Longevity and Aggregate Savings
AbstractFor the last fifty years, countries in Asia and elsewhere witnessed a surge in aggregate savings per capita. Many empirical studies attribute this trend to the highly significant increases in life longevity of the populations of these countries. Some argue that the rise in savings is short-run, to be eventually 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’savings and chosen retirement age response to changes in longevity. Conditions on the age-profile of improvements in survival probabilities are shown to be necessary in order to predict the direction of this response (the uneven history of age specific improvements in longevity is recorded by Cutler (2004)). Population theory (e.g. Coale (1952)) is used to derive the dependence of the steady-state population age density on longevity. This, in turn, enables the explicit aggregation of individual response functions and a comparative steady-state analysis. Sufficient conditions for a sustainable positive effect of increased longevity on aggregate savings per capita are then derived. The importance of the availability of insurance markets is briefly discussed.
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Bibliographic InfoPaper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp403.
Length: 16 pages
Date of creation: Aug 2005
Date of revision:
longevity; life cycle savings; retirement age; aggregate savings;
Other versions of this item:
- 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-2005-12-01 (All new papers)
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