nep-age New Economics Papers
on Economics of Ageing
Issue of 2009‒06‒10
seven papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Fiscal sustainability and policy implications for the euro area By Balassone, Fabrizio; Cunha, Jorge Correia da; Langenus, Geert; Manzke, Bernhard; Pavot, Jeanne; Prammer, Doris; Tommasino, Pietro
  3. Investment Risk and Pensions: Impact on Individual Retirement Incomes and Government Budgets By Edward R. Whitehouse; Anna Christina d'Addio; Andrew Reilly
  4. Il boom demografico prossimo venturo. Tendenze demografiche, mercato del lavoro ed immigrazione: scenari e politiche By Michele Bruni
  5. Aging, Factor Returns, and Immigration Policy By Lena Calahorrano; Oliver Lorz
  6. Investment Risk and Pensions: Measuring Uncertainty in Returns By Anna Christina d'Addio; José Seisdedos; Edward R. Whitehouse
  7. IFSIM Handbook By Baroni, Elisa; Zamac, Jovan; Öberg, Gustav

  1. By: Balassone, Fabrizio; Cunha, Jorge Correia da; Langenus, Geert; Manzke, Bernhard; Pavot, Jeanne; Prammer, Doris; Tommasino, Pietro
    Abstract: In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EU's Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the government's primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses.
    Keywords: population ageing, fiscal sustainability, generational accounting, medium-term objectives for fiscal policy
    JEL: H55 H60
    Date: 2009
  2. By: Susan Thorp; Hardy Hulley; Rebecca McKibbin; Andreas Pedersen
    Abstract: We investigate the impact of means tested public income transfers on post-retirement decumulation and portfolio choice using theoretical simulations and panel data on Australian Age Pensioners. Means tested public pension payments in Australia have broad coverage and give insight into the incentive responsiveness of well-off, as well as poorer households. Via numerical solutions to a discrete time, fi?nite horizon dynamic programming problem, we simulate the optimal consumption and portfolio allocation strategies for a retired household subject to assets and income tests. Relative to benchmark, means tested households should optimally decumulate faster early in retirement, and choose more risky portfolios. Panel data tests on inferred wealth for pensioner households show evidence of more rapid spending early in retirement. However they also show that better-off households continue to accumulate, even when facing a steeper implicit tax rate on wealth than applies to poorer households. Wealthier households also hold riskier portfolios. Results from tests for Lorenz dominance of the panel wealth distribution show no decrease in wealth inequality over the fi?ve years of the study.
    JEL: D91 E21 G11
    Date: 2009–04
  3. By: Edward R. Whitehouse; Anna Christina d'Addio; Andrew Reilly
    Abstract: The current financial and economic crisis has highlighted the importance of investment risk for pension systems. In particular, the dramatic spread of defined-contribution pension provision around the world means that investment risk has a direct effect on living standards in old age. This paper explores how uncertainty over investment returns affects individuals’ retirement incomes and government budgets. The key finding is that public pensions, old-age safety net benefits and the tax system act as “automatic stabilisers” of retirement incomes in the face of investment risk in defined-contribution pension plans. However, the degree of protection offered by these policies, and therefore the exposure of individuals’ retirement incomes to investment risk, varies significantly between countries. The paper uses the OECD pension models to explore the implications of a range of possible outcomes for investment returns. (The distribution of investment returns used is derived from historical data in D’Addio, Seisdedos and Whitehouse, 2009.) The analysis begins with the individual pension-scheme member. The results demonstrate that the overall design of the retirement-income package must be taken into account when assessing exposure of individual incomes in old age to investment performance. Many elements of pension systems are not subject to investment risk. And resource-tested benefits can act to mitigate investment risk by paying a larger benefit when returns are poor. Analysis of net pensions shows how taxes can also act to offset the effect of investment risk on living standards in retirement. The differences between countries in the extent to which these different factors affect exposure to investment risk are huge. Together, taxes and meanstested benefits can be termed “automatic stabilisers” for retirement incomes in the face of investment risk. Secondly, the paper uses the OECD pension models to look at the impact of investment risk on the public finances. The corollary of the reduction in investment risk for individuals through tax and transfer policies is exposure to investment risk of the public finances. In countries with resource-tested benefits, the government has a “contingent liability” that depends on investment returns. Better performance means lower expenditure on safety-net benefits. Similarly, the tax system means that the government is effectively a “co-investor”, with the individual retiree, in the defined-contribution plan. Higher returns mean more tax revenues. This effect is particularly large where the tax burden on pensions in payment is high. Adding these two effects together, governments (and so taxpayers) are in many countries significantly exposed to investment risk. This demonstrates how it is impossible to make risks go away: it is only possible to reallocate the risk between different actors in the pension system.