of the currently proposed and enacted pension reforms aimed at modifying financial incentives may only be effective for people in sufficiently good health.