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

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  • David E. Bloom
  • David Canning
  • Michael Moore

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).

Suggested Citation

  • David E. Bloom & David Canning & Michael Moore, 2004. "The Effect of Improvements in Health and Longevity on Optimal Retirement and Saving," NBER Working Papers 10919, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:10919
    Note: AG EH LS
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    More about this item

    JEL classification:

    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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