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Mortality Change, the Uncertainty Effect, and Retirement

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Author Info
Sebnem Kalemli-Ozcan () (Department of Economics, University of Houston)
David N. Weil

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Abstract

We examine the role of declining mortality in explaining the rise of retirement over the course of the 20th century. We construct a model in which individuals make labor/leisure choices over their lifetimes subject to uncertainty about their date of death. In an environment in which mortality is high, an individual who saved up for retirement would face a high risk of dying before he could enjoy his planned leisure. In this case, the optimal plan is for people to work until they die. As mortality falls, however, it becomes optimal to plan, and save for, retirement. We simulate our model using actual changes in the US life table over the last century, and show that this “uncertainty effect” of declining mortality would have more than outweighed the “horizon effect” by which rising life expectancy would have led to later retirement. A calibration exercise, allowing for heterogeneity in tastes and other non-mortality factors influencing retirement, shows that falling mortality plausibly had a quantitatively significant effect on retirement.

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Publisher Info
Paper provided by Department of Economics, University of Houston in its series Working Papers with number 2004-04.

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Length: 36 pages
Date of creation: Aug 2004
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Handle: RePEc:hou:wpaper:2004-04

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Postal: Houston TX 77023
Web page: http://www.uh.edu/academics/sos/econ/
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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
I12 - Health, Education, and Welfare - - Health - - - Health Production
J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends and Forecasts
J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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References listed on IDEAS
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  14. Romain Duval, 2003. "The Retirement Effects of Old-Age Pension and Early Retirement Schemes in OECD Countries," OECD Economics Department Working Papers 370, OECD Economics Department. [Downloadable!]
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  1. David E. Bloom & David Canning & Michael Moore, 2004. "The Effect of Improvements in Health and Longevity on Optimal Retirement and Saving," NBER Working Papers 10919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Moshe Hazan, 2006. "Longevity and Lifetime Labor Input: Data and Implications," DEGIT Conference Papers c011_065, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
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  3. Karen Kopecky, 2005. "The Trend in Retirement," Economie d'Avant Garde Research Reports 12, Economie d'Avant Garde. [Downloadable!]
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  4. David E. Bloom & David Canning & Rick Mansfield & Michael Moore, 2006. "Demographic Change, Social Security Systems, and Savings," NBER Working Papers 12621, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Pedro Cavalcanti Gomes Ferreira & Samuel de Abreu Pessôa, 2005. "The Effects of Longevity and Distortions on Education and Retirement," Economics Working Papers (Ensaios Economicos da EPGE) 590, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
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  6. David E. Bloom & David Canning & Michael Moore, 2007. "A Theory of Retirement," NBER Working Papers 13630, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. David E. Bloom & David Canning & Michael Moore & Younghwan Song, 2006. "The Effect of Subjective Survival Probabilities on Retirement and Wealth in the United States," PGDA Working Papers 1706, Program on the Global Demography of Aging. [Downloadable!]
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  8. Ben J. Heijdra & Ward E. Romp, 2007. "Retirement, Pensions, and Ageing," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  9. David E. Bloom & David Canning & Bryan Graham, 2002. "Longevity and Life Cycle Savings," NBER Working Papers 8808, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Andrew Mason & Tomoko Kinugasa, 2005. "East Asian Economic Development: Two Demographic Dividends," Economics Study Area Working Papers 83, East-West Center, Economics Study Area. [Downloadable!]
  11. Cruz A. Echevarria & Amaia Iza, 2005. "Life Expectancy, Human Capital, Social Security and Growth," DFAEII Working Papers 200517, University of the Basque Country - Department of Foundations of Economic Analysis II, revised 16 Nov 2006. [Downloadable!]
    Other versions:
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