Executive Summary
Increasing life expectancies and uncertainty about future retirement incomes are likely to lead to various changes in behaviour. As expectations are revised, one potentially important adjustment mechanism is in labour force participation rates. There is already evidence these are rising for those beyond the age of eligibility for New Zealand Superannuation.
This paper uses a new source of longitudinal data on the health, labour force participation and retirement of older New Zealanders. The datasets used in this paper are the Health, Work and Retirement (HWR) study and its successor, the New Zealand Longitudinal Study of Ageing (NZLSA). The HWR study was funded by the Health Research Council of New Zealand for two waves of data collection in 2006 and 2008, and was run by researchers at Massey University. The NZLSA study is funded by the Foundation for Research, Science and Technology (now the Ministry for Science and Innovation) for two waves of data collection in 2010 and 2012, and is also run by Massey University, in conjunction with the Family Centre Social Policy Research Unit.
The central question addressed is: To what extent is labour force participation of those aged 54 to 70 influenced by their health status (both mental and physical), in addition to a wide range of economic, social and demographic variables? Earlier work by Enright and Scobie (2010) used the first wave of the Health Work and Retirement survey (HWR) to investigate the effects of various factors, including health, on the decision to retire. This paper aims to add to this analysis by exploiting the extra information provided by the two more recent waves of survey data, to gain a richer understanding of the determinants of labour force participation and retirement of older New Zealanders. Longitudinal data can help better understand the direct role that health plays in the decision to participate, as the effect of changes in health over time on labour market participation may be examined.
Similarly to Enright and Scobie (2010), we find an association between both mental and physical health, and labour force participation, when not exploiting the longitudinal nature of the data explicitly. When using a relatively objective measure of health status, the predicted probability that males in good health are in the labour force at age 65 is 70%. This falls to 53% for those in ill health, a decline of 17 percentage points. For females, the corresponding drop is 15 percentage points.
Similar results were obtained using a self-rated health measure. The predicted probability of participating in the labour force is 28 percentage points lower for males in fair or poor health relative to those reporting excellent health. For females, the corresponding decline is 19 percentage points.
Based on the longitudinal aspect of the data, we findthatchanges in physical health are indeed significant in explaining the labour force status of males. This indicates there may be a direct effect of health on the retirement decisions of males. However, this was not the case for females.
The presence of some chronic conditions is significantly associated with a lower likelihood of participation. For both males and females, high blood pressure, kidney problems and heart problems are significantly associated with lower probabilities of remaining in the workforce. After the prevalence of the conditions is taken into account, high blood pressure and arthritis are the two most critical chronic conditions that are associated with lower labour force participation.
The measures we have for health status at best are a proxy for the true underlying health status of an individual, and observed health status is a reflection of many unobservable influences (such as genetic endowments). While this study has had access to longitudinal data, which in principle helps to isolate changes over time, the period covered by the survey (2006 to 2010) is relatively short, and encompasses just three observations. Ideally, one would want a longitudinal dataset covering many more years to begin to isolate the dynamic interrelationships between health and retirement.
Nonetheless, it is clear that health has an effect on labour force participation. However, the observed decline in health status as individuals age explains a relatively small proportion of the aggregate decline in participation of older individuals. Ill health appears to be a constraint for some proportion of older individuals, but not all. Of far greater importance are other factors such as financial incentives. For instance, New Zealand Superannuation substantially reduces the likelihood of remaining in the labour force, as do private superannuation income and receipt of government transfers. Other factors, such as changing social norms and expectations of older individuals, phased retirement and flexible work arrangements are likely to be important in encouraging increased participation. Coupled with the increasing investment in human capital by successive cohorts, this suggests an optimistic outlook for the labour market contribution of older New Zealanders.
In addition to the issue of higher rates of labour force exit of older workers, the rate of return to the labour force after a shock is of importance for increasing aggregate participation. Removing barriers to participation - age-based discrimination, limited opportunities for retraining and up-skilling, for example - may also aid in encouraging this inflow, mitigating the likelihood of a temporary withdrawal from employment becoming permanent.
In summary, the results show poor health and eligibility for benefits or pensions encourage exit from the labour force for both males and females, whilst continued employment of a spouse is associated with further participation for males. For females, financial security appears to be a relatively important factor; higher household net wealth is associated with earlier retirement, and the dissolution of marriage with a higher likelihood of participation. Additionally, we find that unobservable effects specific to the individual, explain a substantial proportion of the retirement decision.
The fact that unobservable differences between individuals play an important role in the retirement decision highlights that human behaviour is complex, and the decisions individuals and households make at any time are based on more than what can be observed in a survey. Those decisions are framed by a lifetime's experience and accumulated behaviours. Contemporaneous factors are important in explaining differences in outcomes, but policy interventions to encourage successful ageing should be enacted throughout the life course.
