nep-age New Economics Papers
on Economics of Ageing
Issue of 2008‒03‒25
twenty papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Work at Older Ages: Is Raising the Early Retirement Age an Option for Social Security Reform? By John A. Turner
  2. Endogenous Retirement and Public Pension System Reform in Spain By Alfonso R Sánchez-Martín
  3. Population Aging, Labor Demand, and the Structure of Wages By Margarita Sapozhnikov; Robert K. Triest
  4. Phased Retirement: Problems and Prospects By Robert Hutchens; ; ;
  5. What Happens to Health Benefits after Retirement By Richard W. Johnson; ; ;
  6. What Makes Retirees Happier: A Gradual or 'Cold Turkey' Retirement? By Esteban Calvo; Kelly Haverstick; Steven A. Sass
  7. The Labor Supply of Older Americans By Alicia H. Munnell; Steven A. Sass
  8. Income Security and Stability During Retirement in Canada By Larochelle-Côté, Sébastien; Myles, John F.; Picot, Garnett
  9. Social Security and the search behaviour of workers approaching retirement By J. Ignacio García Pérez; Alfonso R Sánchez Martín
  10. Life-Cycle Equilibrium Unemployment By Chéron, Arnaud; Hairault, Jean-Olivier; Langot, François
  11. Is There Really a Retirement Savings Crisis? An NRRI Analysis By Alicia H. Munnell; Anthony Webb; Francesca Golub-Sass
  12. Private Wealth and Job Exit at Older Age: A Random Effects Model By Bloemen, Hans
  13. Demographic change, pension reform and redistribution in Spain By Alfonso R Sánchez-Martín; Virginia Sánchez Marcos
  14. Why Do Married Men Claim Social Security Benefits So Early? Ignorance or Caddishness? By Steven A. Sass; Wei Sun; Anthony Webb
  15. A New Approach to Raising Social Security's Earliest Eligibility Age By Kelly Haverstick; Margarita Sapozhnikov; Robert Triest; Natalia Zhivan
  16. A Gradual Exit May Not Make for a Happier Retirement By Esteban Calvo; Kelly Haverstick; Steven A. Sass
  17. Social Security, Education, Retirement and Growth. By Amaia Iza; Cruz A. Echevarría
  18. Evaluating the Advanced Life Deferred Annuity - An Annuity People Might Actually Buy By Guan Gong; Steven A. Sass
  19. Medicare Costs and Retirement Security By Alicia H. Munnell
  20. Capital Income Flows and the Relative Well-Being of America's Aged Population By Barry P. Bosworth; Gary Burtless; Sarah E. Anders

  1. By: John A. Turner (Center for Retirement Research, Boston College)
    Abstract: This report examines how changes in worker capabilities and job requirements over the past few decades affect the ability of older workers to work past the Social Security Early Retirement Age of 62. This issue arises because a possible reform of Social Security could raise the early retirement age. This change might be made in conjunction with raising the Normal Retirement Age in order to offset the reduction in annual benefits that workers would receive when retiring at the Early Retirement Age. Fairness is one aspect of the issue of raising Social Security’s Early Retirement Age. Would such a change be fair to demographic groups with relatively short life expectancy, to people with physically demanding jobs, or to people at older ages unable to work or to find work? The issue of fairness can be addressed in terms of cross-sectional equity or intergenerational equity. Because workers worked to older ages early in the history of Social Security, the past becomes a natural comparison. This paper focuses on intergenerational equity, comparing different demographic groups over time. The intergenerational question has two parts. First, have older workers’ capabilities changed over the past few decades in ways that would affect continued employment? Second, have job requirements changed in ways that would affect continued employment for older workers?
    Date: 2007–06
  2. By: Alfonso R Sánchez-Martín (Department of Economics, Universidad Pablo de Olavide)
    Abstract: All around the world, population aging has spurred developed countries to reform their PAYG pension systems. In particular, delaying legal retirement ages and reducing the generosity of pension benefits have been widely implemented changes. In this paper we assess how successful those policies can be in the case of the Spanish economy, and compare with the results obtained by the already implemented reforms (1997 and 2001). This evaluation is accomplished in a heterogeneous-agents, applied general equilibrium model where individuals can adjust their retirement ages in response to changes in pension rules. We check the ability of the model to reproduce the basic stylized facts of retirement behavior (specially the pattern of early retirement induced by minimum pensions). We then use to model to explore the impact of pension reforms. We find that already implemented changes actually increase the implicit liabilities of the system, while delaying the legal retirement age to 68 may roughly halve the size of the current pension debt.
