nep-age New Economics Papers
on Economics of Ageing
Issue of 2011‒01‒03
sixteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Assessing the sustainability of pension reforms in Europe By Grech, Aaron George
  2. Mortality transition and differential incentives for early retirement By d'Albis, Hippolyte; Lau, Paul; Sanchez-Romero, Miguel
  3. Income Uncertainty and Household Savings in China By Marcos Chamon; Kai Liu; Eswar Prasad
  4. Satisfaction with Social Contacts of Older Europeans By Bonsang Eric; Soest Arthur van
  5. Health and Retirement Effects in a Collective Consumption Model of Elderly Households By Aline Bütikofer; Arthur Lewbel; Shannon Seitz
  6. Does the Retirement Consumption Puzzle Differ Across the Distribution? By Fisher, Jonathan; Marchand, Joseph
  7. Optimal time of annuitization in the decumulation phase of a defined contribution pension scheme By Marina Di Giacinto; Bjarne Højgaard; Elena Vigna
  8. Understanding the Decline in Japan's Saving Rate in the New Millennium By Tokuo Iwaisako; Keiko Okada
  9. What is the cost of funded pension scheme (OFE) in Poland? By Michał Kempa
  10. Demography, credit and institutions: A global perspective By Arezki, Arezki
  11. Inequality of Opportunities in Health in Europe: Why So Much Difference Across Countries? By Jusot, F;; Tubeuf, S;; Trannoy, T;
  12. Activation Policies in Japan By Nicola Duell; David Grubb; Shruti Singh; Peter Tergeist
  13. Predicting Sustainable Retirement Withdrawal Rates Using Valuation and Yield Measures By Pfau, Wade Donald
  14. Asymmetric demographic shocks and institutions: The impact on international capital flows and welfare By Arezki, Rabah
  15. Does credit scoring produce a disparate impact? By Robert B. Avery; Kenneth P. Brevoort; Glenn B. Canner
  16. Consumption and time use over the life cycle By Michael Dotsey; Wenli Li; Fang Yang

  1. By: Grech, Aaron George
    Abstract: Spurred by the ageing transition, many governments have made wide-ranging reforms, dramatically changing Europe's pensions landscape. Nevertheless there remain concerns about future costs, while unease about adequacy is growing. This study develops a comprehensive framework to assess pension system sustainability. It captures the effects of reforms on the ability of systems to alleviate poverty and maintain living standards, while setting out how reforms change future costs and relative entitlements for different generations. This framework differs from others, which just look at generosity at the point of retirement, as it uses pension wealth - the value of all transfers during retirement. This captures the impact of both longevity and changes in the value of pensions during retirement. Moreover, rather than focusing only on average earners with full careers, this framework examines individuals at different wage levels, taking account of actual labour market participation. The countries analysed cover 70% of the EU’s population and include examples of all system types. Our estimates indicate that while reforms have decreased generosity significantly, in most, but not all, countries the poverty alleviation function remains strong, particularly where minimum pensions have improved. However, moves to link benefits to contributions have made some systems less progressive, raising adequacy concerns for women and those on low incomes. The consumption smoothing function of state pensions has declined noticeably, suggesting the need for longer working lives or additional private saving for individuals to maintain pre-reform living standards. Despite the reforms, the size of entitlements of future generations should remain similar to that of current generations, in most cases, as the effect of lower annual benefits should be offset by longer retirement. Though reforms have helped address the financial challenge faced by pension systems, in many countries pressures remain strong and further reforms are likely.
    Keywords: Social Security and Public Pensions; Retirement; Poverty; Retirement Policies
    JEL: H55 I38 J26
    Date: 2010–09
  2. By: d'Albis, Hippolyte; Lau, Paul; Sanchez-Romero, Miguel
    Date: 2010–12
  3. By: Marcos Chamon; Kai Liu; Eswar Prasad
    Abstract: China’s household saving rate has increased markedly since the mid-1990s and the age-savings profile has become U-shaped. 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-profile of savings.
    Keywords: Aging , China, People's Republic of , Economic models , External shocks , Income distribution , Pension reforms , Private savings , Private sector , Wages ,
    Date: 2010–12–13
  4. By: Bonsang Eric; Soest Arthur van (METEOR)
    Abstract: This paper analyses the determinants of an important component of well-being amongindividuals aged 50 years or older in eleven European countries: satisfaction with social contacts. We use data from the Survey of Health, Ageing and Retirement in Europe and anchoring vignettes to correct for potential differences in responses scales across countries and socio-demographic groups. On average, older Europeans report being satisfied with their social contacts, but there exist substantial differences across countries: respondents from Northern countries tend to be more satisfied than individuals from Central or Mediterranean countries. Our analysis shows that correcting for response scale differentials alters the country ranking for of satisfaction with social contacts, while it has much less effect on the estimates of what drives within country determinants.
