nep-age New Economics Papers
on Economics of Ageing
Issue of 2010‒10‒23
seven papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Fertility and PAYG pensions in the overlapping generations model By Fanti, Luciano; Gori, Luca
  2. Fertility impact of social transfers in Sub-Saharan Africa – What about pensions? By Göran Holmqvist
  3. Retirement incentives, individual heterogeneity and labour transitions of employed and unemployed workers By J. Ignacio García-Pérez; Sergi Jiménez-Martín; Alfonso R. Sánchez-Martín
  4. Pension financing and macroeconomic equilibrium By Enrico D’Elia
  5. Disability Pension Program and Labor Force Participation in Japan:A Historical Perspective By Oshio, Takashi; Shimizutani, Satoshi
  6. Constrained portfolio choices in the decumulation phase of a pension plan By Marina Di Giacinto; Salvatore Federico; Fausto Gozzi; Elena Vigna
  7. An Assessment of the Italian 2007 Second Pillar Reform: a simulation approach By Corsini, Lorenzo; Pacini, Pier Mario; Spataro, Luca

  1. By: Fanti, Luciano; Gori, Luca
    Abstract: This article analyses how long-run pay-as-you-go public pensions react to a change in fertility in the basic overlapping generations model of neoclassical growth. While it would seem well established both in the academic and political debates that the decline in fertility represents a “demographic time bomb” for the sustainability of public pensions, it is shown that a falling birth rate need not necessarily cause long-run pension benefit to fall.
    Keywords: Fertility; PAYG pensions; OLG model
    JEL: O41 J26
    Date: 2010–10–11
  2. By: Göran Holmqvist
    Abstract: The potential link between child-related cash transfers and increased fertility is often raised as an issue of concern when debating their use. Old-age pension is a form of cash transfer where theory would suggest the opposite impact, i.e. pensions equal decreasing fertility. A handful of Sub-Saharan African countries have introduced non-contributory social pensions that cover the great majority of the older population. It makes them into a distinct group in relation to the rest of the region where public old-age security arrangements, if existing at all, are largely reserved for the formal sector. This paper attempts to trace any impact these high-coverage pension schemes may have had on fertility. Findings suggest that there has been such an impact, in the range of 0,5 to 1,5 children less per woman depending on model specification.
    Date: 2010
  3. By: J. Ignacio García-Pérez; Sergi Jiménez-Martín; Alfonso R. Sánchez-Martín
    Abstract: In this paper we analyze the sensitivity of the labour market decisions of workers close to retirement with respect to the incentives created by public regulations. We improve upon the extensive prior literature on the effect of pension incentives on retirement in two ways. First, by modeling the transitions between employment, unemployment and retirement in a simultaneous manner, paying special attention to the transition from unemployment to retirement (which is particularly important in Spain). Second, by considering the influence of unobserved heterogeneity in the estimation of the effect of our (carefully constructed) incentive variables. Using administrative data, we find that, when properly defined, economic incentives have a strong impact on labour market decisions in Spain. Unemployment regulations are shown to be particularly influential for retirement behaviour, along with the more traditional determinants linked to the pension system. Pension variables also have a major bearing on both workers’ reemployment decisions and on the strategic actions of employers. The quantitative impact of the incentives, however, is greatly affected by the existence of unobserved heterogeneity among workers. Its omission leads to sizable biases in the assessment of the sensitivity to economic incentives, a finding that has clear consequences for the credibility of any model-based policy analysis. We confirm the importance of this potential problem in one especially interesting instance: the reform of early retirement provisions undertaken in Spain in 2002. We use a difference-in-difference approach to measure the behavioural reaction to this change, finding a large overestimation when unobserved heterogeneity is not taken into account.
    Keywords: Retirement, unemployment, incentives, Pension system, Unobserved, heterogeneity, Spain.
