Occupational Retirement and Social Security Reform : the Roles of Physical and Cognitive Health

The role of health in retirement should depend on the labor demand side. In particular, job requirement is heterogeneous and health is multidimensional. I first document a novel fact that physical and cognitive health, respectively, are more associated with retirement when required by the occupation. Then I develop and estimate a dynamic programming model of retirement, incorporating multiple dimensions of health, whose channels may affect retirement differentially across occupations. Counterfactual experiments suggest the retirement effect of cognitive health is half of the physical one up to the late 60s, but has since surged exponentially. Physical and cognitive health disproportionately explain a large share of the health-driven employment declines in manual and professional occupations. Should manual workers face the physical requirement as mild as professional workers, their retirement age gap would reduce from 2.4 to 1.3 years. If the full retirement age increases, manual workers would actually be more responsive in their labor supply, but suffer larger welfare loss due to the disutility of work