nep-age New Economics Papers
on Economics of Ageing
Issue of 2009‒12‒11
fifteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. How Do Pension Changes Affect Retirement Preparedness? The Trend to Defined Contribution Plans and the Vulnerability of the Retirement Age Population to the Stock Market Decline of 2008-2009 By Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
  2. Pension Reforms in an Aging Society: A Fully Displayed Cohort Model By Andras Simonovits
  3. Financial Literacy and Financial Sophistication in the Older Population: Evidence from the 2008 HRS By Annamaria Lusardi; Olivia S. Mitchell; Vilsa Curto
  4. Age trajectories of social policy preferences. Support for intergenerational transfers from a demographic perspective By Harald Wilkoszewski
  5. The Displacement Effect of Public Pensions on the Accumulation of Financial Assets By Michael Hurd; Pierre-Carl Michaud; Susann Rohwedder
  6. Income, Material Hardship, and the Use of Public Programs among the Elderly By Helen Levy;
  7. What Replacement Rates Should Households Use? By John Karl Scholz; Ananth Seshadri
  8. The Level and Risk of Out-of-Pocket Health Care Spending By Michael D. Hurd; Susann Rohwedder
  10. Social Security Literacy and Retirement Well-Being By Hugo Benítez-Silva; Berna Demiralp; Zhen Liu
  11. Adjustment of Deferred Compensation Schemes, Fairness Concerns, and Hiring of Older Workers By Christian Pfeifer
  12. Precautionary and Entrepreneurial Saving: New Evidence from German Households By Frank M. Fossen; Davud Rostam-Afschar
  13. Lifecycle Funds and Wealth Accumulation for Retirement:Evidence for a More Conservative Asset Allocation as Retirement Approaches By Wade D. Pfau
  14. Demographic change and the acceptance of population-related policies. A comparison of 13 European countries By Harald Wilkoszewski; Elena Muth
  15. Population and Health Policies By Schultz, Paul

  1. By: Alan L. Gustman (Dartmouth College and NBER); Thomas L. Steinmeier (Texas Tech University); Nahid Tabatabai (Dartmouth College)
    Abstract: Our findings suggest that although the consequences of the decline in the stock market are serious for those approaching their retirement, the average person approaching retirement age is not likely to suffer a life changing financial loss from the stock market downturn of 2008-2009. Similarly, the likely effects of the stock market downturn on retirements have been greatly exaggerated. If there is any postponement of retirement due to stock market losses, on average it will be a matter of a few months rather than years. Counting layoffs, retirements may be accelerated rather than reduced. We provide background information that corrects misperceptions about pension holdings of the retirement age population. Pension coverage is much more extensive than is usually recognized. Over three quarters of the households with a person ages 51 to 56 in 2004 are currently covered by a pension, or have enjoyed pension coverage in the past. Pension wealth accounts for 23 percent of the total wealth of those on the cusp of retirement. For those nearing retirement age, defined contribution plans remain immature. As a result, almost two thirds of pension wealth held by those 51 to 56 in 2004 is in the form of a defined benefit plan. Lastly, women approaching retirement age are more likely to be covered by a pension than are women from earlier cohorts and they account for a significantly larger share of household pension wealth.
    Date: 2009–10
  2. By: Andras Simonovits (Institute of Economics - Hungarian Academy of Sciences, Department of Economics - CEU, Mathematical Institute - Budapest University of Technology)
    Abstract: We fully display a cohort model of an economy with an aging population, taking into account varying family size, habit formation, inheritance and credit constraints. Filling the model with numbers, we are able to compare different pension reforms: 1. the base run, 2. the reduced accrual rates, 3. replacing wage indexation with price indexation and 4. raised retirement age. Whether the policy changes are anticipated or not, the private reactions widely differ.
