Effect of Health on Retirement of Older Americans: a Competing Risks Study

Retirement is an important event in the life of an individual. The decision to retire or exit from full-time employment may be motivated by several factors, including health. This paper explores the effect of both subjective and relatively more objective physical and mental health conditions on the probability of exit from full-time employment. Using longitudinal data on older Americans from ten waves of the Health and Retirement Study (1992-2010), eight health indices are created from a wide range of health measures by principal component analysis. The effect of these health indices on the time until exit from full-time employment is empirically examined in a proportional hazard model. Single and competing risk specifications are estimated that allow for multiple spells of full-time employment and control for unobserved heterogeneity. The main results suggest that better self-reported health decreases the likelihood of exit from full- time employment, while poor physical health (functional limitations factor) increases the likelihood of exit from full-time employment via complete retirement and disability. For mental health, I find that depression increases the likelihood of exit via complete retirement, part-time work and unemployment while cognitive disorders lead to an increase in likelihood of exit via the disability exit route. Hence, physical and mental health problems are both impediments to continued work. These results have implications for public policies targeted towards retaining older workers within the labor market.