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Labour force participation and retirement of older New Zealanders

Emma Gorman, Grant M. Scobie (NZ Treasury)

Andy Towers (Massey University)

A presentation to the Population Ageing and Labour Market International Research WorkshopUniversity of Waikato

02 Feb 2012

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DisclaimerThe views, opinions, findings, and conclusions or recommendations expressed in this presentation are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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Overview

1. Introduction2. Motivations3. Data4. Descriptive statistics and definitions5. Methods and results6. Conclusions and discussion7. Further work?

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Introduction

• New Zealand’s population is ageing• Health costs + superannuation = fiscal pressures• Increasing labour force participation

– Alleviate fiscal pressures– Health and well-being– Growth and productivity

• Our primary research question: what factors are associated with labour force participation, in particular the role of health.

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Rapid increase in participation of 65+(aggregate data)

Source: HLFS and StatsNZ medium projections

• Participation rates of older New Zealanders are high and increasing (relative to other OECD countries)

- Increasing participation of females

- Increase in age of eligibility for NZS

• Upward trend projected to continue.

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2. Motivations

• Literature identifies poor health, financial incentives (disability insurance, pensions), financial security to encourage exit from labour force; continued employment of spouse associated with further participation.

• Enright and Scobie (2010) found health and marital status to be important factors, using first wave of Health, Work and Retirement survey (cross-section).

• Extends current literature by utilising longitudinal data.

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1. Transitions to retirement• Full-time to part-time• Full-time to retirement • (relative to remaining in full-time employment)

2. Retirement vs. participation

3. Effects of chronic disease on participation

Three approaches

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Data

• The datasets used are the Health, Work and Retirement (HWR) survey (run by Massey University, funded by Health Research Council).

• Aged 54-70 in baseline survey in 2006, followed up in 2008. • Baseline sample randomly selected from electoral roll, with

oversampling of Maori to combat expected attrition• ...and the first wave of its successor study, the New Zealand

Longitudinal Study of Ageing (NZLSA) run by Massey University, and Enhancing Wellbeing in an Ageing Society (EWAS): a research collaboration between the the Family Centre Social Policy Unit and Waikato University.

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Data

• NZLSA is funded by Ministry of Science and Innovation for 2010 and 2012.

• Three wave panel: 2006, 2008 (HWR) and 2010 (NZLSA) of approximately 1,800 New Zealanders surveyed three times on their health, wealth and social well-being.

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4. DESCRIPTIVE STATISTICS AND DEFINITIONS

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Expected ages of complete retirement increase over time

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0.0

5.1

.15

.2

Density

55 60 65 70 75 80 85Age expect to retire completely

200620082010

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Approximately 20% of retired individuals indicate they would prefer to be in part-time employment. Barriers to participation?

Actual Preferred 2006 Full-time Part time Retired Other

Full-time 62 26 9 3 100 Part time 12 76 7 5 100 Retired, no paid work

3 23 70 4 100

2008 Full-time Part time Retired Other

Full-time 55 35 8 2 100 Part-time 6 87 5 s 100 Retired, no paid work

s 19 75 6 100

s indicates an underlying sample size too small for meaningful inference.

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Demand – mismatch of skills with industry demand, lack of suitably flexible or part-time jobs, unwillingness to re-train or up skill older individuals, age-based discrimination?

Supply – health and disability constraints, care giving responsibilities, leisure preferences, social norms?

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0.000

0.050

0.100

0.150

0.200

0.250

0.300

Reasons for reducing or stopping work...health and NZ Superannuation

14Notes: 1. Respondents can indicate multiple categories.

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PARTICIPATION AND RETIREMENT

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Participation and retirement

• We construct two mutually exclusive categories for analysis: – 1. Participating (working or seeking work) – 2. Retired (retired, no paid work)

• Students, homemakers and those with no identifiable labour force status are excluded from the analysis.

• Only consider those who respond to all three waves (approx 1800).

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Measuring health

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Physical Health

General health (overall perception of physical health)

Physical functioning (degree of health-related functional limitation)

Role physical (degree physical health affects daily activities)

Bodily pain (degree of current bodily pain)

Mental Health

Mental health (overall perception of mental health)

Role emotional (degree emotional health affects daily activities)

Social functioning (degree of health-related social limitation)

Vitality (general degree of perceived energy)

• Self-rated health (poor, fair, good, very good, excellent)• SF-12. summarises physical and mental health into two

indices (mean 50, SD 10, range 1-100).

• Chronic disease indicators.

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Participation and health

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• Retirees of both gender have lower physical health than those participating.

Retired Participating

  Female Male Female MalePhysical (SF12) 45 46 50 50Mental (SF12) 55 54 54 55

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Health transitions

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When participating

(t)When retired

(t+2)Always

participatingAlways retired

Male (SF12) 48 45 51 46Female(SF12) 46 45 51 46

• Those who move into retirement in next period are in worse physical health initially than those who are always participating

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Participation and health

• Justification bias: rationalisation of retirement.– Changing social norms, no empirical consensus

• Measuring health – differing reference points, relevance for participation?• Reverse causality – effect of retirement on

health• Unobservables factors, may affect both health

and participation• Health stock

- (Grossman, 1972)

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New Zealand Superannuation (NZS)

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• Paid to all residents aged 65 or over

• Flat rate indexed to average weekly earnings

• No income, asset or work test

• Aims to prevent poverty in old age

• Spending on NZS projected to increase from 4% of GDP

in 2009 to 8% in 2050.

