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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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number
28.
Length: Date of creation: 03 Dec 2006 Date of revision: Handle: RePEc:red:sed006:28
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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
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David E. Bloom & David Canning & Michael Moore, 2007.
"A Theory of Retirement,"
NBER Working Papers
13630, National Bureau of Economic Research, Inc.
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David E. Bloom & David Canning & Michael Moore, 2007.
"A Theory of Retirement,"
PGDA Working Papers
2607, Program on the Global Demography of Aging.
[Downloadable!]
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