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 an individual maximizes a weighted average of utility from labor income until retirement as well as that from pension income afterwards and determines when to retire based on the OV of postponing retirement. 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 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 based on the OV models show that more generous parameters vis-a-vis eligibility for disability pension benefits slightly increases the probability of retirement, while a reduced pension benefit has no significant impact.35 p