Spousal Health Shocks and the Timing of the Retirement Decision in the Face of Forward-Looking Financial Incentives

Courtney Harold Van Houtven Norma B. Coe

WP#2010-7

Abstract

A long and still growing strand of the retirement literature examines the role financial incentives play in the timing of the retirement decision.  A more recent second strand of work has focused on the role of health shocks in the retirement decision.  This paper combines these two components of the literature in order to measure the marginal impact of current wealth (including pension accrual), forward-looking financial incentives (peak-value pension wealth), and health shocks on married individuals’ retirement decision.  This paper helps to clarify whether previously omitted forward-looking financial incentives can explain the strong role attributed to health shocks in the retirement decisions of coupled individuals.  We find that financial incentives are the most important determinant of retirement behavior empirically.  A husband is about half as responsive to his wife’s financial incentives as he is to his own.  Interestingly, we find that married men are responsive to their wives’ health shocks, on both the intensive and extensive margin, but find wives’ decisions concerning work are largely unaffected by their husbands’ health shocks.