    Keywords: population aging, pension models, pension reforms
    JEL: H1 H5 H6
    Date: 2009–10
  3. By: Annamaria Lusardi (Dartmouth College); Olivia S. Mitchell (The Wharton School); Vilsa Curto (Harvard University)
    Abstract: This paper analyzes new data on financial literacy and financial sophistication from the 2008 Health and Retirement Study. We show that financial literacy is lacking among older individuals and for the first time explore additional questions on financial sophistication which proves even scarcer. For this sample of older respondents over the age of 55, we find that people lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees. In view of the fact that individuals are increasingly required to take on responsibility for their own retirement security, this lack of knowledge has serious implications.
    Date: 2009–09
  4. By: Harald Wilkoszewski (Max Planck Institute for Demographic Research, Rostock, Germany)
    Abstract: The political discourse on demographic change has gained momentum in many developed countries. When it began, the discussion centred on the question of how to influence population ageing through political means (e.g., by raising fertility rates). But political decision makers now seem to be concerned about the consequences of demographic change on societal dynamics, especially intergenerational relations. This is particularly evident in Germany, where the latest pension increase provoked a discussion about a possible transformation of the political system into a “gerontocracy”, in which the elderly control public resources to their own benefit. In this paper, we investigate whether there is evidence for such a scenario by looking at two main questions. First, what is the effect of age on preferences toward social policies, which organise public transfers between generations (family and pension policies)? Second, to what extent does a possible age effect depend on further demographic factors, such as parenthood and marriage, which represent the framework of an individual’s life course? In order to answer these questions, we use recent survey data (GGS 2005 and PPAS 2003), which we analyse by applying standard linear models as well as Generalised Additive Models. The latter allow us to identify the trajectories of a possible age effect and its dependency on other demographic variables. In contrast to most existing studies, our analyses show clear age effects: older people are less prone to support a variety of transfers to families than younger respondents. At the same time, the elderly are more prone to support pension policy reforms that put an even greater burden on the younger generation. We can also show that the age effects found are not always linear and follow different trajectories across the life course. We therefore argue that classical economic concepts cannot fully explain age-based support for intergenerational transfers. Age effects have to be seen in light of further demographic variables beyond a solely economically defined life cycle.
    Keywords: Germany, demographic ageing, politics, population change, preferences
    JEL: J1 Z0
    Date: 2009–11
  5. By: Michael Hurd (RAND Corporation, Center for the Study of Aging); Pierre-Carl Michaud (RAND Corporation, Center for the Study of Aging); Susann Rohwedder (RAND Corporation, Center for the Study of Aging)
    Abstract: The generosity of public pensions may depress private savings and provide incentives to retire early. While there is plenty of evidence supporting the latter effect, there remains considerable controversy as whether or not public pensions crowd out private savings. This paper uses international micro-datasets collected over recent years to investigate whether public pensions displace private savings. The identification strategy relies on differences in the progressivity or non-linearity of pension formulas across countries. We also make use of large heterogeneity in earnings across education group and country. The evidence we present is consistent with previous studies using cross-sectional and time-series variation in savings and pensions. We estimate that an extra dollar of pension wealth depresses accumulated financial assets at the time of retirement by 23 to 44 cents and that an extra ten thousand dollars in pension wealth reduces the average retirement age by roughly 1 month.
    Date: 2009–09
  6. By: Helen Levy (University of Michigan);
    Abstract: I use data from the 2006 Health and Retirement Study to analyze the determinants of material hardship among individuals ages 65 and older. Ten percent of the elderly report hardship – defined here as cutting back on food or medications because of cost – in 2006. Although hardship is more likely for poorer individuals and, to some extent, for recipients of public transfer programs (Medicaid, Food Stamps, and/or Supplemental Security Income), the majority of those experiencing hardship are not poor and do not participate in these programs. In multivariate models, I find that self-reported health and activity limitations are significant predictors of hardship.
