On the effects of changing mortality patterns on investment, labour and consumption under uncertainty

Abstract

In this paper we extend the consumption-investment life cycle model for an uncertain-lived agent, proposed by Richard (1974), to allow for flexible labor supply. We further study the consumption, labor supply and portfolio decisions of an agent facing age-dependent mortality risk, as presented by UK actuarial life tables spanning the time period from 1951-2060 (including mortality forecasts). We find that historical changes in mortality produces significant changes in portfolio investment (more risk taking), labour (decrease of hours) and consumption level (shift to higher level) contributing up to 5% to GDP growth during the period from 1980 until 2010.