The Genesis of the Golden Age

Abstract

We develop a life cycle model featuring an optimal retirement decision in the presence of physiological aging. In modeling the aging process we draw on recent advances within the fields of biology and medicine. In the model individuals decide on optimal consumption during life, the age of retirement, and (via health investments) the timing of their death. Accordingly, “years in retirement” is fully endogenously determined. Using the model we can account for the evolution of age of retirement and longevity across cohorts born between 1850 and 1940 in the US. Our analysis indicates that 2/3 of the observed increase in longevity can be accounted for by wage growth, whereas the driver behind the observed rising age of retirement appears to have been technological change in health care. Both technology and income contribute to the rise in years in retirement, but the contribution from income is slightly greater.