Option Value of Work, Health Status, and Retirement Decisions: New evidence from the Japanese Study on Aging and Retirement (JSTAR)

This study examines retirement decisions in Japan, using the option value (OV) model proposed by Stock and Wise (1990) and examined by subsequent studies. This model assumes that individuals maximize a weighted average of utility from their labor income until retirement as well as that from their pension income afterward and determine the timing of retirement based on the OV of postponing it. Using micro-level data collected from the Japanese Study on Aging and Retirement (JSTAR), we computed the OV for each individual working in 2007 and examined its association with the retirement decisions made in 2009. We found that the probability of retirement correlates negatively with the OV and that healthier individuals are somewhat more sensitive to the OV. Furthermore, our simulations show that more generous parameters vis-à-vis eligibility for disability pension benefits slightly increase the probability of retirement, while reduced pension benefits have no significant impact.