Aggregate health shock and retirement decision

Abstract

The retirement of old workers increased during the COVID-19 pandemic, and health concerns are considered to be a critical factor. To understand the effect of pure health concerns during the pandemic, we analyze the impact of the aggregate health shock on retirement decisions using a life cycle model. The aggregate health shock changes the economy from the normal state to the pandemic state, where the probability of adverse idiosyncratic health shock increases, especially if agents are working. Simulation results suggest that the shock accelerates the retirement of agents aged over 60. The increase in retirement is significant even though the shock is expected to be temporary. Also, the effect hinges on the assumption that working poses a greater risk of receiving a negative health shock than retiring. Even accounting for the large income and wealth changes that US households experienced in 2020, a counterfactual experiment suggests that the aggregate health shock plays a prominent role in increasing retirement.