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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
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    Cited by:

    1. Ad. J. W. van de Gevel & Charles N. Noussair, 2013. "The Nexus between Artificial Intelligence and Economics," SpringerBriefs in Economics, Springer, edition 127, number 978-3-642-33648-5, June.
    2. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save Retirement May Backfire," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 05.05, Université de Lausanne, Faculté des HEC, DEEP.
    3. Jane Golley & Rod Tyers, 2012. "Demographic Dividends, Dependencies, and Economic Growth in China and India," Asian Economic Papers, MIT Press, vol. 11(3), pages 1-26, Fall.
    4. David E. Bloom & David Canning, 2004. "Global demographic change : dimensions and economic significance," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 9-56.
    5. Monika Bütler & Olivia Huguenin & Federica Teppa, 2005. "Why Forcing People to Save for Retirement May Backfire," University of St. Gallen Department of Economics working paper series 2005 2005-09, Department of Economics, University of St. Gallen.
    6. Kulish Mariano & Kent Christopher & Smith Kathryn, 2010. "Aging, Retirement, and Savings: A General Equilibrium Analysis," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, July.
    7. Jane Golley & Rod Tyers, 2011. "Contrasting Giants: Demographic Change And Economic Performance In China And India," CAMA Working Papers 2011-10, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. David E. Bloom & David Canning, 2006. "Demographic challenges, fiscal sustainability and economic growth," PGDA Working Papers 0806, Program on the Global Demography of Aging.
    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. David E. Bloom & David Canning & Jocelyn E. Finlay, 2010. "Population Aging and Economic Growth in Asia," NBER Chapters,in: The Economic Consequences of Demographic Change in East Asia, NBER-EASE Volume 19, pages 61-89 National Bureau of Economic Research, Inc.
    11. GOLLEY, Jane & WEI, Zheng, 2015. "Population dynamics and economic growth in China," China Economic Review, Elsevier, vol. 35(C), pages 15-32.
    12. David E Bloom & David Canning, 2006. "Global Demography: Fact, Force and Future," RBA Annual Conference Volume,in: Christopher Kent & Anna Park & Daniel Rees (ed.), Demography and Financial Markets Reserve Bank of Australia.
    13. David E. Bloom & David Canning & Michael Moore & Younghwan Song, 2007. "The Effect of Subjective Survival Probabilities on Retirement and Wealth in the United States," Chapters,in: Population Aging, Intergenerational Transfers and the Macroeconomy, chapter 4 Edward Elgar Publishing.
    14. Jane Golley & Rod Tyers, 2012. "China's Gender Imbalance and its Economic Performance," Economics Discussion / Working Papers 12-10, The University of Western Australia, Department of Economics.
    15. David E. Bloom & David Canning & Michael Moore, 2007. "A Theory of Retirement," PGDA Working Papers 2607, Program on the Global Demography of Aging.
    16. Owen O'Donnell & Federica Teppa & Eddy van Doorslaer, 2008. "Can subjective survival expectations explain retirement behaviour?," DNB Working Papers 188, Netherlands Central Bank, Research Department.
    17. Heidler, Matthias & Raffelhüschen, Bernd & Leifels, Arne, 2006. "Heterogenous life expectancy, adverse selection, and retirement behaviour," FZG Discussion Papers 13, University of Freiburg, Research Center for Generational Contracts (FZG).
    18. Michael Spence & Danny Leipziger, 2010. "Globalization and Growth - Implications for a Post-Crisis World : Commission on Growth and Development," World Bank Publications, The World Bank, number 2440, July.
    19. Fernando Perera-Tallo, 2012. "Optimal Retirement Age and Aging Population," 2012 Meeting Papers 728, Society for Economic Dynamics.

    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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