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Department of Economics, Aarhus School of Business, University of Aarhus Working Papers, Department of Economics, Aarhus School of Business, University of Aarhus

No 04-7:
The Impact of Health on Individual Retirement Plans: a Panel Analysis comparing Selfreported versus Diagnostic Measures

Mona Larsen () and Nabanita Datta Gupta ()

Abstract: Earlier studies have concluded that the use of self-reported health in retirement models is likely to yield an unreliable

impact of health on retirement due to “justification bias”. A few recent studies based on younger cohorts approaching

retirement age have found little support for this hypothesis. This paper adds fresh evidence to this debate by considering

the effect of health on retirement plans in samples of older workers and retirees drawn from a Danish panel survey from

1997-2002 merged to longitudinal register data. Using a wide array of alternative health measures, we compare the role

of subjectively versus objectively measured health as a determinant of retirement planning. We control for unobserved

heterogeneity as well as account for endogeneity and measurement error of health in retirement, and estimate separate

models for women as well as men. As in the more studies, justification bias turns out not to be important. Self-rated

physical and mental health are important predictors of retirement planning, in fact more important than economic

factors, both among men as well as women. At a disaggregated level, back problems and myalgia significantly hasten

male retirement, while back problems, osteoporosis and depression are conditions that significantly affect retirement

among women. Retirement planning is in general unaffected by being hospitalised for a serious condition. Looking at

health changes strengthens the conclusion that health is an important factor in retirement planning. In fact, health shocks

seem to increase the propensity to retire earlier. However, health seems to be less important for retirement planning in

Denmark compared to the US.

Keywords: Government Policy; Regulation; Public Health; (follow links to similar papers)

JEL-Codes: I18; J14; J26; (follow links to similar papers)

56 pages, May 27, 2004

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