    Keywords: Pension System Reform, Applied General Equilibrium, Retirement.
    JEL: D58 H55 J14 J26
    Date: 2008–03
  3. By: Margarita Sapozhnikov; Robert K. Triest (Center for Retirement Research, Boston College)
    Abstract: One consequence of demographic change is substantial shifts in the age distribution of the working age population. As the baby boom generation ages, the usual historical pat tern of there being a high ratio of younger workers relative to older workers is increasingly being replaced by a pattern of there being roughly equal percentages of workers of different ages. One might expect that the increasing relative supply of older workers would lower the wage premium paid for older, more experienced workers.
    Date: 2007–08
  4. By: Robert Hutchens; (ILR School, Cornell University); ;
    Abstract: As baby boomers near traditional retirement ages, many express an intent to work longer. But older workers often look for greater flexibility that would allow them more time for non-work activities. Not surprisingly then, the notion of phased retirement — where an older full-time worker remains with the same employer and gradually reduces work hours — has considerable appeal for employees. Phased retirement may help employers as well by allowing them to keep experienced and productive workers. This brief begins by exploring the potential benefits of phased retirement. The next section documents the extent of phased retirement in today’s workplace and describes the types of people who take it. The following section discusses the problems that employers face when arranging phased retirements. The brief concludes that, while rare today, phased retirement may become more popular in the future.
    Keywords: baby boomers, traditional retirement ages, older workers, phased retirement, potential benefits
    Date: 2007–02
  5. By: Richard W. Johnson; (Urban Institute); ;
    Abstract: Because most workers receive health benefits from their employers, retirement often disrupts health insurance coverage. Some employers offer health insurance to retirees, but many firms are cutting retiree health benefits by passing more costs to retirees or eliminating benefits altogether. Few alternatives exist. Private nongroup coverage is generally quite expensive, and few people in their 50s and early 60s qualify for publicly financed benefits. Many workers who cannot obtain retiree benefits from their own employers or their spouses’ employers delay retirement to age 65, when Medicare coverage begins. This brief examines the availability and cost of health insurance coverage at ages 55 to 64 and changes in coverage after retirement. Today most workers with employer health benefits retain their coverage when they retire early, although their required premium contributions have increased sharply over the past ten years. In the future, however, steady declines in the share of younger workers with access to retiree health benefits may jeopardize income security for the next generations of retirees.
    Keywords: retirement, health benefits, disrupt, cutting benefits, health insurance coverage
    Date: 2007–02
  6. By: Esteban Calvo; Kelly Haverstick; Steven A. Sass (Center for Retirement Research, Boston College)
    Abstract: This study explores the factors that affect an individual’s happiness while transitioning into retirement. Recent studies highlight gradual retirement as an attractive option to older workers as they approach full retirement. However, it is not clear whether phasing or cold turkey makes for a happier retirement. Using longitudinal data from the Health and Retirement Study, this study explores what shapes the change in happiness between the last wave of full employment and the first wave of full retirement. Results suggest that what really matters is not the type of transition (gradual retirement or cold turkey), but whether people perceive the transition as chosen or forced.
    Date: 2007–10
  7. By: Alicia H. Munnell; Steven A. Sass (Center for Retirement Research, Boston College)
    Abstract: This paper summarizes what is known about the labor supply of older men, defined as those 55 and over. The topic is of great interest because older individuals will comprise a much greater portion of the population, so their labor supply will have a significant impact on national output, tax revenues, and the cost of means-tested programs. Most importantly, a greater proportion of older individuals will need to work than do at present, because retirement income systems are contracting and working longer is the only way for most to ensure financial security in their old age. The focus is on men, because women’s work patterns reflect the increasing participation of cohorts over time as well as the factors that affect retirement behavior.
