nep-age New Economics Papers
on Economics of Ageing
Issue of 2008‒10‒07
seven papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Macroeconomic Effects of Pension Reform in Russia By David Hauner
  2. Government funds and demographic transition – alleviating ageing costs in a small open economy By Kinnunen, Helvi
  3. An Egg Today and a Chicken Tomorrow: A Model of Social Security with Quasi-Hyperbolic Discounting By Matteo Bassi
  4. Will the Norwegian pension reform reach its goals? An integrated micro-macro assessment By Erling Holmøy and Kyrre Stensnes
  5. Subjective Health Assessments and Active Labor Market Participation of Older Men: Evidence from a Semiparametric Binary Choice Model with Nonadditive Correlated Individualspecific Effects By Jürgen Maurer; Roger Klein; Francis Vella
  6. Motives for parental money transfers in Europe By Javier Olivera
  7. Social security and the search behaviour of workers approaching retirement By José Ignacio García; Alfonso R. Sánchez Martín

  1. By: David Hauner
    Abstract: Putting the pension system on a sustainable footing arguably remains the biggest challenge in Russia's economic policies. The debate about the policy options was hitherto constrained by the absence of general equilibrium analysis. This paper fills this gap by simulating their macroeconomic effects in a DSGE model calibrated to Russia's economy-the first of its kind to the best of our knowledge. The results suggest that a minimum benefit level in the public system should optimally be financed through lower government consumption, while higher taxation of labor and capital should be avoided. Reducing public investment spending is superior to increasing consumption taxes unless investment generates high rates of return.
    Keywords: Russian Federation , Pensions , Economic reforms , Private savings , Tax policy , Public investment , Consumption taxes , Aging , Population , Value added tax , Working Paper ,
    Date: 2008–08–22
  2. By: Kinnunen, Helvi (Bank of Finland Research)
    Abstract: This paper investigates public pension funding using a dynamic general equilibrium macroeconomic model (DSGE) that facilitates investigation of distortionary effects of fiscal and pension policy responses to ageing. The model is calibrated to the Finnish economy, which will encounter substantial ageing pressures in the near future. During the transition to an older population structure ageing costs can be substantially lowered by allowing public funds to smooth out the tax responses. Cutting down on pension prefunding at a time when the pace of ageing is at its peak reduces the necessary tax hikes and stimulates labour supply growth at the moment when the labour market is tightest. With smaller funding needs, ageing leads to a slower growth in labour costs, a better employment conditions and faster production growth.
    Keywords: ageing; general equilibrium; public finance; government funds
    JEL: E13 H55 J11 J26
    Date: 2008–09–23
  3. By: Matteo Bassi (Università di Salerno, CSEF Toulouse School of Economics (GREMAQ))
    Abstract: Strotz (1956) first suggested that individuals are more impatient when making short-run tradeoffs than long-run ones. Many experimental studies supports his conjecture. Motivated by recent evidence from the British Department of Work and Pension (2006), this paper applies this behavioral framework to retirement decisions. We propose a three-periods OLG model with quasi-hyperbolic consumers whosave for post retirement consumption in the first period and choose their retirement age in the second. We show that this behavioral assumption explains the observed drop in post retirement consumptiondue to lack of saving and the high level of voluntary (i.e. not due to disability or dismission from the firm) early exit from the labor force. When deciding about their retirement age, workers weight too much the costs of remaining at work (i.e. disutility of working, implicit tax on continued activity) and too little the benefits of postponed retirement (i.e. increase of the Bismarckian component of the pension formula), perceived as too far in the future. We investigate the implications of time inconsistent preferences for a political economy model in which voters determine simultaneously thesize and the degree of redistribution of the pension system. We show that, when voting over thepayroll tax, time inconsistent young workers, who look for a commitment device that increases boththeir saving and retirement age, form a coalition with rich in order to decrease the size of the system. When voting over the degree of redistribution, they form a coalition with poor individuals as to in-crease the at part of the pension formula. Our political model provides a political justification for the negative relationship between size and redistribution observed in most OECD countries (Disney 2004).
