Why retiring later is the route to a healthier old age

Gabriel H. Sahlgren
MANY dream about the day they can stop working. And the rise of retirement since the Second World War is clearly a defining feature of how developed societies have changed over the period. Labour force participation among the elderly has slumped over the past half century and, in combination with an ageing population, this mass phenomenon has put significant pressure on pension systems, while decreasing growth prospects. With lower employment rates, savings rates also decline, in turn leading to lower investment and growth.

The economic arguments for working longer are, therefore, compelling. An important question, however, is how a longer working life affects health. If people are more likely to fall ill, increasing employment rates among the elderly may be thwarted – while leading to increased healthcare costs and more suffering among old people. But if working longer has beneficial health effects, decreasing the time people spend in retirement produces a virtuous circle in which sustainable pension systems, economic growth prospects, lower health costs, and better health go hand in hand.

In a new paper released last week, I analyse this question in detail. There are no straightforward theoretical predictions. Retirement can both increase and reduce stress, incentives to invest in health, social contacts, and exercise. One effect, however, is clear-cut: retirement usually produces a drop in income, which, if anything, should have a negative impact on health. But, overall, the theoretical relationship between retirement and health is ambiguous.

Ambiguity also defines existing research on the matter. Some studies find positive, some negative, and some find no effects of retirement on health. Yet many of these studies suffer from methodological problems, or do not disentangle short and longer-term effects. While retirement may be more like a holiday at the start, with a spike in leisure, negative effects can still emerge after time.

My new empirical findings, from a statistical analysis of 7,000 to 9,000 people across 11 European countries, suggest precisely that. In the beginning, retirement seems to have either no effect or a positive impact. But within a couple of years, these turn into strong negative effects on self-assessed mental and physical health. For example, retirement decreases the likelihood that an individual will classify him or herself in “very good” or “excellent” health by 40 per cent. After the honeymoon, retirement appears to be outright bad for you.

The findings, therefore, give support for the “win-win” scenario in which policies that induce people to work longer, such as increases in the state pension age and removal of labour market regulation, create better growth prospects, solvent pension systems, lower health care costs, and better health among the elderly. This does not mean people should be forced to work until they die, but merely that a better work-retirement balance should be prioritised. If not, the retirement dream might quickly turn into a dreadful nightmare.

Gabriel H. Sahlgren is research fellow at the Institute of Economic Affairs. His paper Work Longer, Live Healthier was released last week.