    Date: 2007–06
  8. By: Larochelle-Côté, Sébastien; Myles, John F.; Picot, Garnett
    Abstract: Past research has shown that the Canadian pension system is relatively effective in helping seniors to stay out of poverty. However, the extent to which the pension system enables individuals and families to maintain living standards achieved during their working years after retirement (income security) is less well understood. To help fill this knowledge gap, we employ 20-year longitudinal data to track individuals as they move from age 55 through their retirement years. We use various measures of an individual's family income to study four main issues: change in income levels through retirement; the role that various income sources play in this change; variation in replacement rates through time and between poorer and richer individuals; and, finally, the degree of long-term stability in individual incomes. For workers with average incomes, family income falls after age 60, declines until age 68, and then stabilizes at approximately 80% of the income level they had at age 55. In contrast, low income individuals (those in the bottom income quintile) experience little change in income as they move from age 55 through the retirement years, largely because of the income maintenance effects of the public pension system. They experience high levels of individual income instability in their late 50s and early 60s, but income instability falls dramatically after retirement. Individuals in the top quintile experience substantially larger income declines in retirement so that income inequality within a cohort declines as the cohort ages. More recent groups of retirees are experiencing higher income levels than earlier cohorts, largely because of higher private pensions. Replacement rates have changed little among cohorts, however. Whether recent gains in income levels will persist in future cohorts is unknown since pension coverage has been falling among younger workers.
    Keywords: Labour, Income, pensions, spending and wealth, Wages, salaries and other earnings, Household, family and personal income, Pension plans and funds and other retirement income programs
    Date: 2008–03–10
  9. By: J. Ignacio García Pérez (Department of Economics, Universidad Pablo de Olavide); Alfonso R Sánchez Martín (Department of Economics, Universidad Pablo de Olavide)
    Abstract: This paper explores the links between unemployment, retirement and their associated public insurance programs. It is a contribution to a growing body of literature focused on a better understanding of the labor behavior of advanced-age workers, which has gained importance as the pension crisis looms. It also contributes to the literature of optimal unemployment insurance by exploring the interaction of unemployment benefits and retirement pensions. The analysis combines the development of a new theoretical model and a detailed exploration of the empirical regularities using the Spanish Muestra Continua de Vidas Laborales (MCVL) dataset. The model is an extension of the standard search model, designed to reproduce the non-stationary environment faced by workers of advanced ages (in the age range 50/65). Via calibrated simulations we show that the basic empirical re-employment and retirement patterns can be considered as rational responses to both the labor market conditions and the institutional incentives. Generous Unemployment Benefits (for durations of up to two years) together with very significant early retirement penalties, make optimal to stay unemployed without searching for large groups of unemployed workers. This moral hazard problem can be substantially alleviated through institutional reform. We explore several potential reforms and find that changing the details of early retirement pensions seems more promising than changing the Unemployment Benefit system.
    Keywords: Unemployment, Retirement, Search models
    JEL: J64 J68 J26
    Date: 2008–03
  10. By: Chéron, Arnaud (University of Le Mans); Hairault, Jean-Olivier (University of Paris 1); Langot, François (University of Le Mans)
    Abstract: This paper develops a life-cycle approach to equilibrium unemployment. Workers only differ respectively to their distance from deterministic retirement. A non age-directed search equilibrium is then typically featured by increasing (decreasing) firing (hiring) rates with age and a hump-shaped age profile for employment. Because of intergenerational inefficiencies, the Hosios condition no longer achieves efficiency. We then explore the optimal age-pattern of some policy tools to restore this efficiency. The optimal profile for employment subsidies should increase with age, whereas firing taxes and hirings subsidies would have to be hump-shaped. Lastly, we examine the robustness of our results. We show that age-directed recruitment policies cannot exist in equilibrium even if it would have been ex-ante possible, and that introducing endogenous search effort of unemployed workers reinforces our main results.
