Health, Longevity, and Optimal Retirement

Abstract

We develop a life-cycle model of optimal retirement and savings behavior under complete markets. Our model explains the long-run decline in the age of retirement as an income level effect, with higher wage growth and lower interest rates tending to increase the retirement age. We show that improvements in health and longevity tend to increase the desired retirement age, but less than proportionately, while, contrary to conventional views, reducing savings rates. These results suggest that social security systems should respond to population aging by raising the retirement age and not by increasing people's contributions or reducing their benefit rates.

Keywords: Aging, health, retirement, savings

JEL Classification: J26, D91