Population structure and capital accumulation: the role of rising longevity on savings

Abstract

In recent years the population in most industrialized countries is experiencing a change in the age composition of its members. Most notably, the share of old people will increase as a consequence of low fertility rates and increasing life expectancies. By now, it is not clear how a changing age composition of a society will affect the overall level of savings of an economy. However, this influence has to be considered as crucial, since the saving rate is an important variable in an economy.<br />This master thesis focuses on the individual level. It deals with the question of how an increasing life expectancy influences consumption and savings at the individual level. By reviewing four alternative models of the literature, the thesis works out the different results on the relation between longevity and individual savings as it will depend on the model specification chosen. All four models are based on the life cycle theory with consumption smoothing. The effects of different pension systems on savings are not examined in these models, though of course they will have an important impact on savings.<br />While the different models introduced in the master thesis produce different outcomes, we regard the model that assumes an initially low mortality rate and a fixed retirement age to be the most realistic one.<br />Under these assumptions an increasing life expectancy will imply falling saving rates. Assuming alternatively an initially high mortality rate and a fixed retirement age, would result in a positive relation between life expectancy and savings. For a model that assumes no fixed retirement age, the most probable result of an increasing life expectancy is again a decreasing saving rate but additionally also the effect that the population will work longer. The models used could be improved in many ways. The three most interesting amendments would be the allowance of agents who do not behave fully rational (i.e. either irrational or bounded rational), to move from an analysis at the individual level to an analysis at the household level and to allow for institutionalized transfer systems.