<BR>L’actuelle crise financière et économique a mis en évidence l’importance du risque d’investissement pour les systèmes de retraite. En particulier, la propagation dramatique des régimes à cotisations définies à travers le monde implique que le risque d’investissement a un effet direct sur le niveau de vie des individus pendant la retraite. Ce document analyse comment l’incertitude sur les rendements des investissements affecte les revenus de retraite des individus et les budgets des gouvernements. La conclusion principale est que les pensions publiques, les filets de sécurité mis en place pour les personnes âgées et le système fiscal jouent le rôle de « stabilisateurs automatiques » des revenus de retraite face au risque d’investissement dans des plans de retraite à cotisations définies. Cependant, le degré de protection offert par ces politiques, et donc l’exposition au risque d’investissement des revenus de retraite individuels, varie de manière significative entre les pays. Le document utilise les modèles de pension de l’OCDE pour étudier les implications associées à une gamme de rendements des placements. (La distribution des rendements d’investissement utilisée est dérivée des données historiques selon la procédure illustrée dans D’Addio, Seisdedos et Whitehouse, 2009). L’analyse se concentre en premier lieu sur les revenus de retraites des individus. Les résultats démontrent que la conception globale de l’ensemble des revenus de retraite doit être prise en compte lors de l’évaluation de l’exposition aux performances des investissements des revenus individuels de retraite. De nombreux éléments des systèmes de retraite ne sont pas sujets au risque d’investissement. Et les prestations sous condition de ressources peuvent atténuer le risque d’investissement moyennant le paiement d’une prestation plus élevée lorsque les rendements sont faibles. L’analyse des revenus de retraites nets d’impôts montre comment ces derniers peuvent également contribuer à compenser l’effet du risque d’investissement sur le niveau de vie pendant la retraite. Les différences entre les pays dans la mesure où ces différents facteurs influent sur l’exposition au risque d’investissement sont énormes. Ensemble, les taxes et les prestations sous conditions de ressources peuvent être qualifiées de « stabilisateurs automatiques » pour les revenus de retraite face au risque d’investissement. Deuxièmement, le document utilise des modèles de pension de l’OCDE pour examiner l’impact du risque d’investissement sur les finances publiques. Le corollaire de la réduction de risque d’investissement pour les particuliers par le biais de politiques fiscales et de transfert est l’exposition aux risques d’investissement des finances publiques. Dans les pays qui ont mis en place des prestations sous condition de ressources, le gouvernement a un « passif » qui dépend du rendement du capital investi. Une meilleure performance signifie la baisse des dépenses pour des filets de sécurité. De même, le système fiscal implique que le gouvernement est effectivement un « co-investisseur », avec les retraités, dans le plan à cotisations définies. Des rendements plus élevés, impliquent des recettes fiscales plus élevées. Cet effet est particulièrement important lorsque la charge fiscale sur les droits à pension est élevée. La somme de ces deux effets signifie finalement que, les gouvernements (et donc les contribuables) sont fortement exposés au risque d’investissement dans de nombreux pays. Cela montre pourquoi et à quel point il est impossible de faire disparaître les risques : il est seulement possible de redistribuer ces risques entre les différents acteurs du système de retraite.
    Keywords: pensions, pensions de retraite, retour sur investissement, investment return
    JEL: D14 G11 G23
    Date: 2009–06–05
  4. By: Michele Bruni
    Abstract: The aim of the research is to introduce a generational stock-flow model to estimate international migration needs and provide long terms demographic forecasts in which migration is an endogenous variables determined by demographic trends and additional labor demand. At the empirical levels, it provides long term scenarios of net migratory balances and demographic trends for Italy. The main conclusion is that the decrease in fertility experienced by Italy, as by all industrialized countries, will not determine a contraction of population and working age population, as forecasted by all national and international statistical institutions, but will generate unprecedented population increases and international migratory flows
    Keywords: demography; iimmigration; labour market; economy politics
    JEL: J11 J21 J61
    Date: 2008–12
  5. By: Lena Calahorrano (RWTH Aachen University, Faculty of Business and Economics, Templergraben 64, 52062 Aachen, Germany); Oliver Lorz (RWTH Aachen University, Faculty of Business and Economics, Templergraben 64, 52062 Aachen, Germany)
    Abstract: In this note we analyze how aging affects immigration policy. We set up a dynamic political-economy model of representative democracy in which the government of the destination country sets the immigration level to maximize aggregate welfare of the constituency. Aging, i.e. a decline in the growth rate of the native population, has an expansionary effect on immigration. This immigration effect may even overcompensate the initial decline in population growth such that the total labor force grows more strongly and the capital stock per worker declines. We also compare our results to the social planner allocation and to the median-voter equilibrium.
