A Health Production Model With Endogenous Retirement

Abstract

We formulate a stylized structural model of health, wealth accumulation and retirement decisions building on the human capital framework of health and derive analytic solutions for the time paths of consumption, health, health investment, savings and retirement. We argue that the literature has been unnecessarily restrictive in assuming that health is always at the “optimal” health level. Exploring the properties of corner solutions we find that advances in population health decrease the retirement age, while at the same time individuals retire when their health has deteriorated. This potentially explains why retirees point to deteriorating health as an important reason for early retirement, while retirement ages have continued to fall in the developed world, despite continued improvements in population health and mortality. In our model, workers with higher human capital invest more in health and because they stay healthier retire later than those with lower human capital whose health deteriorates faster.

Health, Health Insurance, and Retirement: A Survey

“…Pelgrin and St-Amour (2016) briefly discuss the role of endogenous medical spending but conduct no quantitative assessments. Theoretical analyses that embed retirement decisions within the Grossman framework include Wolfe (1985) and Galama et al (2013).…”

Optimal Social Insurance and Health Inequality

“…While most of the conventional public pension literature ignores issues of health and longevity, there exists a smaller literature investigating the impact of health on labor supply and retirement when health is exogenous (Philipson and Becker, 1998;French, 2005;Heijdra and Romp, 2009;French and Jones, 2011;Imrohoroglu and Kital, 2012;Bloom, Canning and Moore, 2014) and when it is endogenously determined via the Grossman model of health capital accumulation (Wolfe, 1985;Galama et al, 2013). In Wolfe (1985), however, retirement is not determined by welfare maximization, and in Galama et al (2013) longevity is not affected by health investment.…”

“…In Wolfe (1985), however, retirement is not determined by welfare maximization, and in Galama et al (2013) longevity is not affected by health investment. Philipson and Becker (1998) investigate a life cycle model with given retirement age, longevity enhancing health expenditure, and (public) annuities.…”

Old Age Work Participation

“…Failing health may lead to retirement (Kalwij and Vermeulen, 2008). Galama et al (2013) introduce variants of the basic Grossman model that include a retirement decision. Existing studies often find a negative effect of retirement on, in particular, cognitive functioning, as a result of living less stimulating lives in retirement compared to working lives (Rohwedder and Willis 2010;Bonsang et al, 2012).…”