nep-age New Economics Papers
on Economics of Ageing
Issue of 2010‒10‒02
ten papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. The minimum pension as an instrument of poverty protection in the defined contribution pension system – an example of Poland By Chlon-Dominczak, Agnieszka; Strzelecki, Paweł
  2. The impact of a minimum pension on old age poverty and its budgetary cost. Evidence from Latin America By DETHIER, Jean - Jacques; PESTIEAU, Pierre; ALI, Rabia
  3. The impact of scale, complexity, and service quality on the administrative costs of pension funds: A cross-country comparison By Jacob A. Bikker; Onno W. Steenbeek; Federico Torracchi
  4. Myopia, redistribution and pensions By CREMER, Helmuth; PESTIEAU, Pierre
  5. Asset Allocation for Government Pension Funds in Pakistan:A Case for International Diversification By Rehman, Fahd
  6. Reforming Pension Funds in Sri Lanka: International Diversification and the Employees’ Provident Fund By Ajantha Sisira Kumara; Wade D. Pfau
  7. Long term care insurance puzzle By PESTIEAU, Pierre; PONTHIERE, Grégory
  9. Mortality, family and lifestyles By Grégory Ponthière
  10. “No Country for Old Men”: a Note on the trans-Tasman Income Divide By Andrew Coleman; Hugh McDonald

  1. By: Chlon-Dominczak, Agnieszka; Strzelecki, Paweł
    Abstract: Pension systems’ reforms are often related to a shift towards (fully or partially) defined contribution systems, in which the pension distribution reflects to a larger extent the wage distribution. Additionally, relatively shorter working lives of those that have lower earnings, increase the risk of receiving lower benefits. The aim of the paper is to present the changing role of minimum pension as a tool of redistribution in Poland after the pension reform. The new mandatory pension system covers workers born after 1948 and is based on two components – notional and funded defined contribution (NDC and FDC). It replaced the old defined-benefit PAYG system, which had a significant redistribution through the pension formula. The formula itself served as a tool of low income protection, that was additionally strengthened by the minimum pension guarantee. The new system aims at actuarial fairness, which means that the only mechanism of redistribution is the minimum pension, financed from general taxes. As a result of this change, grater income inequalities of pensioners following those of people in working age are expected. This means a change of the role of the minimum pension from one of the tools supporting redistributive policy to the main tool of social policy preventing poverty among elderly persons. The minimum pension is expected to fall compared to average wage. The decision on its level and evolution becomes one of the most important policy questions. It will have crucial importance in preventing poverty in the old-age. Simulations are used to present the impact of changes in the pension distribution on the number of pensioners covered by minimum pension.
    Keywords: pension system; old-age poverty; minimum pension; indexation rules; define contributions; DC sytem; pension distribution
    JEL: H55 I38 I32
    Date: 2010–09
  2. By: DETHIER, Jean - Jacques (The World Bank, Washington DC, USA); PESTIEAU, Pierre (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; CREPP, University of Liège, B- 4000 Liège, Belgium); ALI, Rabia (The World Bank, Washington DC, USA)
    Abstract: This paper examines the impact on old age poverty and the fiscal cost of universal minimum old age pensions in Latin America using recent household survey data for 18 countries. Alleviating old age poverty requires different approach from other age groups and a minimum pension is likely to be the only alternative available. First we measure old age poverty rates for all countries. Second we discuss the design of minimum pensions schemes, means-tested or not, as well as the disincentive effects that they are expected to have on the economic and social behavior of households including labor supply, saving and family solidarity. Third we use the household surveys to simulate the fiscal cost and the impact on poverty rates of alternative minimum pension schemes in the 18 countries. We show that a universal minimum pension would substantially reduce poverty among the elderly except in Argentina, Brazil, Chile and Uruguay where minimum pension systems already exist and poverty rates are low. Such schemes have much to be commended in terms of incentives, spillover effects and administrative simplicity but have a high fiscal cost. The latter is a function of the age at which benefits are awarded, the prevailing longevity, the generosity of benefits, the efficacy of means testing, and naturally the fiscal capacity of the country.