    Keywords: Demographic change, political economy, immigration policy
    JEL: D78 F22
    Date: 2009
  6. By: Anna Christina d'Addio; José Seisdedos; Edward R. Whitehouse
    Abstract: This paper explores how uncertainty over investment returns affects pension systems. This issue is becoming more important because of the dramatic spread of defined-contribution pension provision around the world. It has also been highlighted by the recent financial crisis: the OECD estimates that pension funds lost 23% of their value in 2008, worth a heady USD 5.4 trillion. The scale of investment risk is measured in this paper using historical data on returns on equities and bonds in major OECD economies over the past quarter century. The results show a median real return of 7.3% a year on a portfolio equally weighted between equities and bonds (averaging across the countries studied). It might be expected that, over a very long period, the degree of uncertainty in investment returns is small. After all, a few bad years in the market are likely to be offset by boom years. Nevertheless, the degree of uncertainty, even with the relatively long investment horizons of pensions, is found to be large. In 10% of cases, an annual return of less than 5.5% would be expected, while in 10% of cases, this should exceed 9.0%. Compounded over the time horizon for pension savings of 40 years or more, such differences in rates of return amount to enormous sums of money. However, there is a series of reasons why returns achieved by individuals on their pension funds are less than the market return (as measured by conventional indices). These factors include administrative charges, agency and governance effects and demographic change, depressing investment returns below the high levels recorded over the past two decades. As a result, a more conservative assumption for future investment returns than the record over the past quarter century is appropriate. Settling on a median of 5.0% annual real return net of charges implies that 80% of the time, the investment return on pension savings should be between 3.2% and 6.7% a year.<BR>Ce document mesure l’impact de l’incertitude des rendements d’investissement sur les systèmes de retraite. Ce sujet devient de plus en plus important en raison de la propagation spectaculaire des systèmes de retraite à cotisations définies. Le degré du risque d'investissement est mesuré à l’aide de données historiques sur le rendement des actions et des obligations dans un nombre de pays de l’OCDE au cours du dernier quart de siècle. Les résultats montrent, en moyenne dans les pays étudiés, un rendement réel médian de 7,3 % annuel d’un portefeuille composé en parties égales d’actions et d’obligations. On pourrait s’attendre à ce que, sur une très longue période, le degré d’incertitude du rendement des investissements soit faible. Après tout, quelques mauvaises années sont susceptibles d’être compensées par des années de prospérité. Néanmoins, le degré d’incertitude, même en prenant le très long horizon temporel sur lequel se fait l’investissement des pensions, se trouve à être grand. Dans 10 % des cas, on devrait s’attendre à un rendement annuel de moins de 5,5 %, tandis que dans 10 % des cas, il devrait dépasser 9,0 %. Les calculs des rendements composés de l’épargne-retraite sur une période de 40 ans, montrent que de telles différences sont équivalentes à d’énormes sommes d’argent. Toutefois, il existe une série de facteurs qui peuvent expliquer pourquoi les rendements obtenus par les individus sur leurs fonds de pension sont inférieurs aux rendements du marché (tels que ceux mesurés par les indices classiques). Ces facteurs qui incluent les frais administratifs, les effets d’agence et de gouvernance et ceux liés au changement démographique, ont contribué à la baisse des rendements en dessous du niveau élevé enregistré au cours des deux dernières décennies. Par conséquent, une hypothèse plus conservatrice sur le rendement des investissements futurs est appropriée. En fixant la médiane du rendement annuel net de charges à 5 % implique que dans 80 % des cas, le rendement sur l’investissement de l’épargne-retraite devrait se situer entre 3,2 % et 6,7 % par an.
    JEL: D14 G11 G23
    Date: 2009–06–09
  7. By: Baroni, Elisa (Institute for Futures Studies); Zamac, Jovan (Institute for Futures Studies); Öberg, Gustav (Institute for Futures Studies)
    Abstract: <p>This handbook explains the simulation model IFSIM. IFSIM is an agent based simulation model written in JAVA. The model is constructed for analyzing demographic and economic issues. The aim of the model is to include the main consumption and production patterns over the life-cycle and thus being able to test demo-economic interactions.<p>
    Keywords: agent-based modelling; simulation model; JAVA; demogrphy; economy; demo-economic interactions
    JEL: C63 J11
    Date: 2009–05–20

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