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Mortality Change, the Uncertainty Effect, and Retirement

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  • Sebnem Kalemli-Ozcan

    ()
    (Department of Economics, University of Houston)

  • David N. Weil

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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File URL: http://www.uh.edu/econpapers/RePEc/hou/wpaper/2004-04.pdf
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Bibliographic 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
Date of revision:
Handle: RePEc:hou:wpaper:2004-04

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Postal: Houston TX 77023
Web page: http://www.uh.edu/class/economics/
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