• 15 Feb 21
  • Posted by Nikolov, Plamen

Early retirement: potential decline in cognitive function and human capital

Working less can lead to reduced stress, improved diets, and better sleep patterns. But it may also mean less involvement in social activities and lower mental acuity. This column reports evidence that the negative impact of early retirement could far outweigh the positive effects, and examines policies that could slow down the decline in cognitive function and human capital of older age groups.

How do public policies, and specifically pension schemes, affect the wellbeing of elderly retirees who decide to retire early? Do pension programs generate any potential downsides that policy-makers need to take into account? Are the large benefits that such programs can confer – such as better physical health, less stress, and more time for leisure – justified by the possible loss of quality of life due to speedier cognitive decline?

In a recent study, we find that people who retire early can suffer from accelerated cognitive decline and may even encounter the early onset of dementia. Our research examines the effects of a large retirement program in rural China.

Human capital and its potential depreciation

To most people, capital means a bank account, a thousand shares of Apple stock, or machines used in factories and business plants. But such tangible forms of physical capital are not the only type of economic capital. Formal schooling, a computer training course, and lectures on the virtues of punctuality and team management can also be a form of capital – ‘human capital’.

Human capital broadly encompasses the skills and abilities of individual workers in an economy. It has many dimensions: schooling, health, cognitive skills, and non-cognitive skills.

Human capital, and its connection to higher earnings and a better life, has long fascinated economists. Historically, however, economic research has mainly focused on the causes of human capital accumulation in early life.

Considerably less attention, if any, has been devoted to the causes and consequences of human capital depreciation in late adulthood. But recent evidence from neuropsychology suggests that the human brain is malleable and open to enhancement even in late adulthood.

Better understanding of the causes of human capital depreciation in later life has powerful economic consequences. Cognitive functioning is crucial for decision-making as it influences an individual’s ability to process information. Although some cognitive decline appears to be an inevitable by-product of aging, faster onset of cognitive decline can have profound adverse consequences on one’s life.

Therefore, examining the causes of cognitive performance in late adulthood is paramount. Better understanding of the causes of cognitive decline can help to craft better policies. It is especially important to understand the role that retirement policies can play in influencing cognition in old age.

Can early retirement speed up cognitive decline in old age?

Our study takes on this issue using data from China to examine the effects of a retirement program on cognitive decline among individuals who retire early.

China introduced the New Rural Pension Scheme (NRPS) in 2009 to ease demographic pressures and concerns about old-age poverty. This is a voluntary contribution-based retirement program: pensioners who reach the age of 60 and who have contributed to the scheme can receive a basic pension from the government and a portion from their own contributions to the account balance.

A new data source – the Chinese Health and Retirement Longitudinal Survey (CHARLS), which collects nationally representative data on individuals aged 45 and above – makes it possible to examine how early retirement influences several dimensions of cognitive performance.

Our analysis focuses on two critical cognitive domains: episodic memory, which captures fluid intelligence aspects; and intact mental status, which captures both fluid and crystallized intelligence.

You rest, you rust

The results indicate that the NRPS has a significantly negative effect on cognition among individuals aged 60 and older. Early retirement negatively influences all measures of cognition: immediate recall, delayed recall, and total word recall. The mental decline is equivalent to a reduction in general intelligence of the population of 1.7%.

Since retirement programs are geared towards ensuring the wellbeing of aging adults, this effect is alarming. What is worse, the biggest negative effect is on the measures of delayed recall, which neurological research demonstrates are highly accurate detectors of dementia.

Lessons for policy

What are the potential mechanisms that can account for the decline of cognitive performance among early retirees? The program boosted income for some people, and this could reduce incentives to remain in the labor force.

Reduced labor force participation could in itself lead to enormous benefits for people: reduced stress, improved personal diets, and improved overall sleep patterns. But working less could also create unintended adverse effects: fewer engagements in social activities and reduced mental acuity.

In short: you rest, you rust. The negative impact of early retirement far outweighs the positive effects.

These findings call for closer examination of the role that retirement programs can play in accelerating human capital depreciation in late adulthood. Cognitive impairments among the elderly, even if not severely debilitating, bring about a loss of quality of life and can have negative consequences.

Policies that aim to slow down cognitive decline in older ages are likely to generate large positive spillovers for society.

 

Author:

Plamen Nikolov is Assistant Professor in the Department of Economics at The State University of New York (at Binghamton). His research spans broadly the areas of development economics, labor economics, applied microeconomics and international relations.