    Keywords: old age poverty, income transfer, pension systems, family income, fiscal policies, human development
    JEL: D19 D31 H30 I38 O15
    Date: 2010–07–01
  3. By: Jacob A. Bikker; Onno W. Steenbeek; Federico Torracchi
    Abstract: Administrative costs per participant appear to vary widely across pension funds in different countries. These costs are important because they reduce the rate of return on the investments of pension funds, and consequently raise the cost of retirement security. Using unique data on 90 pension funds over the period 2004-2008, this paper examines the impact of scale, the complexity of pension plans, and service quality on the administrative costs of pension funds, and compares those costs across Australia, Canada, the Netherlands, and the US. We find that, except for Canada, large unused economies of scale exist. Analyses on a disaggregated level confirm economies of scale for small and medium pension funds. Even though the pension funds in the sample are among the largest in the world, further cost savings appear to be possible. Higher service quality and more complex pension plans significantly raise costs, whereas offering only one pension plan reduces costs, as does a relatively large share of deferred (or sleeping) participants. Administrative costs vary significantly across pension fund types, with differences amounting to 100%.
    Keywords: Pension funds; Administrative costs; Scale economies; Service level; Complexity; Optimal scale.
    JEL: G23
    Date: 2010–08
  4. By: CREMER, Helmuth (Toulouse School of Economics (GREMAQ, IDEI and Institut universitaire de France)); PESTIEAU, Pierre (CREPP, HEC-Management School, University of Liège, Belgium; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; PSE and CEPR)
    Abstract: This paper reviews a number of recent contributions that study pension design with myopic individuals. Its objective is to explore how the presence of more or less myopic individuals affects pension design when individuals differ also in productivity. This double heterogeneity gives rise to an interesting interplay between paternalistic and redistributive considerations, which is at the heart of most of the results that are presented. The main part of the paper is devoted to the issue of pension design when myopic individual do not save “enough” for their retirement because their “myopic self” (with a high discount rate) emerges when labor supply and savings decisions are made. Some extensions and variations are considered in the second part. In particular we deal with situations where labor disutility or preferences for consumption are subject to “habit formation” and where sin goods have a detrimental effect on second period health. Myopic individuals tend to underestimate the effects of both habit formation and sinful consumption, which complicates public policy.
    Keywords: myopia, dual self, pensions, sin goods, habit formation
    JEL: E6 H55 D91
    Date: 2010–07–01
  5. By: Rehman, Fahd
    Abstract: Reforms have begun in Pakistan to sustain the funded pension scheme for government-operated pension schemes such as the Employees Old Age Benefit Institution (EOBI). Presently, the EOBI operates its own fund and invests most of its assets in government-backed securities which are basically interest-bearing debt instruments. Although the returns on the EOBI’s fund have been high for a short period due to higher interest rates and minimum pension distributions, this trend is not likely to continue. Funded pension schemes depend heavily on portfolio performance because risk is transferred to contributors. Therefore, asset allocation becomes considerably important. The purpose of this study is to determine optimal asset allocation and the role of international diversification specifically for the EOBI’s funds and generally for newly created funded pension schemes in Pakistan. The article analyzes the potential benefits accrued through international investments based on historical returns over almost five decades with varying degrees of risk aversion coefficients. Varying degrees of risk may allow policymakers to incorporate their strategies for future asset behavior and take timely action to counter the potential threat of aging, demographic shifts, and liabilities and to ensure decent benefits for pensioners.
    Keywords: Asset allocation; international diversification; pension fund; Pakistan
    JEL: G11 G23
    Date: 2010–07–19
  6. By: Ajantha Sisira Kumara (National Graduate Institute for Policy Studies); Wade D. Pfau (National Graduate Institute for Policy Studies)
    Abstract: The Employees’ Provident Fund (EPF) of Sri Lanka is a defined-contribution pension fund whose pooled asset holdings consist mainly of local government bonds. Regulations prohibit international diversification, and this paper aims to quantify the extent of the potential harms, if any, caused by this constraint. To improve the robustness of the findings, we use two distinct methodologies. These include traditional mean-variance analysis from modern portfolio theory, and Monte Carlo simulations that estimate the distribution of wealth accumulated at retirement from the contributions of a hypothetical worker. Both methods produce qualitatively and quantitatively similar results: workers with risk aversion varying from aggressive to conservative will be better served by allowing international diversification. The results are particularly persuasive for the second approach. The EPF fund managers will likely behave fairly conservatively toward risk, which suggests that around half of the fund assets should be invested abroad.
