Mental retirement and schooling

We assess the validity of differences in eligibility ages for early and old age pension benefits as instruments for estimating the effect of retirement on cognitive functioning. Because differences in eligibility ages across country and gender are correlated with differences in years of schooling, which affect cognitive functioning at old ages, they are invalid as instruments without controlling for schooling. We show by means of simulation and a replication study that unless the model incorporates schooling, the estimated effect of retirement is negatively biased. This explains a large part of the “mental retirement” effects which have recently been found.

► Previous studies find that retirement reduces cognitive performance using IV methods. ► Because retirement eligibilities and schooling are correlated, the instruments are in general invalid. ► The bias due to the omission of schooling explains the large effects found in the literature. ► Omitting schooling from cross-country and cross-state studies may invalidate instruments.