Longevity and Aggregate Savings
AbstractFor the last fifty years, countries in Asia and elsewhere have witnessed a surge in aggregate savings per capita. Some empirical studies attribute this trend to the increases in life longevity of the populations of these countries. It has been argued that the rise in savings is short-run, eventually to be dissipated by the dissaving of the elderly, whose proportion in the population rises along with longevity. This paper examines whether these conclusions are supported by economic theory. A model of life-cycle decisions with uncertain survival is used to derive individuals' consumption and chosen retirement age response to changes in longevity from which changes in individual savings are derived. Conditions on the age-profile of improvements in survival probabilities are shown to be necessary in order to predict the direction of this response. Population theory (e.g. Coale, 1952) is used to derive the steady-state population age density function, enabling the aggregation of individual response functions and a comparative steady-state analysis. Under certain conditions, increased longevity is shown to increase aggregate savings per capita. These conclusions pertain to an economy with a competitive annuity market. The absence of such market compels individuals to leave unintended bequests, whose size depends on the (random) age of death. While an increase in longevity raises individual savings for given endowments, it is shown that the effect on expected steady-state aggregate savings, taking into account the endogenous ergodic distribution of endowments, cannot be determined a-priori.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1828.
Date of creation: 2006
Date of revision:
longevity; annuities; life cycle savings; retirement age; steady-state; aggregate savings;
Other versions of this item:
- Eytan Sheshinski, 2005. "Longevity and Aggregate Savings," Discussion Paper Series dp403, The Center for the Study of Rationality, Hebrew University, Jerusalem.
- Eytan Sheshinski, 2009. "Longevity and Aggregate Savings," Discussion Paper Series dp519, The Center for the Study of Rationality, Hebrew University, Jerusalem.
- D1 - Microeconomics - - Household Behavior
- D6 - Microeconomics - - Welfare Economics
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- H0 - Public Economics - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-18 (All new papers)
- NEP-HEA-2006-11-18 (Health Economics)
- NEP-MAC-2006-11-18 (Macroeconomics)
- NEP-PBE-2006-11-18 (Public Economics)
- NEP-SEA-2006-11-18 (South East Asia)
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