...wealth-income ratio, whilst Khoman and Weale (2006) and Turner (2006) investigate life cycle saving and the savings shortfall relation to pensions. Economists are careful in the use of the term 'too little' in relation to the outcomes of the decisions of optimising agents, and if we think there is a market failure, we have to describe that failure. Agents who are saving for retirement have to make decisions on the date at which they retire, the level of savings during their working lives and the level of consumption they will undertake when retired as well as whilst working. They may save too little because of misperceptions about their life expectancy or about the provision of publicly funded goods or money, such as health services and retirement pensions.

Analysing individual optimising decisions in a macroeconomic context is difficult, especially as the most commonly used overlapping generations models do not aggregate. In our first section we discuss the implications of the model of perpetual youth, discussed in Blanchard and Fischer (1989), for the analysis of savings behaviour. This form not only allows us to aggregate across consumers to produce an equation we can use in a macro model, but also allows us to investigate analytically as well as empirically the implications of a change in expected life. This section also discusses the supply side of the model and other features that structure the outcomes of the simulations. We then go on to analyse the implications of a change in life expectancy for savings, output and incomes, using NiGEM with fully forward looking consumers. We subsequently look at the impact of extending working lives on saving. The model simulations on these two topics are then brought together to evaluate the overall impacts of a change in the perception of longevity in the UK accompanied by an extension of working lives. We build up the final simulation by parts in order that the overall effects of the policy package can be more clearly understood.

The modelling framework

We utilise the NiGEM model, which can be used in various ways. In this note we use a version that approximates the Dynamic Stochastic General Equilibrium models in use by institutions such as the Bank of England. (1) Output (Y) is determined in the long run by supply factors, and the economy is small, open and has perfect capital mobility. The production function is CES, where output depends on capital (K) and on labour services (L), which is a combination of the number of persons in work and the average hours of those persons. The rate of technical progress (tech) is assumed to be labour augmenting and independent of the policy innovations considered here

Q = [alpha][([delta](K).sup.-[rho]] +(1-[delta])([Le.sup.tech)-[rho])-1/[rho]

We assume forward looking behaviour in the adjustment of capital and investment depends on expected trend output and the forward looking user cost of capital. However, the capital stock does not adjust instantly, as there are costs involved in doing so. The equilibrium level of unemployment is given by the bargain in the labour market, as discussed in Barrell and Dury (2003), and the speed of adjustment depends on (rational) expectations of future inflation, and price setting behaviour is also forward looking. Financial markets follow arbitrage conditions and they too...

NOTE: All illustrations and photos have been removed from this article.



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