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The Effects of Longevity and Distortions on Education and Retirement

  • Ferreira, Pedro Cavalcanti
  • Pessoa, Samuel de Abreu

This article studies the impact of longevity and taxation on life-cycle decisions and long-run income. Individuals allocate optimally their total lifetime between education, working and retirement. They also decide at each moment how much to save or consume out of their income, and after entering the labor market how to divide their time between labor and leisure. The model incorporates experience-earnings profiles and the return-to-education function that follows evidence from the labor literature. In this setup, increases in longevity raises the investment in education - time in school - and retirement. The model is calibrated to the U.S. and is able to reproduce observed schooling levels and the increase in retirement, as the evidence shows. Simulations show that a country equal to the U.S. but with 20% smaller longevity will be 25% poorer. In this economy, labor taxes have a strong impact on the per capita income, as it decreases labor effort, time at school and retirement age, in addition to the general equilibrium impact on physical capital. We conclude that life-cycle effects are relevant in analyzing the aggregate outcome of taxation.

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 590.

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Date of creation: 02 Jun 2005
Date of revision:
Handle: RePEc:fgv:epgewp:590
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  1. Mateos-Planas, Xavier, 2000. "Schooling and distortions in a vintage capital model," Discussion Paper Series In Economics And Econometrics 0030, Economics Division, School of Social Sciences, University of Southampton.
  2. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April.
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  6. Sebnem Kalemli-Ozcan & David N. Weil, 2004. "Mortality Change, the Uncertainty Effect, and Retirement," Working Papers 2004-04, Department of Economics, University of Houston.
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  9. Mateos-Planas, Xavier, 2000. "Schooling and distortions in a vintage capital model," Discussion Paper Series In Economics And Econometrics 0030, Economics Division, School of Social Sciences, University of Southampton.
  10. BOUCEKKINE, Raouf & de la CROIX, David & LICANDRO, Omar, 2002. "Early mortality declines at the dawn of modern growth," CORE Discussion Papers 2002030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2003. "Fifty Years of Mincer Earnings Regressions," NBER Working Papers 9732, National Bureau of Economic Research, Inc.
  12. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
  13. Edward C. Prescott, 2004. "Why do Americans Work so Much More than Europeans?," NBER Working Papers 10316, National Bureau of Economic Research, Inc.
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  15. Jones, C.I., 2000. "Sources of U.S. Economic Growth in a World of Ideas," Papers 99-29, United Nations World Employment Programme-.
  16. 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.
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