Increasing life expectancy and optimal retirement:does population aging necessarily undermine economic prosperity?

Abstract

In this paper we analyze the eects of changes in longevity and the pace of technological progress on interest rates, savings behaviour and optimal retirement decisions. In so doing we embed the dynamic optimization problem of choosing a life-cycle consumption path and the retirement age into a general equilibrium setting. Thereby we assume that technology evolves exogenously and the production side of the economy can be described by means of a neoclassical production function. Our results show that (i) the aggregate capital to consumption ratio increases and interest rates decrease in response to increases in longevity; (ii) the response of the optimal retirement age to increases in longevity is ambiguous. However, for reasonable parameter values the optimal retirement age increases in longevity; (iii) the aggregate capital to consumption ratio decreases and interest rates increase in response to faster technological progress; (iv) the response of the optimal retirement age to faster technological progress is ambiguous. However, for reasonable parameter values the optimal retirement age increases in the pace of technological improvements.endogenous retirement, life-cycle savings, population aging, technological progress, economic prosperity