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Increasing life expectancy and optimal retirement:does population aging necessarily undermine economic prosperity?

  • Klaus Prettner

    ()

    (Harvard Center for Population and Development Studies)

  • David Canning

    ()

    (Harvard School of Public Health)

In this paper we analyze the e ects of changes in longevity and the pace of technological progress on interest rates, savings behaviour and optimal retirement decisions. In so doing we embed the dynamic optimization problem of choosing a life-cycle consumption path and the retirement age into a general equilibrium setting. Thereby we assume that technology evolves exogenously and the production side of the economy can be described by means of a neoclassical production function. Our results show that (i) the aggregate capital to consumption ratio increases and interest rates decrease in response to increases in longevity; (ii) the response of the optimal retirement age to increases in longevity is ambiguous. However, for reasonable parameter values the optimal retirement age increases in longevity; (iii) the aggregate capital to consumption ratio decreases and interest rates increase in response to faster technological progress; (iv) the response of the optimal retirement age to faster technological progress is ambiguous. However, for reasonable parameter values the optimal retirement age increases in the pace of technological improvements.

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File URL: http://www.hsph.harvard.edu/pgda/WorkingPapers/2012/PGDA_WP_91.pdf
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Paper provided by Program on the Global Demography of Aging in its series PGDA Working Papers with number 9112.

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Date of creation: Feb 2012
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Handle: RePEc:gdm:wpaper:9112
Contact details of provider: Web page: http://www.hsph.harvard.edu/pgda

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  1. David E. Bloom & David Canning & Michael Moore, 2007. "A Theory of Retirement," NBER Working Papers 13630, National Bureau of Economic Research, Inc.
  2. Kuhn, Michael & Wrzaczek, Stefan & Prskawetz, Alexia & Feichtinger, Gustav, 2012. "Optimal choice of health and retirement in a life-cycle model," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 01/2012, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
  3. David E. Bloom & David Canning & Günther Fink, 2008. "Population Aging and Economic Growth," PGDA Working Papers 3108, Program on the Global Demography of Aging.
  4. Ben Heijdra & Jochen Mierau, 2011. "The Individual Life Cycle and Economic Growth: An Essay on Demographic Macroeconomics," De Economist, Springer, vol. 159(1), pages 63-87, March.
  5. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  6. David E. Bloom & David Canning & Gunther Fink, 2009. "The Graying of Global Population and Its Macroeconomic Consequences," PGDA Working Papers 4709, Program on the Global Demography of Aging.
  7. David E. Bloom & David Canning & Günther Fink, 2011. "Implications of Population Aging for Economic Growth," NBER Working Papers 16705, National Bureau of Economic Research, Inc.
  8. Alberto Petrucci, 2002. "Consumption Taxation and Endogenous Growth in a Model with New Generations," International Tax and Public Finance, Springer, vol. 9(5), pages 553-566, September.
  9. Bloom, David E. & Canning, David & Mansfield, Richard K. & Moore, Michael, 2007. "Demographic change, social security systems, and savings," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 92-114, January.
  10. Heijdra, Ben J. & Romp, Ward E., 2009. "Retirement, pensions, and ageing," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 586-604, April.
  11. Reinhart, Vincent Raymond, 1999. "Death and taxes: their implications for endogenous growth," Economics Letters, Elsevier, vol. 62(3), pages 339-345, March.
  12. Heijdra, Ben J. & Ligthart, Jenny E., 2006. "The Macroeconomic Dynamics Of Demographic Shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 10(03), pages 349-370, June.
  13. Klaus Prettner & Alexia Prskawetz, 2010. "Demographic Change in Models of Endogenous Economic Growth. A Survey," Working Papers 1008, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  14. Futagami, Koichi & Nakajima, Tetsuya, 2001. "Population Aging and Economic Growth," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 31-44, January.
  15. Gruber, Jonathan & Wise, David, 1998. "Social Security and Retirement: An International Comparison," American Economic Review, American Economic Association, vol. 88(2), pages 158-63, May.
  16. repec:dgr:kubcen:200490 is not listed on IDEAS
  17. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695, March.
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