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Increasing life expectancy and optimal retirement in general equilibrium

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  • Klaus Prettner

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  • David Canning

Abstract

We analytically assess the effects of changes in longevity on the interest rate, the consumption-savings behavior, and the optimal retirement decision within a dynamic general equilibrium setting. We derive a simple sufficient condition for which the optimal retirement age always increases with life expectancy. Numerical assessment reveals that for realistic parameter values that reflect the situation in industrialized countries, the optimal retirement age indeed increases with life expectancy and the sufficient condition tends to be fulfilled. Together with the fact that the actual retirement age did not increase in industrialized countries over the last decades, while there have been large improvements in longevity, this leads us to conclude that strong monetary and institutional incentives for early retirement exist and these counteract the effects of increasing life expectancy. Our policy conclusion is that the retirement age should be partially linked to life expectancy and that incentives for early retirement should be removed. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Klaus Prettner & David Canning, 2014. "Increasing life expectancy and optimal retirement in general equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(1), pages 191-217, May.
  • Handle: RePEc:spr:joecth:v:56:y:2014:i:1:p:191-217
    DOI: 10.1007/s00199-013-0776-9
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:joecag:v:8:y:2016:i:c:p:42-51 is not listed on IDEAS
    2. Chen, Brian K. & Jalal, Hawre & Hashimoto, Hideki & Suen, Sze-chuan & Eggleston, Karen & Hurley, Michael & Schoemaker, Lena & Bhattacharya, Jay, 2016. "Forecasting trends in disability in a super-aging society: Adapting the Future Elderly Model to Japan," The Journal of the Economics of Ageing, Elsevier, vol. 8(C), pages 42-51.
    3. Bloom, David E. & Chen, Simiao & Kuhn, Michael & McGovern, Mark & Oxley, Les T. & Prettner, Klaus, 2017. "The economic burden of chronic diseases: Estimates and projections for China, Japan, and South Korea," Hohenheim Discussion Papers in Business, Economics and Social Sciences 09-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    4. Prettner, Klaus & Strulik, Holger, 2018. "Trade and productivity: The family connection redux," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 276-291.
    5. Miyoshi, Yoshiyuki & Toda, Alexis Akira, 2017. "Growth effects of annuities and government transfers in perpetual youth models," Journal of Mathematical Economics, Elsevier, vol. 72(C), pages 1-6.
    6. Bloom, David E. & Kuhn, Michael & Prettner, Klaus, 2018. "Health and Economic Growth," IZA Discussion Papers 11939, Institute of Labor Economics (IZA).
    7. Ben J. Heijdra & Laurie S. M. Reijnders, 2016. "Human Capital Accumulation and the Macroeconomy in an Ageing Society," De Economist, Springer, vol. 164(3), pages 297-334, September.
    8. repec:cup:jpenef:v:17:y:2018:i:02:p:200-230_00 is not listed on IDEAS
    9. Edle von Gaessler, Anne & Ziesemer, Thomas, 2017. "Ageing, human capital and demographic dividends with endogenous growth, labour supply and foreign capital," MERIT Working Papers 043, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    10. Nicolas Drouhin, 2018. "Theoretical considerations on the retirement consumption puzzle and the optimal age of retirement," Working Papers halshs-01767096, HAL.
    11. repec:spr:jopoec:v:31:y:2018:i:1:d:10.1007_s00148-017-0654-z is not listed on IDEAS
    12. Hirazawa, Makoto & Yakita, Akira, 2017. "Labor supply of elderly people, fertility, and economic development," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 75-96.
    13. Bong-Gyu Jang & Hyeng Keun Koo & Yuna Rhee, 2016. "Asset demands and consumption with longevity risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 587-633, August.
    14. Heijdra, Ben J. & Reijnders, Laurie S. M., 2018. "Longevity shocks with age-dependent productivity growth," Journal of Pension Economics and Finance, Cambridge University Press, vol. 17(02), pages 200-230, April.

    More about this item

    Keywords

    Endogenous retirement; Life-cycle savings; Increasing longevity; Population aging; J11; J26; O41;

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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