Optimal Retirement Age and Aging Population

Fernando Perera-Tallo
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Fernando Perera-Tallo: Universidad de La Laguna

No 728, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Over recent decades, most developed countries have experienced a fall in fertility and an increase in longevity which have led to a significant increase in the weight of elderly on the population and a decrease in the number of working-age people per elderly population. Economists and politicians are concerned about the aging population process and the need to introduce policy reforms such as fertility enhancing programs and delaying the legal retirement age. This paper introduces a model which determines the optimal retirement age and analyzes the effects of population aging on it. What is revealed is the different role that the drop in the fertility rate and the increase in longevity play in determining the optimal retirement age. While an increase in longevity always implies an increase in the optimal retirement age, a drop in the fertility rate does not. The reason is that a drop in fertility involves three offsetting mechanisms: first, it raises the weight of elders on population increasing the dependency ratio (defined as non working population, children and retirees, over working population), which involves a larger optimal retirement age. Second, it also diminishes the weight of children, and this reduces the dependency ratio, decreasing the optimal retirement age. Finally, a drop in fertility rate increases the weight of older workers in the labor force. If these are more productive than the average, then the drop in the fertility increases the productivity of the labor force and reduces the optimal retirement age. In spite of these counterweighing mechanisms, this paper provides a clear measure to determine the sign of the effect of a drop in the fertility rate over per capita labor and the optimal retirement age. Such measure may be easily obtained from the data an establishes a precise criterion for clarifying the aging population debate

Date: 2012
New Economics Papers: this item is included in nep-age, nep-dem and nep-dge
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