nep-age New Economics Papers
on Economics of Ageing
Issue of 2010‒12‒11
thirteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Various Tax Policy Alternatives to Delay Retirement: Some Computations and Implications By Emin Gahramanov; Xueli Tang
  2. Private Wealth and Planned Early Retirement: A Panel Data Analysis for the Netherlands, 1994-2009 By van Ooijen, Raun; Mastrogiacomo, Mauro; Euwals, Rob
  3. The Life-Cycle Hypothesis Revisited: Evidence on Housing Consumption after Retirement By Miriam Beblo; Sven Schreiber
  4. Income Uncertainty and Household Savings in China By Marcos Chamon; Kai Liu; Eswar S. Prasad
  5. Housing Mobility and Downsizing at Older Ages in Britain and the United States By James Banks; Richard Blundell; Zoe Oldfield; James P. Smith
  6. The Public-Sector Pension Bubble: Time to Confront the Unmeasured Cost of Ottawa's Pensions By Alexandre Laurin; William Robson
  7. Aging and decision making: How aging affects decisions under uncertainty By Sproten, Alec; Diener, Carsten; Fiebach, Christian; Schwieren, Christiane
  8. Population Aging and Economic Growth in China By Judith Banister; David E. Bloom; Larry Rosenberg
  9. Optimal Aging and Death By Carl-Johan Dalgaardy; Sebastian Vollmer
  10. Demographic Change, Intergenerational Altruism, and Fiscal Policy - A Political Economy Approach - By Oguro, Kazumasa; Shimasawa, Manabu; Aoki, Reiko; Oshio, Takashi
  11. Demography, stock prices and interest rates: The Easterlin hypothesis revisited By Fabrizio Orrego
  12. House Price Volatility and the Housing Ladder By James Banks; Richard Blundell; Zoe Oldfield; James P. Smith
  13. Interest rate effects of demographic changes in a New-Keynesian life-cycle framework By Engin Kara; Leopold von Thadden

  1. By: Emin Gahramanov; Xueli Tang
    Abstract: Demographic challenges have been threatening the fiscal sustainability of pension systems across most of the developed world. A popular policy response to pension financing difficulties is the encouragement (or enforcement) of later retirement, as well the legislation of higher payroll taxes over time. In this paper we analyze how various tax policy experiments, including changes in the Social Security payroll tax, affect people’s desire to leave the workforce and the state of the economy. For this purpose we build a general-equilibrium life-cycle model with rational and myopic consumers, facing a mortality risk. Agents leave accidental bequests and are heterogeneous in their age-dependent work productivity. We incorporate productive government expenditures, categorize people into the rich and poor, and endogenize people’s retirement decision. We find that although some reasonable fiscal reforms are unlikely to abruptly delay people’s planned retirement dates, there exists a number of alternative fiscal arrangements which are welfare and output enhancing, consumption-smoothing, and more or less distributionally neutral. This alone suggests that the welfare losses due to the pension crisis can potentially be counter-balanced by various fiscal reforms. Increasing the payroll tax is the most distortive among all the existing tax policy reforms. Increasing bequest and capital tax rates by reasonable magnitudes have the least impact on output, implying that the combination of higher capital and bequest taxes with a lower social security payroll tax can be used to generate extra revenues to cope with the pension crisis. The highest combined welfare gain, positive to all agents, can be achieved by increasing the consumption tax, but this tax also tends to encourage retirement.
    Date: 2010–12–05
  2. By: van Ooijen, Raun (De Nederlandsche Bank); Mastrogiacomo, Mauro (CPB Netherlands Bureau for Economic Policy Analysis); Euwals, Rob (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We study the causal relation between private wealth and retirement age. We propose two estimation strategies based on expected retirement age. The outcome variable is observed repeatedly over time. We correct first for the unobserved heterogeneity in the disutility of work by using panel data techniques. Next, we exploit information on expected wealth accumulation in order to identify the unexpected component in wealth accumulation. In line with the literature we find a small but significant effect of private wealth on planned early retirement.
    Keywords: early retirement, private wealth, subjective retirement expectations
    JEL: C23 J26
    Date: 2010–11
  3. By: Miriam Beblo; Sven Schreiber
    Abstract: According to the life-cycle theory of consumption and saving, foreseeable retirement events should not reduce consumption. Whereas some consumption expenditures may fall when goods are self-produced (given higher leisure after retirement), this argument applies especially to housing consumption which can hardly be substituted by home production. We test this hypothesis using micro data for Germany (SOEP) and find that income reductions when entering retirement have a negative effect on housing expenditures for tenants. For some econometric specifications, this effect is significantly stronger than the one of income changes at other times. While this result suggests that the strict consumption-smoothing hypothesis is violated for the subgroup of non-home owners (60% in Germany), the effect is quantitatively small, which explains the ambiguity of previous findings.