    Keywords: Economics ;
    Date: 2010
  5. By: Aline Bütikofer (University of Bern); Arthur Lewbel (Boston College); Shannon Seitz (Boston College)
    Abstract: Using data on elderly individuals and couples, we estimate a collective model of household consumption of a variety of goods, showing how resources are shared between husband and wife, and how this allocation is affected by retirement and health status. We identify the extent to which shared consumption of some goods by elderly married couples reduces their costs of living relative to living alone. We also identify the fraction of household resources consumed by wives versus husbands, taking this jointness of some consumption into account. The results are relevant for household bargaining models and for a variety of welfare calculations.
    Keywords: Collective household models, Bargaining models, Retirement, Aging, Health, Equivalence scales, Indifference scales, Cost of Living, Consumption, Welfare
    JEL: D13 D12 I1 D6 C30
    Date: 2010–12–15
  6. By: Fisher, Jonathan (New York Census Research Data Center); Marchand, Joseph (University of Alberta, Department of Economics)
    Abstract: Previous research has repeatedly found a puzzling one-time drop in consumption at retirement at the mean or median. This study expands upon the previous work by examining these same retirement changes across the entire consumption distribution through the application of quantile regression techniques on data from the 1990-2007 Consumer Expenditure Survey. The evidence indicates gradually larger decreases in consumption across the distribution using several measures of consumption, with insignificant changes shown at lower deciles and the greatest drops occurring at the higher deciles.
    Keywords: retirement; life-cycle model; household consumption
    JEL: D12 D91 J26
    Date: 2010–12–01
  7. By: Marina Di Giacinto (University of Cassino); Bjarne Højgaard (Spar Nord Bank, Aalborg); Elena Vigna (Università degli studi di Torino, CeRP and Collegio Carlo Alberto)
    Abstract: In this paper, we consider the problem of finding the optimal time of annuitization for a retiree of a defined contribution pension scheme having the possibility of choosing her own investment and consumption strategy. We exploit the model introduced by Højgaard - Vigna (2010), who formulate the problem as a combined stochastic control and optimal stopping problem. They select a quadratic loss function that penalizes both the deviance of the running consumption rate from a desired consumption rate and the deviance of the final wealth at the time of annuitization from a desired target. We make extensive numerical investigations to address relevant issues such as optimal annuitization time, size of final annuity upon annuitization, extent of improvement when annuitization is not immediate and comparison between optimal annuitization and immediate annuitization. We find that the optimal annuitization time depends on personal factors such as the retiree's risk aversion and her subjective perception of remaining lifetime. It also depends on the financial market, via the Sharpe ratio of the risky asset. Optimal annuitization should occur a few years after retirement with high risk aversion, low Sharpe ratio and/or short remaining lifetime, and many years after retirement with low risk aversion, high Sharpe ratio and/or long remaining lifetime. Moreover, we show rigorously that with typical values of the model's parameters, a pension system where immediate annuitization is compulsory for all individuals is sub-optimal within this model. We measure the cost of sub-optimality in terms of loss of expected present value of consumption from retirement to death, and we find that the cost of sub-optimality, in relative terms, varies between 6% and 40%, depending on the risk aversion. This result gives an idea about the extent of loss in wealth suffered by a retiree who cannot choose programmed withdrawals, but is obliged to annuitize immediately on retirement all her wealth.
    Keywords: Dened contribution pension scheme, decumulation phase, optimal annuitization time, cost of sub-optimality.
    JEL: D91 G11 G23 J26
    Date: 2010–12–26
  8. By: Tokuo Iwaisako; Keiko Okada (Policy Research Institute)
    Abstract: The decline in Japan's household saving rate accelerated sharply after 1998, but then decelerated again from 2003. Such nonlinear movement in the saving rate cannot be explained by the monotonic trend of population aging alone. According to the life cycle model of consumption and saving, population aging will increase short-run fluctuations in the saving rate, because the consumption of older households is less sensitive to income shocks. Analyzing income and spending data for different age groups, we argue that this is exactly what happened during the recession following the banking panic of 1997/98. Two important changes in income distribution are associated with this mechanism. First, the negative labor income shock, which in the initial stages of the lost decade was mostly borne by the younger generation, spread to older working households in the late 1990s and early 2000s. Second, there was a significant income shift from labor to shareholders associated with the corporate restructuring being undertaken during this time. This resulted in a decline in the wage share, so that the increase in corporate saving offset the decline in household saving.