    Date: 2009–09
  7. By: John Karl Scholz (Institute for Research on Poverty, NBER and University of Wisconsin–Madison); Ananth Seshadri (University of Wisconsin–Madison)
    Abstract: Common financial planning advice calls for households to ensure that retirement income exceeds 70 percent of average pre-retirement income. We use an augmented life-cycle model of household behavior to examine optimal replacement rates for a representative set of retired American households. We relate optimal replacement rates to observable household characteristics and in doing so, make progress in developing a set of theory-based, but readily understandable financial guidelines. Our work should be a useful building block for efforts to assess the adequacy of retirement wealth preparation and efforts to promote financial literacy and well-being.
    Date: 2009–09
  8. By: Michael D. Hurd (RAND); Susann Rohwedder (RAND)
    Abstract: The Health and Retirement Study (HRS) is a long-running panel survey with good measures of economic status, so it is the pre-eminent data set for studies about the economic status of the older population and economic preparation for retirement. However, the HRS expends considerably fewer resources on the measurement of out-of-pocket spending than other surveys such as the Medical Expenditure Panel Survey (MEPS) and the Medicare Current Beneficiary Survey (MCBS), which may result in its having relatively less accurate measurement of such spending. We compare the level and distribution of out-of-pocket spending in the HRS with similar measures in MEPS and MCBS in the population aged 65 or older. We find that the measures of out-of-pocket spending in the HRS are about 50% greater than those in MEPS at the mean, and very much greater at the upper points of the distribution. HRS and MCBS are in better agreement, although the HRS is higher at the mean and at the top of the distribution. The implication is that the level and risk of out-of-pocket spending on health care are exaggerated in HRS. Observation error in the HRS measurement relative to MEPS and MCBS is to be expected, but this does not explain the apparent bias. We conclude that researchers who use HRS 2004 or earlier should examine health care spending carefully, even on a case-by-case basis.
    Date: 2009–09
  9. By: Yoichi Okita (National Graduate Institute for Policy Studies); Wade D. Pfau (National Graduate Institute for Policy Studies); Giang Thanh Long (National Economics University (NEU))
    Abstract: Obtaining appropriate forecasts for the future population is a vital component of public policy analysis for issues ranging from government budgets to pension systems. Traditionally, demographic forecasters rely on a deterministic approach with various scenarios informed by expert opinion. This approach has been widely criticized, and we apply an alternative stochastic modeling framework that can provide a probability distribution for forecasts of the Japanese population. We find the potential for much greater variability in the future demographic situation for Japan than implied by existing deterministic forecasts. This demands greater flexibility from policy makers when confronting population aging issues.
    Keywords: stochastic population forecasts, Japan, Lee-Carter method
    JEL: J1 C53
    Date: 2009–05
  10. By: Hugo Benítez-Silva (SUNY-Stony Brook); Berna Demiralp (Old Dominion University); Zhen Liu (University at Buffalo)
    Abstract: We build upon the growing literature on financial literacy, which studies the prevalence of lack of knowledge about various financial issues, and analyze how much people know about the Social Security rules using a small pilot survey conducted in 2007, and a follow-up and extended survey funded by MRRC conducted in December of 2008. We then assess the consequences of the apparent prevalence of lack of information by individuals about the rules governing the Social Security system using a realistic and empirically-based life-cycle model of retirement behavior under uncertainty. We investigate the individual’s retirement and savings decisions under incomplete information and unawareness, in which a portion of the population does not know some or all of the rules of the system. We compare the outcomes in these cases to the outcome under full information, computing the welfare gain resulting from the acquisition of information regarding the Social Security system. Our analysis can illuminate the need for policies that foster knowledge of the system, which can improve welfare, and can result in better policy outcomes.
