Does retirement affect cognitive performance?1

This paper analyzes the effect of retirement on cognitive performance, controlling for individual heterogeneity and endogeneity of the retirement decision. The empirical analysis uses longitudinal data from a biennial survey among individuals aged 50+ living in the United States (Health and Retirement Study 1998-2006), and the eligibility ages for Social Security as instrumental variables for retirement. Results highlight a significant negative effect of retirement on cognitive performance. The empirical analysis shows that this effect is unlikely to be due to reverse causality or unobserved individual heterogeneity. Furthermore, we complement the analysis by using data from a comparable international survey: The Survey of Health, Ageing and Retirement in Europe. We use the cross-country difference in the age-pattern of retirement across countries and gender as an instrumental variable for retirement and confirm previously obtained results. Our results suggest that increasing labor force participation of older workers is not only desirable to insure the viability of retirement schemes, but it could also delay cognitive decline, and thus the occurrence of associated impairments at older age.