The Effects of Income on Mental Health: Evidence from the Social Security Notch

Background: Mental health is a key component of overall wellbeing and mental disorders are relatively common, including among older adults. Yet the causal effect of income on mental health status among older adults is poorly understood.

Aims: This paper considers the effects of a major source of transfer income, Social Security retirement benefits, on the mental health of older adults.

Methods: The Social Security benefit "Notch" is as a large, permanent, and exogenous shock to Social Security income in retirement. The "Notch" is used to identify the causal effect of Social Security income on mental health among older ages using data from the AHEAD cohort of the Health and Retirement Study.

Results: We find that increases in Social Security income significantly improve mental health status and the likelihood of a psychiatric diagnosis for women, but not for men.

Discussion: The effects of income on mental health for older women are statistically significant and meaningful in magnitude. While this is one of the only studies to use plausibly exogenous variation in household income to identify the effect of income on mental health, a limitation of this work is that the results only directly pertain to lower-education households.

Implications: Public policy proposals that alter retirement benefits for the elderly may have important effects on the mental health of older adults.