    Keywords: consumption smoothing, retirement-consumption puzzle, SOEP
    JEL: C33 D91 E21
    Date: 2010
  4. By: Marcos Chamon; Kai Liu; Eswar S. Prasad
    Abstract: China’s household saving rate has increased markedly since the mid-1990s and the age-savings profile has become U-shaped during the 2000s. We find that rising income uncertainty and pension reforms help explain both of these phenomena. Using a panel of Chinese households covering the period 1989-2006, we document that strong average income growth has been accompanied by a substantial increase in income uncertainty. Interestingly, the permanent variance of household income remains stable while it is the transitory variance that rises sharply. A calibration of a buffer-stock savings model indicates that rising savings rates among younger households are consistent with rising income uncertainty and higher saving rates among older households are consistent with a decline in the pension replacement ratio for those retiring after 1997. We conclude that rising income uncertainty and pension reforms can account for over half of the increase in the urban household savings rate in China since the mid-1990s as well as the U-shaped age-saving profile.
    JEL: D91 E21 J3
    Date: 2010–12
  5. By: James Banks; Richard Blundell; Zoe Oldfield; James P. Smith
    Abstract: This paper examines geographic mobility and housing downsizing at older ages in Britain and America. Americans downsize housing much more than the British largely because Americans are much more mobile. The principal reasons for greater mobility among older Americans are two fold: (1) greater spatial distribution of geographic distribution of amenities (such as warm weather) and housing costs and (2) greater institutional rigidities in subsidized British rental housing providing stronger incentives for British renters not to move. This relatively flat British housing consumption with age may have significant implications for the form and amount of consumption smoothing at older ages.
    Date: 2010–09
  6. By: Alexandre Laurin (C.D. Howe Institute); William Robson (C.D. Howe Institute)
    Abstract: Fair-value accounting reveals Ottawa’s employee pension obligations to be larger and more volatile than official figures, a problem shared by European and US state governments. This exposes taxpayers to an unmeasured $65 billion funding shortfall. To keep pace with benefit accruals and stop the gap from growing, contributions in the latest fiscal year would have had to be almost double what was actually paid in. Taxpayers risk finding that the responsibility to back-fill the funding hole falls to them – and potentially finding that fears of sovereign defaults by governments with opaque balance sheets and big exposure to public employee pensions will drive up the cost of borrowing.
    Keywords: Pension Papers, fair-value accounting, Canadian public-sector pensions, defined-benefit (DB) plans
    JEL: H55
    Date: 2010–11
  7. By: Sproten, Alec; Diener, Carsten; Fiebach, Christian; Schwieren, Christiane
    Abstract: In an aging society, it becomes more and more important to understand how aging affects decision making. Older adults have to face many situations that require consequential financial decisions. In the present study, we examined the effects of aging on decisions in two domains of uncertainty: risk and ambiguity. For this purpose, a group of young and older adults played a card game which was composed of risky and ambiguous conditions. In the risk condition, participants knew the probabilities to win or loose the game (i.e. full information), whereas in the ambiguous condition, these probabilities were unknown (thus, there was lack of information). When confronted with risky decisions, the behaviour of older and young adults (measured by the number of times participants chose a gamble instead of a sure amount of money) did not differ. In contrast, under ambiguity, there were significant age-effects in decision making: older people were less ambiguity-averse than young subjects. We conclude that there exist differences in uncertainty-processing between young and older adults, and discuss possible explanations of these differences.
    Keywords: Age differences; experiment; risk and uncertainty
    JEL: J14 C91
    Date: 2010–12–03
  8. By: Judith Banister (Harvard School of Public Health); David E. Bloom (Harvard School of Public Health); Larry Rosenberg (Harvard School of Public Health)
    Keywords: Population aging, economic growth, China
    Date: 2010–03
  9. By: Carl-Johan Dalgaardy; Sebastian Vollmer (Harvard School of Public Health)
    Abstract: This study introduces physiological aging into a simple model of optimal in- tertemporal consumption. In this endeavor we draw on the natural science literature on aging. According to the purposed theory, the speed of the aging process and the time of death are endogenously determined by optimal health investments. At the same time, physiological aspects of the aging process infuence optimal savings and health investment. We calibrate the model for the average US male in 2000 and proceed to show that the calibrated model accounts well for the cross-country link between labor productivity and life expectancy in the same year (\the Preston curve"); cross-country income dierences can explain dierences in life expectancy at age 20 of up to a decade. Moreover, techno- logical change in health care of about 1.1% per year can account for the observed shift in the Preston curve between 1980 and 2000.
