Working Paper: NBER ID: w10919
Authors: 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).
Keywords: health; longevity; retirement; savings; lifecycle model
JEL Codes: J26; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improvements in health and longevity (I14) | optimal retirement age (J26) |
| optimal retirement age (J26) | leisure time (J22) |
| optimal retirement age (J26) | savings rates (D14) |
| worsening health (I14) | decline in age of retirement (J26) |
| higher wage levels (J31) | earlier retirement (J26) |
| higher wage levels (J31) | desire for leisure (J29) |
| aging populations (J11) | substantial capital stocks (E22) |
| substantial capital stocks (E22) | lower long-run interest rates (E43) |
| lower long-run interest rates (E43) | retirement behavior (J26) |
| higher savings rates (D14) | earlier retirement (J26) |