Uncertain Lifetimes, Retirement and Economic Welfare

The effect of increased life expectancy on retirement age is ambiguous because a change in the survival probability is analogous to a change in intertemporal prices. It is shown that the decision to retire earlier or later depends on the old-age saving behavior. Early retirement could emerge if one saves in old age. It is also shown that the effect of intertemporal substitutions, arising from the imperfection of the annuity market, could produce a tilt to the reservation wage profile, which, in turn, makes early retirement possible.