Longevity and Life Cycle Savings

Abstract

We add health and longevity to a standard model of life cycle saving and show that, under plausible assumptions, increases in longevity lead to higher savings rates at every age, even when retirement is endogenous.In a stable population these higher savings rates are offset by increased old age dependency, but during the disequilibrium phase, when longevity is rising, the effect on aggregate savings rates can be substantial.Our results explain the boom in savings in East Asia during 1950-90 as a combination of rising life expectancy and falling youth dependency, though they predict that savings in the region will return to more normal levels as populations age.We also find that falling life expectancies in Africa are associated with declining savings rates.

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