Socio-economic determinants of cognitive decline in older ages

We analyze socio-economic determinants of cognitive abilities and cognitive decline of older individuals in Europe and the USA. In an increasingly complex world, cognitive abilities are more and more important for social participation. Complex decisions involve those on medical treatments, insurance coverage, or investments on financial markets, for example. Moreover, strong cognitive decline is the most important reason for long-term care dependence and nursing home entry. While each person is subject to age-related cognitive decline, there are large individual heterogeneities. Apart from genetic factors that cannot be manipulated, potential reasons for these heterogeneities are different levels of education and differences in the daily use of the brain. The prominent “use-it-or-lose-it hypothesis” states that cognitive abilities decrease over time when the brain is challenged less, for instance due to absence from the labor market. Specifically, we are interested in effects of retirement, unemployment and education - factors that can, at least in part, be manipulated by policy makers. In our analysis, we use large micro data sets with objective information on cognitive abilities and diagnoses of cognitive impairment together with microeconometric estimation methods from the treatment effect literature. We exploit natural experiments like compulsory schooling reforms and institutional regulations such as early retirement regulations to make credible causal analyses. We study short- and long-term effects of retirement, long-term effects of education and also how both interact. We also analyze one of the most important mechanisms for drastic changes in cognitive abilities, namely health shocks and how policy variables can moderate that. We make several contributions to the literature by using flexible, transparent and also novel estimation techniques.