    Keywords: International Diversification, Utility Maximization, EPF, Hypothetical Worker, Modern Portfolio Theory, Sri Lanka
    JEL: G11 H55 G23
    Date: 2010–09
  7. By: PESTIEAU, Pierre (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; CREPP, University of Liege, B-4000 Liège, Belgium and Paris School of Economics); PONTHIERE, Grégory (Paris School of Economics and Ecole Normale Supérieure, Paris, France.)
    Abstract: The purpose of this paper is to examine the alternative explanatory factors of the so-called long term care insurance puzzle, namely the fact that so few people purchase a long term care insurance whereas this would seem to be a rational conduct given the high probability of dependence and the high costs of long term care. For that purpose, we survey various theoretical and empirical studies of the demand and supply of long term care insurance. We discuss the vicious circle in which the long term care insurance market is stuck: that market is thin because most people find the existing insurance products too expensive, and, at the same time, the products supplied by insurance companies are too expensive because of the thinness of the market. Moreover, we also show that, whereas some explanations of the puzzle involve a perfect rationality of agents on the LTC insurance market, others rely, on the contrary, on various behavioral imperfections.
    Keywords: long term care insurance, dependence, annuity puzzle
    JEL: I18 J14 G22
    Date: 2010–05–01
  8. By: Laura Crespo (CEMFI, Centro de Estudios Monetarios y Financieros); Pedro Mira (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We study the prevalence of informal caregiving to elderly parents by their mature daughters in Europe and the effect of intense (daily) caregiving and parental health on the employment status of the daughters. We group the data from the first two waves of SHARE into three country pools (North, Central and South) which strongly differ in the availability of public formal care services and female labour market attachment. We use a time allocation model to provide a link to an empirical IV-treatment effects framework and to interpret parameters of interest and differences in results across country pools and subgroups of daughters. We estimate the average effect of parental disability on employment and daily care-giving choices of daughters and the ratio of these effects which is a Local Average Treatment effect of daily care on labour supply under exclusion restrictions. We find that there is a clear and robust North-South gradient in the (positive) effect of parental ill-health on the probability of daily care-giving. The aggregate loss of employment that can be attributed to daily informal caregiving seems negligible in northern and central European countries but not in southern countries. Large and significant impacts are found for particular combinations of daughter characteristics and parental disability conditions. The effects linked to longitudinal variation in the health of parents are stronger than those linked to cross-sectional variation.
    Keywords: Informal care, employment, instrumental variables, treatment effects.
    JEL: J2 C3 D1
    Date: 2010–09
  9. By: Grégory Ponthière
    Abstract: While there is a large empirical literature on the intergenerational transmission of health and survival outcomes in relation to lifestyles, little theoretical work exists on the long-run prevalence of (un)healthy lifestyles induced by mortality patterns. To examine that issue, this paper develops an overlapping generations model where a healthy lifestyle and an unhealthy lifestyle are transmitted vertically or obliquely across generations. It is shown that there must exist a locally stable heterogeneous equilibrium involving a majority of healthy agents, as a result of the larger parental gains from socialization efforts under a higher life expectancy. Wealso examine the robustness of our results to the introduction of parental altruistic concerns for children's health and of asymmetric socialization costs.
    Date: 2010
  10. By: Andrew Coleman (Motu Economic and Public Policy Research); Hugh McDonald (Motu Economic and Public Policy Research)
    Abstract: Although much work has been done analysing the possible causes of the New Zealand-Australian income gap, to date there has been little analysis of the extent to which this gap differs by gender and age. Using New Zealand and Australian employment and census data we examine these differences and find that (1) over the last 25 years the incomes of New Zealand women have declined less rapidly than those of New Zealand men, relative to Australian incomes; (2) this poor relative performance of New Zealand males was felt most by those in middle age; and (3) the stronger relative income growth of New Zealand females appears to be largely driven by increased public sector wage growth, and as such, its long term sustainability is questionable.
    Keywords: dynamic optimisation, electricity spot market performance, stochastic fuel availability, storage options, climate change
    JEL: D4 D9 L1 L5 L9
    Date: 2010–08

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