Mortality Decline, Retirement Age, and Aggregate Savings

Abstract

We use an overlapping-generations model with endogenous retirement and saving to study the trade-off between saving and retirement age in response to mortality decline. When life expectancy increases by one year, people delay retirement by about four months. With this magnitude of delay in retirement age, the percentage of lifetime spent in working decreases, and people have to save more for postretirement years. Neither the pure form of sole adjustment through savings nor the proportionality hypothesis is consistent with our results, but the proportionality hypothesis is a better rule of thumb in predicting future behavior. Our choice of the modified Boucekkine et al. (2002) survival function gives a convenient one-to-one correspondence between life expectancy increase and a change in the survival parameter.

Health and Economic Growth

“…Theoretical models reflect the mixed empirical evidence: While Prettner andCanning (2014) andChen andLau (2016) show that an increase in longevity should lead to an increase in labor supply and savings, caveats arise in the presence of social security and in economies where knowledge spillovers (Romer, 1986) or R&D (Romer, 1990) drive economic growth. 8 Considering the role of a pay-as-yougo pension scheme within a Romer (1986) economy, Heijdra and Mierau (2011) show that declining mortality promotes economic growth due to a sufficient saving response.…”

The impact of health status and human capital formation on regional performance: Empirical evidence

“…The empirical evidence for industrialized countries shows that increasing longevity and good health, with correspondingly longer working lives, could help to prevent increased dependency in old age (e.g., Loichinger & Weber, 2016 for Europe's case). That is, an increase in longevity should lead to an increase in labour supply and savings in retirement expenditures (e.g., Chen & Lau, 2016; Prettner & Canning, 2014). In turn, Kuhn and Prettner (2016) argue that health‐related increases in the working life have surprisingly ambiguous effects on economic growth: on the hand, health improvements increase longevity and reduce mortality, driving participation in the labour market and reducing retirement savings.…”

The Return on Social Security With Increasing Longevity

“…This might not be the case if the age of death is uncertain as has been shown by Kalemli-Ozcan & Weil (2010) and d' Albis et al (2012). For a calibrated study see Chen & Lau (2014) and for a model including human capital investments Zhang & Zhang (2009). this policy.…”