Session: The Economy and Mental Health
Room: Hollister 306
Time: Mon 15:00-16:30

Presenter: Maarten Lindeboom (VU University Amsterdam. Department of Economics)

Discussant: Agnes Rupp (National Institute of Health)

Abstract

This paper assesses the impact of a dramatic reform of the Dutch pension system on mental health, savings behavior and retirement expectations of workers nearing retirement age. The reform means that public sector workers born on January 1, 1950 or
later face a substantial reduction in their pension rights while workers born before this threshold date may still retire under the old, more generous rules. We use a unique matched survey and administrative data set comprising male public sector workers born
in 1949 and 1950 to exploit the exogenous variation in pension rights induced by the natural experiment. Our analysis reveals that those who by chance are exposed to a pension reform that confronts them with substantially lower pension wealth have much higher depression rates. This effect persists over time and grows stronger the closer one is born to the threshold date. Furthermore, we find differing effects for different types of workers. For instance, the effects are stronger for unmarried workers and negligible for workers whose partner has a pension or an income. Finally, we find that those affected by the reform also respond by working an additional four months and that they are more likely to participate in a savings program that is likely to only partially compensate for the loss in pension wealth. Our data do not allow us to give a definitive answer to the questions of why the depression rate of the affected group is so much higher and why this effect persists over time. We find, however, that later expected retirement is important for mental health, but other factors are also at work. We argue that the discontinuous assignment rule and the strong differential treatment of workers born around January 1 and the relatively short period before actual retirement are important for this effect.

Our findings have great relevance for public policy. Currently, most countries in the developed world are revising their pension systems to cope with population aging. The reforms are geared toward extending working life and to a smaller role for defined benefit
pensions. Furthermore, a substantial part of the pension wealth of workers has recently evaporated due to the current financial crises. Changes in worker pension claims, due either to financial crises or to government pension policy changes, will have severe consequences for most workers nearing retirement. Workers either have to accept a
substantial drop in pension wealth, increase pension contributions or work substantially longer. The results of this study show that a sudden irreversible deterioration of future prospects can have serious consequences for the mental health of workers nearing retirement, especially when their own employer reneges on pre-existing arrangements in ways that it is difficult to adjust to once one has taken those rules into account in one's plans. In the longer run these mental health effects may translate into somatic diseases. This will not only affect individual well being, but it will also engender costs associated with depression and worse physical health.

Key Terms

mental health, retirement, natural experiment, regression discontinuity

Authors:

Maarten Lindeboom (VU University. Department of Economics)