Subjective well-being around retirement

Happiness and life satisfaction become important in economics research, since not only they are considered as an ultimate goal of life but also as a proxy for subjective well-being. Many studies have focused on the changes in income, consumption and leisure time around retirement. More recent studies use subjective indicators, such as satisfaction with life in general or in domains of life, to study well-being. This paper combines these two strands of literature to examine life satisfaction around retirement. More specifically, we study the effect of both retirement and unemployment on life satisfaction, using subjective satisfaction indicators from the German Socio-Economic Panel (GSOEP). Moreover, a unique feature of this data set is that individuals’ expectation of future life satisfaction has been collected every year, resulting in a panel data set with both expectations and realizations of life satisfaction. We exploit this information to analyze how accurate individuals anticipate changes in satisfaction around retirement, as well as the correlation between the forecasting error in life satisfaction and the labour market status, income level, marital status and health condition. Our analysis uses panel data models to account for unobservedheterogeneity. Moreover, we use an ordered response model, explicitly take the ordinal nature of the satisfaction scale into account. We confirm a previous finding in the literature that unemployment and involuntary retirement have significant negative effects on life satisfaction; voluntary retirement on the other hand has no effect on life satisfaction. An important finding is that unemployed and involuntary retired individuals underestimate future life satisfaction. That is, their current labor market status has temporarynegative effects on well-being, but, after 5 years, individuals are happier with their life than previously anticipated. Again, we find no effects of voluntary retirement on the forecasting error. Turning to marital status, we find small and generally insignificant effect of being widowed or divorced on either current life satisfaction or the forecast error. On the other hand, health factors are strongly correlated to well-being: poor health status yields to pessimism of the future, however realized life satisfaction was higher thanexpected, suggesting only temporary eects of being in bad health.