Ill health and retirement in Britain: a panel data-based analysis

Abstract

We examine the effect of ill health on retirement decisions in Britain, using the British Household Panel Survey (1991-1998). As self-reported health status is likely to be endogenous to the retirement decision, we instrument self-reported health by a constructed 'health stock' measure using a set of health indicator variables and personal characteristics, as suggested by Bound et al. (Bound, J., Schoenbaum, M., Stinebrickner, T.M., Waidmann, M., 1999. The dynamic effects of health on the labor force transitions of older workers. Labour Economics 6, 179-202). Using a range of econometric techniques, we show that adverse shocks to individual health stocks predict individual retirement behaviour among workers aged from 50 until state pension age. We compare responses of economic activity to constructed health measures with that arising using direct indicators of functional limitations and specific health problems. We also examine the dynamics of health shocks and whether adverse and positive health shocks have symmetric effects on transitions in and out of economic activity.