Does Retirement Lead to Life Satisfaction? Causal Evidence from Fixed Effect Instrumental Variable Models

Abstract

This paper presents robust evidence that retirement causally improves overall life satisfaction which is subsequently explained by improvements in satisfaction with one's financial situation, free time, health, and participation in local community activities. Furthermore, while the positive wellbeing impact of retirement is sizable initially, it fades after the first 3 years. We find that the improvements in financial satisfaction upon retirement are only observed for low-income individuals. However, the wellbeing impact of retirement does not differ by gender, educational, occupational, economic or marital backgrounds. We also explore several potential explanations for our findings. This paper employs a fixed effect instrumental variable model, which exploits the discontinuity in the eligibility ages for state pension to construct an instrument for retirement, and 18 waves of high-quality Australian panel data. The results also suggest that failing to adequately account for the endogeneity of retirement would result in a downward-biased estimate of a positive wellbeing impact of retirement.

Retirement, Housing Mobility, Downsizing and Neighbourhood Quality – A Causal Investigation

“…A3 reports full results from the first stage regressions. The estimates of the instrumental variable show that, consistent with that in previous Austrian studies using the same data and similar method (Zhu 2016; Atalay et al 2019b;Nguyen et al 2020), the retirement probability of individuals aged above the pension eligibility age is about 10 percentage points higher than that of individuals just under the PEA threshold. Other results are as expected.…”

“…Throughout this paper, the unit of analysis is the individual. We follow prior Australian studies (Zhu 2016; Atalay et al 2019b;Nguyen et al 2020)…”

Retirement and voluntary work provision: Evidence from the Australian Age Pension reform

“…The age cubed term, together with age and age squared, are not statistically significant in the FE-IV estimations. The results here suggest that the quadratic specification of age effects, as used in our baseline estimations, can sufficiently capture the smooth age trend (Zhu, 2016;Atalay et al, , 2020Nguyen et al, 2020).…”

“…In this section, we assess whether our main results continue to hold when we focus on HILDA respondents of a smaller age range (55-75) as in Atalay et al (2020) and Nguyen et al (2020). 4 and 7, although the precision of the estimates is slightly reduced (as expected).…”

“…However, conditional on a smooth age trend, the binary instrument indicating whether having reached certain specific age is unlikely to have an impact on people's voluntary work provision except through the channel of their retirement. Retirement induced by social security incentives is exogenous and has been used widely in the extant literature (Bonsang et al, 2012;Stancanelli and Van Soest, 2012;Eibich, 2015;Zhu and He, 2015;Kampfen and Maurer, 2016;Zhu, 2016;Atalay et al, , 2020Fischer and Muller, 2020;Frimmel and Pruckner, 2020;Nguyen et al, 2020).…”