Does Retirement Make You Happy? A Simultaneous Equations Approach

TitleDoes Retirement Make You Happy? A Simultaneous Equations Approach
Publication TypeReport
Year of Publication2014
AuthorsFonseca, R, Kapteyn, A, Lee, J, Zamarro, G
Series TitleMRRC Working Paper
Document Number2014-310
InstitutionMichigan Retirement Research Center, University of Michigan
CityAnn Arbor
KeywordsDepressive symptoms, Income, Life Satisfaction, Retirement

Continued improvements in life expectancy and fiscal insolvency of public pensions have led to increased 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 well-being as financial circumstances may influence well-being, so the effects of retirement may be confounded by income changes. Also, unobservable determinants of income are probably related with unobservable determinants of well-being, making income possibly endogenous if used as control in 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 from 2004 to 2010.

We find that depressive symptoms are negatively related to retirement while life satisfaction is positively related. Remarkably, income does not seem to affect depression or life satisfaction. This contrasts with correlations in the raw data showing 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 Key10989