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METHODS AND RESULTS

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1. Transitions to retirement• Full-time to part-time• Full-time to retirement • (relative to remaining in full-time employment)

2. Retirement vs. participation3. Effects of chronic disease on participation

Methods

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1. Transitions

• Y=

• = f ( health, net wealth, other household income, ethnicity, region, migrant status, highest qualification, gender, financial incentives (NZS), number of financial dependents, marital status, participation status of spouse, attitude toward retirement, age, survey year)

• Measured at time t24

Full-time(t) – retirement(t+2)

Full-time(t) – part-time(t+2)

Full-time(t) – full-time(t+2)

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1. Results

• Females more likely than males to move into part-time rather than remain in full-time work.

• Better physical and mental health associated with lower probability of direct transition to retirement, measured by both SF-12 and self-rated.

• Age – older individuals more likely to move out of full-time work.

• Examine role of health using more data, i.e. including those who are always retired or always in work.

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2. Retirement vs. participation

• Y=

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1 if participating

0 if retired

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Health

Low health Medium health High health

2006

2008

2010

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2. Retirement vs. participation

1( ` ` 0)it it i i itY u X Z

• Aim to account for unobservable individual specific effects, using logit with random effects.

Explanatory variables Individual specific effect

Random error

• Likely to be correlation between unobservables and covariates (e.g health), so bias from omitted variables remains.

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2. Retirement vs. participation

• Parameterise this correlation between covariates and unobservables (Mundlak, 1978).

•

• The final specification includes terms intended to capture time invariant differences between people (unobserved heterogeneity); as well as a term which captures the effect of changes within individuals over time.

• i.e. Identify direct effect of health through within person variation.• Estimate models separately for males and females.

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`i i itX

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2. Results

- Other controls are age, region, ethnicity, other superannuation, benefit receipt, migrant status, attitude toward retirement, log of other household income. - (***) 10% (**) 5% (*) 1%

Participation (base=retired)

Pooled logit Logit with random effects Pooled logit Logit with random effects

Net wealth quartiles (base=Q1)Q2 2 2 -3 -2Q3 2 5 -8 *** -7 **Q4 -3 -2 -8 *** -7 **Education (base=none)Secondary 3 3 7 *** 7 ***Tertiary 5 4 9 *** 9 **On NZS -13 *** -8 *** -29 *** -10 ***Financial dependents 3 ** 1 8 *** 3 *Health status (SF12)Physical 4 *** 2 *** 3 *** 0Mental 1 ** 1 1 ** 1Marital status (base=married with a non-working spouse)Separated / divorced 5 3 13 *** 11 ***Widow / er 4 1 6 * 4Never married -7 -7 6 7Married with working spouse 7 *** 4 * 2 1

Males Females

Average marginal effects (percentage points) Average marginal effects (percentage points)

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Results

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• After accounting for unobserved heterogeneity, physical health remains a significant determinant of participation for males, however for females this effect disappears.

- Direct effect of physical health on male labour supply? - Females less likely to be employed in physically demanding

occupations?

• Individual specific heterogeneity explains a substantial proportion of variation.

- Decisions by households and individuals are complex, and influenced by factors unobserved and unreported in a survey.

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Results

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•Continued employment of spouse – higher participation for males.

- No effect for females – more likely to be secondary earner.

• Dissolution of marriage – separation, divorce, widow – higher participation for females.

• Large effects of New Zealand Superannuation and financial dependents.

• Positive effects of education found for females only.

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3. Chronic illness

• Epilepsy• Diabetes• Blood pressure• Heart• Asthma• Respiratory• Ulcer• Stroke

• Liver• Bowel• Hernia• Kidney• Skin• Arthritis• Sight• Hearing• Cancer• Hepatitis

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Prevalence of chronic disease by labour force status

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3. Chronic illness

• Y=

• =f ( indicators for each chronic disease, demographics and economics controls as in previous models)

• Estimated separately for males and females. • Marginal effects weighted by prevalence, implied effect on

aggregate participation.

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1 if participating

0 if retired

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A. Females Initial probability After the change Average marginal effect (percentage point change in

probability) High blood pressure 62.6 67.5 -4.9 Heart problems 66.4 59.6 -6.8 Arthritis 67.9 62.0 -5.9

B. Males

High blood pressure 69.0 73.4 -4.4 Heart problems 66.6 72.9 -6.3 Kidney 62.8 72.1 -9.3 Cancer 64.7 72.8 -8.1

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In summary

• Poor physical and mental health associated with retirement, and transitions to retirement.

• After accounting for unobserved heterogeneity, physical health remains important determinant of retirement for males only.

• Heart problems and high blood pressure most critical chronic diseases for participation.

• Other factors: NZS, marital status. 37

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Further work

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• Insight into retirement transitions

• Labour market returns to health investment

• Further realism of assumptions around retirement in age in modelling

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...Questions?

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Thank you