    Keywords: job search, matching, life cycle
    JEL: J22 J26 H55
    Date: 2008–03
  11. By: Alicia H. Munnell (Center for Retirement Research, Boston College); Anthony Webb; Francesca Golub-Sass
    Abstract: The National Retirement Risk Index (NRRI) has shown that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, nearly 45 percent will be ‘at risk’ of being unable to maintain their standard of living in retirement. That is, these households are projected to have replacement rates — retirement income as a share of pre-retirement income — that fall more than 10 percent short of a target rate designed to maintain their pre-retirement living standard. More realistic assumptions regarding earlier retirement and reluctance to annuitize 401(k) balances or tap housing equity would put the percentage ‘at risk’ considerably higher, as would the inclusion of rapidly growing health care costs. Yet, recent academic articles and press stories question whether Americans are facing a retirement income crisis...
    Date: 2007–08
  12. By: Bloemen, Hans (Free University of Amsterdam)
    Abstract: Private wealth holdings are likely to become an increasingly important determinant in the job exit decision of elderly workers. Net wealth may correlate with worker’s characteristics that also determine the exit out of a job. It is therefore important to include a rich set of observed characteristics in an empirical model for retirement in order to measure the (marginal) effect of wealth on the job exit rate. But even with a rich set of regressors the question remains whether there are unobservable worker’s characteristics that affect both net wealth and the job exit rate. We specify a simultaneous equations model for job exit transitions with multiple destinations, net wealth, and the initial labour market state. The job exit rates and the net wealth equation contain random effects. We allow for correlation between the random effects of job exit and net wealth, and the initial labour market state.
    Keywords: retirement, life cycle models, saving
    JEL: J26 D91
    Date: 2008–03
  13. By: Alfonso R Sánchez-Martín (Department of Economics, Universidad Pablo de Olavide); Virginia Sánchez Marcos (Departamento de Economía, Universidad de Cantabria)
    Abstract: Recent demographic changes have spurred pension reforms aimed at restoring the financial sustainability of PAYG systems. In Spain, the most significant reforms were undertaken in 1997 and in 2002, entailing an increase in the length of the averaging period in the pension formula, an increase in the penalties for early retirement and for retirement with short contributive records, a bonus for retirement after the age of 65, and a change in the eligibility conditions. In this paper we use an Applied General Equilibrium model populated by two-earners households to evaluate the redistributive impact of the pension system and the financial and welfare consequences of these reforms on households that differ in their education, region of residence and year of birth. The initial redistribution is assessed by comparing the internal rate of return provided to different households. We find that they vary considerable depending on education and cohort. Regarding the reforms, we find an increase in the implicit debt of the pension system after the reforms, and important changes in welfare. Households up to secondary education born between 1935 and 1975 are predicted to benefit from the reform, while the welfare of younger cohorts will be hit by higher taxes and unfavorable macroeconomic changes.
    Keywords: Social Security, Pension Reform, Applied General Equilibrium, Redistribution
    JEL: D58 H55 J11
    Date: 2008–03
  14. By: Steven A. Sass; Wei Sun; Anthony Webb (Center for Retirement Research, Boston College)
    Abstract: Most married men claim Social Security benefits at age 62 or 63, well short of both Social Security’s Full Retirement Age and the age that maximizes the household’s expected present value of benefits (EPVB). This results in a loss of less than 4 percent in household EPBV. But essentially the entire loss is borne by the survivor benefit, falls nearly 20 percent. As many elderly widows have very low incomes, early claiming by married men is a major social problem.
    Date: 2007–10
  15. By: Kelly Haverstick; Margarita Sapozhnikov; Robert Triest; Natalia Zhivan (Center for Retirement Research, Boston College)
    Abstract: While Social Security’s Normal Retirement Age (NRA) is increasing to 67, the Earliest Eligibility Age (EEA) remains at 62. Similar plans to increase the EEA raise concerns that they would create excessive hardship on workers that are worn-out or in bad health. One simple rule to increase the EEA is to tie an increase to the number of quarters of covered earnings. Such a provision would allow those with long worklives — presumably the less educated and lower paid — to quit earlier. We provide evidence that this simple rule would not satisfy the goal of preventing undue hardship on certain workers. Thus, this paper considers an alternative policy that ties an increase in the EEA to individuals’ Average Indexed Monthly Earnings (AIME). We show that allowing workers with low AIME to continue to be eligible to receive benefits at age 62 has promise as a policy to protect workers who have low earnings and are in poor health from hardship associated with an increase in the EEA.
