We provide an explanation for the common finding that the effect of retirement onlife satisfaction is negligible. For this we use subjective well-being measures for lifeand domains of life satisfaction that are available in the German Socio-Economic Panel(GSOEP) and show that the effect of voluntary retirement on satisfaction with currenthousehold income is negative, while the effect on satisfaction with leisure is positive.At the same time, the effect on health satisfaction is positive but small. Following thelife domain approach we then argue that these effects offset each other for an averageindividual and that therefore the overall effect is negligible. Furthermore, we showthat it is important to distinguish between voluntary and involuntary retirement. Theeffect of involuntary retirement is negative because the adverse effect on satisfactionwith household income is bigger, the favorable effect on satisfaction with leisure issmaller, and the effect on satisfaction with health is not significantly different fromzero. These results turn out to be robust to using different identification strategiessuch as fixed effects and first differences estimation, as well as instrumental variablesestimation using eligibility ages and plant closures as instruments for voluntary andinvoluntary retirement.
