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The Effect of Improvements in Health and Longevity on Optimal Retirement and Saving

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Author Info
David E. Bloom
David Canning
Michael Moore

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Abstract

We develop a life-cycle model of optimal retirement and savings behavior under complete markets where retirement is caused by worsening health in old age. Our model explains the long-run decline in the age of retirement as an income level effect. We show that improvements in health and longevity tend to increase the desired retirement age, though less than proportionately, while, contrary to conventional views, reducing savings rates. The retirement age is not simply proportional to healthy life span because compound interest creates a wealth effect when lifespan increases, leading to more leisure (early retirement) and higher consumption (lower savings).

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10919.

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Date of creation: Nov 2004
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Handle: RePEc:nbr:nberwo:10919

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Find related papers by JEL classification:
J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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  2. Robert W. Fogel, 1994. "Economic Growth, Population Theory, and Physiology: The Bearing of Long-Term Processes on the Making of Economic Policy," NBER Working Papers 4638, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. James M. Poterba, 2004. "Impact of population aging on financial markets in developed countries," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 43-53. [Downloadable!]
  4. Ronald Lee, 2003. "The Demographic Transition: Three Centuries of Fundamental Change," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 167-190, Fall. [Downloadable!] (restricted)
  5. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-1), pages 91-196. [Downloadable!]
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  10. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May. [Downloadable!] (restricted)
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  13. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, vol. 77(4), pages 630-46, September. [Downloadable!] (restricted)
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  16. Cutler, D.M. & Poterba, J.M. & Sheiner, L.M. & Summers, L.H., 1990. "An Aging Society: Opportunity Or Challenge," Working papers 553, Massachusetts Institute of Technology (MIT), Department of Economics.
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  17. Kalemli-Ozcan, Sebnem & Ryder, Harl E. & Weil, David N., 2000. "Mortality decline, human capital investment, and economic growth," Journal of Development Economics, Elsevier, vol. 62(1), pages 1-23, June. [Downloadable!] (restricted)
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  20. Sickles, Robin C & Taubman, Paul, 1986. "An Analysis of the Health and Retirement Status of the Elderly," Econometrica, Econometric Society, vol. 54(6), pages 1339-56, November. [Downloadable!] (restricted)
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  21. Ehrlich, Isaac & Chuma, Hiroyuki, 1990. "A Model of the Demand for Longevity and the Value of Life Extension," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 761-82, August. [Downloadable!] (restricted)
  22. repec:fth:harver:1490 is not listed on IDEAS
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  26. Chang, Fwu-Ranq, 1991. "Uncertain Lifetimes, Retirement and Economic Welfare," Economica, London School of Economics and Political Science, vol. 58(230), pages 215-32, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David E. Bloom & David Canning, 2006. "Demographic challenges, fiscal sustainability and economic growth," PGDA Working Papers 0806, Program on the Global Demography of Aging. [Downloadable!]
  2. Owen O'Donnell & Federica Teppa & Eddy van Doorslaer, 2008. "Can subjective survival expectations explain retirement behaviour?," DNB Working Papers 188, Netherlands Central Bank, Research Department. [Downloadable!]
  3. Bloom, David & Canning, David, 2006. "Global Demography: Fact, Force and Future," MPRA Paper 2577, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. David E. Bloom & David Canning & Jocelyn Finlay, 2008. "Population Aging and Economic Growth in Asia," PGDA Working Papers 4008, Program on the Global Demography of Aging. [Downloadable!]
    Other versions:
  5. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save Retirement May Backfire," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.05, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
  6. 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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  7. 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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  8. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save for Retirement May Backfire," University of St. Gallen Department of Economics working paper series 2005 2005-09, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  9. David E. Bloom & David Canning, 2005. "Global Demographic Change: Dimensions and Economic Significance," PGDA Working Papers 0105, Program on the Global Demography of Aging. [Downloadable!]
    Other versions:
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