Longevity and Aggregate Savings

For the last fifty years, countries in Asia and elsewhere witnessed a surge in aggregate savings per capita. Many empirical studies attribute this trend to the highly significant increases in life longevity of the populations of these countries. Some argue that the rise in savings is short-run, to be eventually dissipated by the dissaving of the elderly, whose proportion in the population rises along with longevity. This paper examines whether these conclusions are supported by economic theory. A model of life cycle decisions with uncertain survival is used to derive individuals’savings and chosen retirement age response to changes in longevity. Conditions on the age-profile of improvements in survival probabilities are shown to be necessary in order to predict the direction of this response (the uneven history of age specific improvements in longevity is recorded by Cutler (2004)). Population theory (e.g. Coale (1952)) is used to derive the dependence of the steady-state population age density on longevity. This, in turn, enables the explicit aggregation of individual response functions and a comparative steady-state analysis. Sufficient conditions for a sustainable positive effect of increased longevity on aggregate savings per capita are then derived. The importance of the availability of insurance markets is briefly discussed.