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The Effects of Longevity and Distortions on Education and Retirement

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Author Info
Pedro Cavalcanti Ferreira (Fundacao Getulio Vargas)
Samuel de Abreu Pessoa (Fundacao Getulio Vargas)

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Abstract

This article studies the impact of longevity and taxation on life-cycle decisions and long run income. Individuals allocate optimally their total lifetime between education, working and retirement. They also decide at each moment how much to save or consume out of their income, and, after entering the labor market, how to divide their time between labor and leisure. The model incorporates experience-earnings profiles and return to education function that follows evidence from the labor literature. In this setup increases in longevity raises the investment in education - time in school - and retirement. The model is calibrated to the U.S. and is able to reproduce observed schooling trends of the last century. It also reproduces the increase in retirement, as the evidence shows. Simulations show that a country equal to the U.S. but with 20% smaller longevity will be 25% poorer, mostly because of the impact of life expectancy on human capital formation and retirement. In this economy labor taxes has a strong impact on the per capita income, as it decreases labor effort, time at school and retirement age, in addition to the general equilibrium impact over physical capital. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.01.003
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 3 (July)
Pages: 472-493
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Handle: RePEc:red:issued:05-49

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Related research
Keywords: Life expectancy Human capital Retirement Long run income

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Find related papers by JEL classification:
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
I20 - Health, Education, and Welfare - - Education - - - General

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  1. Terra, Maria Cristina T. & Bonomo, Marco Antônio Cesar, 2005. "Special Interests and Political Business Cycles," Economics Working Papers (Ensaios Economicos da EPGE) 597, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  2. Cysne, Rubens Penha, 2006. "An Intra-Household Approach to the Welfare Costs of Inflation (Revised Version, Forthcoming 2006, Estudos Econômicos)," Economics Working Papers (Ensaios Economicos da EPGE) 612, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  3. Watanuki, Masakazu & Flôres Junior, Renato Galvão, 2006. "Integration Options for Mercosul - An Investigation Using the AMIDA Model," Economics Working Papers (Ensaios Economicos da EPGE) 610, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  4. Barbosa, Fernando de Holanda, 2005. "The Contagion Effect of Public Debt on Monetary Policy: The Brazilian Experience," Economics Working Papers (Ensaios Economicos da EPGE) 591, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  5. Cysne, Rubens Penha, 2006. "Income Inequality in a Job-Search Model With Heterogeneous Discount Factors (Revised Version, Forthcoming 2006, Revista Economia)," Economics Working Papers (Ensaios Economicos da EPGE) 611, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  6. Páscoa, Mario Rui & Torres-Martínez, Juan Pablo & Araújo, Aloísio Pessoa de, 2006. "Bubbles, Collateral and Monetary Equilibrium," Economics Working Papers (Ensaios Economicos da EPGE) 614, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
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