Journal of Economic Growth

, Volume 15, Issue 1, pp 65–91 | Cite as

Mortality change, the uncertainty effect, and retirement

Article

Abstract

We examine the role of declining mortality in explaining the rise of retirement over the course of the twentieth 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.

Keywords

Life cycle model Retirement Annuities 

JEL Classification

E21 I12 J11 J26 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.University of HoustonHoustonUSA
  2. 2.NBERCambridgeUSA
  3. 3.Brown UniversityProvidenceUSA

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