Mortality change, the uncertainty effect, and retirement

Abstract

We examine the role of declining mortality in explaining the rise of retirement over the course of the 20th century. We construct a model in which individuals make labor/leisure choices over their lifetimes subject to uncertainty about their dates of death. In an environment with high mortality, an individual who saves for retirement faces a high risk of dying before he can enjoy his planned leisure. In this case, the optimal plan is for people to work until they die. As mortality falls, however, it becomes optimal to plan, and save for, retirement. We analyze our model using two mathematical formulations of the survival function as well as data on actual changes in the US life table over the last century, and show that this “uncertainty effect” of declining mortality would have more than outweighed the “horizon effect” by which rising life expectancy would have led to later retirement.

Mortality transition and differential incentives for early retirement

“…These assumptions follow many articles such as Heijdra and Romp [15] and Kalemli-Ozcan and Weil [17], and are consistent with the stylized description of retirement as "a complete and permanent withdrawal from paid labor" in Costa [8, p. 6].…”

“…Both features have been mentioned in Wilmoth and Horiuchi [23]. In Section 3 we will compare Kalemli-Ozcan and Weil [17] with this article, and link their differences to these two features of mortality decline. and children, whereas in the later stage, an "aging of mortality decline" has occurred, characterized by "successively larger reductions in mortality rates at older ages, and by smaller reductions at younger ages" (Wilmoth and Horiuchi [23, pp.…”

“…For example, the important role of the generous benefits provided by the social security system has been analyzed by Gruber and Wise [10,11], and the wealth effect associated with sustained economic growth has been examined by Costa [8]. To complement these well-known explanations, several researchers (such as Bloom et al [3], Kalemli-Ozcan and Weil [17]) examine the relatively neglected question of how mortality decline affects retirement age. In particular, Kalemli-Ozcan and Weil [17] show that people may retire earlier if the decrease in the variability of age at death associated with mortality decline is very significant.…”

“…To complement these well-known explanations, several researchers (such as Bloom et al [3], Kalemli-Ozcan and Weil [17]) examine the relatively neglected question of how mortality decline affects retirement age. In particular, Kalemli-Ozcan and Weil [17] show that people may retire earlier if the decrease in the variability of age at death associated with mortality decline is very significant. In this article, we continue this line of inquiry by studying the differential incentives for early retirement provided by mortality changes at different stages of demographic transition.…”

Life Expectancy, Schooling, and Lifetime Labor Supply: Theory and Evidence Revisited

“…5 Considering an endogenous retirement decision leaves the relevant first order conditions as well as the main results unaffected, as is discussed in the Appendix. For related recent work on the consequences of declining mortality for retirement and savings patterns see Weil (2010) andd'Albis et al (2012).…”