    JEL: J14 J26 J64
    Date: 2010–10
  4. By: Enrico D’Elia (ISAE - Institute for Studies and Economic Analyses)
    Abstract: Financing pension systems necessitates that actual output is redistributed from workers and entrepreneurs actually in activity in favour of retirees. Therefore, in a closed economy, the return on accrued pension funds, to be distributed to pensioners, is ceiled by the real growth of income, unless the share of income levied on active workers increases indefinitely. Only possible revenues from past foreign investment can increase the overall resources available to pay domestic pensions. Thus, an efficient pre funded pension system inevitably stimulates large international capital movements. The paper sheds some light on an issue often overlooked in the debate on the merits and drawbacks of different systems, i.e. their possible consequences on interest and exchange rates. In order to provide an explicit solution for the dynamics of the relevant variables, the paper adopts an analytical approach more simple than the usual overlapping generation models. In particular, the paper confirms that in an aging society, with a fully indexed PAYG system, a constant contribution rate would make the public debt and related interest rates explode. On the other hand, in a pre-funded system, interest rates should be set below the national growth rates, and exchange rates must be ready to accommodate to large deficit of the balance of payment for many decades after the switch from a PAYG system, and later to large surplus.
    Keywords: Aging society, Capital movements, Monetary policy, Pensions
    JEL: E43 F21 F32 H55 J32
    Date: 2010–07
  5. By: Oshio, Takashi; Shimizutani, Satoshi
    Abstract: This paper utilizes historical information to explore the relationship between labor force participation of middle aged and old people and the disability program in Japan. In particular, we explore the time series dimension to identify what has determined the trend in disability program participation over time and relate it with the labor supply. We find that mortality and health measures have been largely unrelated to the disability program participation rates. While major revisions to the disability program have slightly expanded the eligibility for DI programs, the program participation is still very low; thus, the effect on labor force participation is very limited in Japan, which is in contrast with some European countries that have high take up rates, inducing early retirement.
    Date: 2010–09
  6. By: Marina Di Giacinto; Salvatore Federico; Fausto Gozzi; Elena Vigna
    Abstract: This paper deals with a constrained investment problem for a defined contribution (DC) pension fund where retirees are allowed to defer the purchase of the annuity at some future time after retirement. This problem has already been treated in the unconstrained case in a number of papers. The aim of this work is to deal with the more realistic case when constraints on the investment strategies and on the state variable are present. Due to the difficulty of the task, we consider the basic model of [Gerrard, Haberman & Vigna, 2004], where interim consumption and annuitization time are fixed. The main goal is to find the optimal portfolio choice to be adopted by the retiree from retirement to annuitization time in a Black and Scholes financial market. We define and study the problem at two different complexity levels. In the first level (problem P1), we only require no short-selling. In the second level (problem P2), we add a constraint on the state variable, by imposing that the final fund cannot be lower than a certain guaranteed safety level. This implies, in particular, no ruin. The mathematical problem is naturally formulated as a stochastic control problem with constraints on the control and the state variable, and is approached by the dynamic programming method. We give a general result of existence and uniqueness of regular solutions for the Hamilton-Jacobi-Bellman equation and, in a special case, we explicitly compute the value function for the problem and give the optimal strategy in feedback form. A numerical application of the special case - when explicit solutions are available - ends the paper and shows the extent of applicability of the model to a DC pension fund in the decumulation phase.
    Keywords: pension fund; decumulation phase; constrained portfolio; stochastic optimal control; dynamic programming; Hamilton-Jacobi-Bellman equation
    JEL: C61 G11 G23
    Date: 2010
  7. By: Corsini, Lorenzo; Pacini, Pier Mario; Spataro, Luca
    Abstract: In this paper we aim at assessing the outcomes of the 2007 Italian reform of the complementary social security and to identify the determinants behind them. The reform gave relevant incentives to workers to switch from investing about 7% of their gross wages into a compulsory defned benefit scheme inside the firm (which took the form of a termination indemnity payment, the TFR scheme) to an external pension fund. We provide a theoretical framework to model workers' choice problem of switching between these pension schemes and we then perform an agent-based simulation taking into account all the details of the reform. Our simulations are able to replicate the Italian data in term of adhesion rates to complementary social security and also to identify some of the key determinants of that outcome, like the fiscal incentives, the financial literacy and the expectations on the rate of returns of pension funds.
    Keywords: Agent Based Simulation; Pension Schemes; Second Pillar
    JEL: C63 E27 G23 J32
    Date: 2010

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