    Date: 2007–10
  16. By: Esteban Calvo; Kelly Haverstick; Steven A. Sass
    Abstract: Workers often say they want to retire gradually. As retirement is a sharp break with life as they know it, it’s not surprising that many prefer to negotiate the transition a step at a time. Many policymakers also view gradual retirement favorably. They see it as a way to extend careers, shorten retirements, and thereby improve retirement income security. Expanding opportunities for gradual or “phased” retirement has thus gained a prominent place on the policy agenda...
    Date: 2007–10
  17. By: Amaia Iza (The University of the Basque Country); Cruz A. Echevarría (The University of the Basque Country)
    Abstract: n this paper we analyze the effects of social security policies in an unfunded, earnings-related social security system on the incentives to education investment and voluntary retirement, on growth and on income inequality. Growth is endogenously driven by human capital investment, individuals differ in their innate (learning) ability at birth, and the pension scheme includes a minimum pension. More skilled individuals spend more on education, minimum pensions reduce low skill individuals' incentives to invest in human capital, there is no monotonic relationship between per capita growth and income inequality.
    Keywords: Social Security; Pay-as-you-go; Voluntary Retirement; Human Capital; Minimum Pension
    JEL: O40 H55 J10
    Date: 2008–03–11
  18. By: Guan Gong; Steven A. Sass (Center for Retirement Research, Boston College)
    Abstract: Although annuities provide longevity insurance that should, in theory, be attractive to risk-averse households facing an uncertain lifespan, rates of voluntary annuitization remain extremely low. We evaluate a proposed annuity product, the Advanced Life Deferred Annuity, an annuity purchased at retirement, providing an income commencing in advanced old age. Using numerical optimization techniques, we show that this product would provide a substantial proportion of the longevity insurance provided by an immediate annuity, at a small fraction of the cost. At plausible levels of actuarial unfairness, households should prefer it to both immediate and postponed annuitization, and an optimal decumulation of unannuitized wealth. We show that few households would suffer significant losses were it used as a 401(k) plan default.
    Date: 2007–09
  19. By: Alicia H. Munnell (Center for Retirement Research, Boston College)
    Abstract: Most of the discussion of retirement security focuses on declining Social Security replacement rates, modest 401(k) balances, the low level of saving, and longer life expectancy. Rising health care costs, which seem too amorphous to incorporate into numerical examples, are often characterized as a “wildcard” that could undermine the best laid plans. This brief focuses on just one component of retiree health care costs — the Medicare program. It discusses the impact on future retirees of both rising out-of-pocket payments and higher taxes that will be needed to cover future health care expenditures. The numbers come directly from the 2007 Annual Report issued by the Medicare Trustees. The conclusion is sobering. The growing cost and tax burdens associated with Medicare alone suggest that even the most conservative target replacement rates may be inadequate.
    Date: 2007–08
  20. By: Barry P. Bosworth (The Brookings Institution); Gary Burtless (The Brookings Institution); Sarah E. Anders (The Brookings Institution)
    Abstract: One way to assess the effectiveness of a nation’s pension system is to measure its success in bringing the incomes of the aged close to those enjoyed by the nonaged. The comparability of income estimates for the aged and nonaged depends, however, on the relative accuracy of the income reports for the two populations. Unfortunately, some income items that are particularly important to the elderly, including occupational pensions, income derived from financial assets, and returns on homeowners’ net equity in their principal residence, are either unreported or significantly underreported in household surveys. In this paper we assess the effects of unmeasured and underreported income flows on the relative incomes of the aged and near-aged. We use survey data from the March Current Population Survey and the Survey of Consumer Finances. The latter survey contains information on wealth holdings as well as income. Using our broadest definition of income, which includes the return on net equity in an owner-occupied home and the predicted annuity flow from a household’s financial assets, the incomes of aged households in the middle of the old-age income distribution appear to be similar to those of nonaged households in the middle of the nonaged income distribution. In the top and bottom one-quarter of the old-age income distribution, incomes under the broadest income definition are substantially higher than those of nonaged households in the equivalent position of the income distribution. This income pattern diverges sharply from the one that would be inferred under the Census Bureau’s standard money income definition, which shows that aged households have noticeably lower incomes than the nonaged.
    Date: 2007–10

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