What is it about?

Economists have mainly focused on human capital accumulation rather than on the causes and consequences of human capital depreciation in late adulthood. To investigate how human capital depreciates over the life cycle, we examine how a newly introduced pension program, the National Rural Pension Scheme, affects cognitive performance in rural China. Retirement plans typically offer benefits that guarantee participants a certain level of income security in old age. Nevertheless, we find clear evidence of adverse effects on cognitive performance among NRPS participants. Specifically, we find that the provision of pension benefits negatively impacts immediate recall, delayed recall, and total word recall for program participants. This finding is significant, as lower performance on delayed recall memory measures has been a highly accurate detector of dementia among senior individuals.

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Why is it important?

Historically, the economics literature has primarily focused on human capital formation and considerably less on the causes and consequences of human capital depreciation, including cognitive decline. However, recent neuropsychological evidence suggests that the adult brain is malleable and open to enhancement even in late adulthood. Cognitive aging is a complex phenomenon, and its economic and policy causes are not well understood. In this paper, we analyze the effects of a pension program on cognitive performance in old age. Studying how human capital depreciates over the life cycle has powerful economic consequences. At the micro-level, cognitive functioning is crucial for decision-making. Elderly individuals make complex financial, health, and long-term care decisions, with significant economic implications. Given the lack of intermediary market institutions in rural areas to aid with financial decisions connected to income security or health care provision, examining the impact on the cognition of the elderly population in a country like China may be especially crucial. Understanding the causes of cognitive decline is also crucial for policy, as the relationship between cognitive aging and productivity affects long-term economic growth.

Perspectives

Our study contributes a new angle to the existing literature on participation in retirement programs in low- and middle-income countries (LMICs). First, we are among the first studies to examine how access to a retirement plan affects cognitive performance in the context of a developing country, and our study relies on a rich new dataset supplemented by analyses of administrative records.7,8 Illuminating how retirement programs can generate adverse downstream effects on old-age cognition can provide insights for enriching existing models on human capital depreciation. Furthermore, from a policy standpoint, uncovering the potential mechanisms that lead to old-age cognitive decline can inform debates on creating policies to mitigate some of the adverse impacts without engendering the numerous benefits that retirement programs can confer to beneficiaries. Studying the depreciation of human capital is especially relevant in China because of its population size and the growing share of its elderly population. Second, we show how program participation affects a broader set of cognitive domains than has been previously considered. This study uses data on various proxies of cognition, such as episodic memory, which is sensitive to aging. As we age, episodic memory is the first domain to deteriorate. Finally, we provide insights into possible mechanisms underlying the observed impact of pension benefits on cognitive functioning.

Dr. Plamen Nikolov
Harvard Institute for Quantitative Social Science

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This page is a summary of: Do pension benefits accelerate cognitive decline in late adulthood? Evidence from rural China, Journal of Economic Behavior & Organization, January 2023, Elsevier, DOI: 10.1016/j.jebo.2022.11.025.
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