Complex dynamics in an OLG model of neoclassical growth with endogenous retirement age and public pensions

This study analyses the dynamics of a general equilibrium, overlapping-generations (closed) economy with pay-as-you-go public pensions and tax-financed health investments that affect the retirement time when old. Life of the typical agent is divided between youth (firth period) and old age (second period). The latter period of life is, in turn, divided between work time and retirement time in a proportion contingent on an individual's state of health. We show that: (i) a unique non-trivial steady state exists, and (ii) when the labour income tax rates used to finance health expenditure or public pensions are included in an intermediate range of values, complex dynamics occur when individuals have perfect foresight. This holds because the increase either in the fraction of time spent working when old or disability pensions reduces savings and capital accumulation. In addition, dynamic phenomena such as multiple bubbling structures related to the bifurcation diagram can be observed. Under some general assumptions, we show that the rise in health care expenditure and/or public pensions initially destabilises the steady-state equilibrium and causes complex dynamics but eventually acts as a stabilising device. (C) 2012 Elsevier Ltd. All rights reserved.