    Date: 2009–09
  11. By: Christian Pfeifer (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: Hutchens (1986, Journal of Labor Economics 4(4), pp. 439-457) argues that deferred compensation schemes impose fixed-costs to firms and, therefore, they employ older workers but prefer to hire younger workers. This paper shows that deferred compensation can be a recruitment barrier even without these fixed-costs, because adjustments of wage-tenure profiles for older new entrants can lead to adverse incentive effects from a fairness perspective. A personnel data set and a linked employeremployee data set reveal that wage-tenure profiles of white-collar workers are indeed adjusted according to entry age but that firms still hire few older workers.
    Keywords: deferred compensation, entry age, fairness, internal labor markets, wages
    JEL: J14 J31 J33 M51 M52
    Date: 2009–11
  12. By: Frank M. Fossen; Davud Rostam-Afschar
    Abstract: The well-documented positive correlation between income risk and wealth was interpreted as evidence for high amounts of precautionary wealth in various studies. However, the large estimates emerged from pooling non-entrepreneurs and entrepreneurs without controlling for heterogeneity. This paper provides evidence for Germany based on representative panel data including private wealth balance sheets. Entrepreneurs, who face high income risk, hold more wealth than employees, but it is shown that this is not due to precautionary motives. Entrepreneurs may rather save for old age, as they are usually not covered by statutory pension insurance. The analysis accounts for endogeneity of entrepreneurial choice.
    Keywords: precautionary saving, precautionary wealth, entrepreneurship
    JEL: D91 D12 E21
    Date: 2009
  13. By: Wade D. Pfau (National Graduate Institute for Policy Studies)
    Abstract: A line of recent studies cast doubt on the efficacy of the lifecycle investment strategy, which calls for switching into a more conservative investment portfolio as retirement approaches, as a suitable way to provide for the retirement needs of workers with defined-contribution pensions. After comparing simulation outcomes for lifecycle and fixed asset allocation strategies, we determine that the lifecycle strategy can be justified even in a framework including only financial wealth. We find that investors with very reasonable amounts of risk aversion may prefer the lifecycle approach, despite the tendency for aggressive fixed allocation strategies to produce larger expected wealth.
    Keywords: lifecycle funds, target date funds, retirement planning, asset allocation
    JEL: D14 D81 G11 G23
    Date: 2009–10
  14. By: Harald Wilkoszewski (Max Planck Institute for Demographic Research, Rostock, Germany); Elena Muth (Max Planck Institute for Demographic Research, Rostock, Germany)
    Abstract: -
    Keywords: European Union, demographic ageing, politics, population change, preferences
    JEL: J1 Z0
    Date: 2009–11
  15. By: Schultz, Paul (Yale University)
    Abstract: The program evaluation literature for population and health policies is in flux, with many disciplines documenting biological and behavioral linkages from fetal development to late life mortality, chronic disease, and disability, though their implications for policy remain uncertain. Both macro and micro economics seek to understand and incorporate connections between economic development and the demographic transition. The focus here is on research methods, findings, and questions that economists can clarify regarding the causal relationships between economic development, health outcomes, and reproductive behavior, which operate in many directions, posing problems for identifying causal pathways. The connection between conditions under which people live and their expected lifespan and health status refers to "health production functions". The relationships between an individual's stock of health and productivity, well being, and duration of life encompasses the "returns to health human capital". The control of reproduction improves directly the well being of women, and the economic opportunities of her offspring. The choice of population policies may be country specific and conditional on institutional setting, even though many advances in biomedical and public health knowledge, including modern methods of birth control, are now widely available. Evaluation of a policy intervention in terms of cost-effectiveness is typically more than a question of technological efficiency, but also the motivation for adoption, and the behavioral responsiveness to the intervention of individuals, families, networks, and communities. Well-specified research strategies are required to address (1) the economic production of health capacities from conception to old age, (2) the wage returns to increasing health status attributable to policy interventions, (3) the conditions affecting fertility, family time allocation, and human capital investments, and (4) the consequences for women and their families of policies which change the timing as well as number of births.
    JEL: D13 I18 J13 O12
    Date: 2009–07

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