    Keywords: aging, death, optimal intertemporal consumption
    Date: 2010–07
  10. By: Oguro, Kazumasa; Shimasawa, Manabu; Aoki, Reiko; Oshio, Takashi
    Abstract: Our study employs an OLG model under which political strengths of different generations (the working and retirees with and without children) determine the distribution of the fiscal burden between the generations, including the future generation. We investigate the relationship between the extent of intergenerational altruism, the political regime, and the intergenerational distribution of the fiscal burden. We show that if the working generation were to care more about the utility of the retirees (their parents), cooperation between the working and retirees with children would be possible, changing the political outcome. As a result, the tax burden of the working generation would decrease and its members would be better off. Lowering the voting age and having parents vote on behalf of their children would also result in the same shift, but for higher levels of intergenerational altruism and the working generation’s political
    Keywords: Public debt, public deficit, OLG models, intergenerational altruism, Demeny voting method
    JEL: D64 E60 H63
    Date: 2010–11
  11. By: Fabrizio Orrego (Tepper School of Business Carnegie Mellon University)
    Abstract: During the twentieth century, the U.S. witnessed a cyclical birth rate. This in turn shaped the evolution of the ratio of middle-age to young adults, or MY ratio, which captures the stance of the population pyramid at any given time. In this paper, I study the effects of demographic change, as measured by the MY ratio, on stock prices and interest rates. I construct an equilibrium model in the spirit of Geanakoplos et al. (2004). The model relates the economic fortune of a cohort to its relative size (Easterlin hypothesis) and matches qualitatively the long-run trends in real interest rates and stock prices in the U.S. postwar era. The first prediction of the model is that the price-earnings ratio and stock prices should be in phase with the MY ratio. The second prediction is that real interest rates should move inversely with the MY ratio, except after the peak in the MY ratio. Unlike Geanakoplos et al. (2004), this model does not predict that stock prices should move inversely with real interest rates. On the contrary, this model shows that in a stationary cyclic equilibrium there may be independent movements in stock and bond prices, which are necessary to prevent arbitrage opportunities.
    Keywords: Overlapping generations, age structure, habits, consumption socialization
    Date: 2010–12
  12. By: James Banks; Richard Blundell; Zoe Oldfield; James P. Smith
    Abstract: This paper investigates the effects of housing price risk on housing choices over the life-cycle. Housing price risk can be substantial but, unlike other risky assets which people can avoid, the fact that most people will eventually own their home creates an insurance demand for housing assets early in life. The authors' contribution is to focus on the importance of home ownership and housing wealth as a hedge against future house price risk for individuals moving up the ladderÑpeople living in places with higher housing price risk should own their first home at a younger age, should live in larger homes, and should be less likely to refinance. These predictions are tested and shown to hold using panel data from the United States and Great Britain.
    JEL: D12 D91
    Date: 2010–09
  13. By: Engin Kara (Economics Department, University of Bristol, 8 Woodland Road, BS8 1TN, Bristol.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper develops a small-scale DSGE model which embeds a demographic structure within a monetary policy framework. We extend the tractable, though non-monetary overlapping-generations model of Gertler (1999) and present a small synthesis model which combines the set-up of Gertler with a New-Keynesian structure, implying that the short-run dynamics related to monetary policy are similar to the paradigm summarized in Woodford (2003). In sum, the model offers a New-Keynesian platform which can be used to investigate in a closed economy set-up the response of macroeconomic variables to demographic shocks, similar to technology, government spending or monetary policy shocks. Empirically, we use a calibrated version of the model to discuss a number of macroeconomic scenarios for the euro area with a horizon of around 20 years. The main finding is that demographic changes, while contributing slowly over time to a decline in the equilibrium interest rate, are not visible enough within the time horizon relevant for monetary policy-making to require monetary policy reactions. JEL Classification: D58, E21, E50, E63.
    Keywords: Demographic change, Monetary policy, DSGE modelling.
    Date: 2010–12

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