    Keywords: Hyperbolic Discounting, Majority Voting, Redistribution, Retirement Age, Saving Behaviour
    JEL: A12 D91 E21 H55 J64
    Date: 2008–09–26
  4. By: Erling Holmøy and Kyrre Stensnes (Statistics Norway)
    Abstract: The Norwegian pension reform of 2006 intends to (1) improve long run fiscal sustainability by reducing the growth in public old-age expenditures, (2) strengthen labour supply incentives, and (3) maintain the main redistributive features of the present system. We assess to what extent the reform is likely to achieve these three goals, using two empirical models iteratively: We combine a detailed dynamic micro simulation of individual benefits and government pension expenditures with a CGE-model, which captures behavioural effects and equilibrium repercussions. We find that the pension reform improves fiscal balances substantially. Compared to a no-reform scenario, the payroll tax rate can be cut by 10 percentage points in 2050. Increased employment contributes more to the fiscal improvement than the reduction in pension expenditures. However, these changes are basically level effects; the reform has a surprisingly small effect on the growth rate of the necessary tax burden starting in 2020. In particular, the growth rate of public pension expenditures is hardly affected. Stronger government finances and higher employment is obtained at the expense of a significant increase income inequality among old age pensioners.
    Keywords: Pension reforms; Fiscal sustainability; Income distribution; Computable general equilibrium model; Dynamic micro simulation
    JEL: H30 H55 H62 H68 O15
    Date: 2008–09
  5. By: Jürgen Maurer; Roger Klein; Francis Vella (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: We use panel data from the US Health and Retirement Study 1992-2002 to estimate the effect of self-assessed health limitations on active labor market participation of men around retirement age. Self-assessments of health and functioning typically introduce an endogeneity bias when studying the effects of health on labor market participation. This results from justification bias, reflecting an individual’s tendency to provide answers which "justify" his labor market activity, and individual-specific heterogeneity in providing subjective evaluations. We address both concerns. We propose a semiparametric binary choice procedure which incorporates potentially nonadditive correlated individual-specific effects. Our estimation strategy identifies and estimates the average partial effects of health and functioning on labor market participation. The results indicate that poor health and functioning play a major role in the labor market exit decisions of older men.
    JEL: I10 J10 J26 C14 C30
    Date: 2008–09–23
  6. By: Javier Olivera
    Abstract: We find a high prevalence of Europeans giving equal financial transfers to their adult children, regardless of siblings’ income differences. This behaviour is sharply different from previously documented for American counterparts and it is not predicted by any conventional model on family transfers. We build a model to explain the motives for European parental transfers which includes concern with fairness and leaves altruism as an additional motive. We show that, in contrast to the prediction of the pure altruism model, parents do not offset income inequality among their children but decide to give equal transfers in order to be “fair”. However, the parents might start to give larger transfers to poorer children if the siblings’ income inequality becomes unbearable from the parent’s view. We find evidence for this behaviour using simulations for parameter’s distributions and also microeconomic data of 9 European countries from the Survey of Health, Aging, and Retirement in Europe (SHARE).
    Keywords: intergenerational transfers, exchange, altruism, fairness.
    JEL: D19 D64 J18
    Date: 2008–09
  7. By: José Ignacio García (Centro de Estudios Andaluces); Alfonso R. Sánchez Martín (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. 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 a extension of the standard search model, designed to reproduce the non—stationary environment faced by workers approaching retirement and to explore the interaction of unemployment benefits and retirement pensions. Via calibrated simulations we show that the basic empirical reemployment and retirement patterns can be rationalized as the optimal 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 he substantially alleviated through institutional reform. Setting the early retirement penalties according to the age when the individual withdraws from the labor force (rather than when he/she claims the pension for the first time) seems particularly beneficial. It increases the labor supply, reduces the financial cost for the social security system and generate enough extra resources to compensate for the welfare loss of those unemployed directly hit by the reform.
    Keywords: Unemployment search, job benefit, retirement
    JEL: J64 J68 J26
    Date: 2008

This nep-age issue is ©2008 by Claudia Villosio. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.