    Keywords: Japan's saving rate, household saving, life cycle model, corporate saving, Lost Decade
    JEL: E2 E6 J4
    Date: 2010
  9. By: Michał Kempa (Ministry of Finance in Poland)
    Abstract: Funded defined contribution (FDC) scheme (Open Pension Funds) was created in Poland in 1999. 37.4% of the pension contribution is redirected to FDC, while the rest remains in the public notional defined contribution (NDC) system. The FDC share of the contribution is relatively high compared to other countries with similar systems, especially given the currently high structural deficit of the NDC system. In 2010 roughly 1.6% of GDP will be transferred to FDC bringing the total value of transfers (including the cost of financing) to 16.5% of GDP. This cost was fully covered by the state budget. The magnitude of transfers begs the question on its limit and time framework. The transition period, during which the accumulation of the assets in FDC takes place, is still far from over. Only those born after 1968 were obliged to join FDC, which implies that the disbursements from the new system will remain insignificant until 2030s-2040s. To estimate the impact of the FDC on the public fund balance one needs to take into account both the loss of the pension contribution and lower future pension paid from the public NDC. In this article this was accomplished by comparing the simulated balance of the public pension fund in two scenarios: one based on current legislation and an alternative one, where the whole contribution remains in the public NDC system. The difference between the pension fund balance in those two scenarios constitutes the cost of introduction of the FDC. The results show that the FDC will incur cost (albeit very small) even at the end of analysis horizon (year 2060). Including the cost of finance, by 2060 the accumulated cost of transfers to FDC will have reached 94% of GDP.
    Keywords: Pension economics, pension finance, public finance
    JEL: H55 J26 G23
    Date: 2010–11–03
  10. By: Arezki, Arezki
    Abstract: This paper examines the role of age structure and its interaction with various capital market imperfections in driving international capital ows in an empirical framework. Using panel data covering the period 1970 to 2000 for up to 115 countries, results indicate the existence of a di¤erentiated e¤ect in the relationship between age structure and international capital flows. Good institutions allow for a differentiated impact of age structure on saving and investment, opening the scope for an impact of age structure in driving international capital flows. In contrast, bad institutions result in no e¤ect of age structure on international capital flows. Despite increased credit availability contributing to reduced aggregate saving, this will nevertheless magnify the role of the population age structure in driving international capital flows. Over the past three decades, age structure changes are estimated to have contributed to improve the current account position by five percent of GDP in more advanced aging countries. However, around the year 2020, population age structure changes are projected to deteriorate the current account position in the latter countries which will experience a drop in saving. In other regions, the faster the current aging process, the sharper the projected improvement in the current account position. This improvement is projected to reverse itself, at a later stage in time in regions with a slower aging process. Also, our results suggest that in order to take advantage of their younger population in the form of increased foreign capital inows, countries that are less advanced in the demographic transition would need to improve the quality of their institutional arrangements before the "window of opportunity" closes.
    Keywords: F2; F4
    JEL: F4 F2
    Date: 2010–12–25
  11. By: Jusot, F;; Tubeuf, S;; Trannoy, T;
    Abstract: Among inequalities in health, those which are explained by circumstances during childhood or parents' characteristics are recognized as inequalities of opportunities in health and are considered as the most unfair. Tackling health inequalities in later life and improving the underlying socioeconomic determinants for older people is at the core of the European Union healthy-ageing strategy. We use the 2004 Survey on Health Ageing and Retirement in Europe and examine the influence of social and family background on the probability of reporting a good self-assessed health in adulthood using logistic models in ten European countries. The comparison of the odds ratios associated with family background without and with adjustment for individual educational level and occupation allows assessing the direct influence of family background and its influence through the determination of individual social status. Using the Gini index, we evaluate the magnitude of inequalities of opportunities in health, regardless of the mechanism of transmission and consider it in comparison with several indicators of economic and sanitary conditions. Inequalities of opportunity are more marked in Mediterranean and Germanic countries than in Nordic and Benelux countries. For instance, they are twice more important in Spain than in Sweden. Whereas they are mainly explained by social reproduction in most countries a direct effect of fathers' occupation on adult health remains in Belgium, Germany, Italy and Spain. There are country-specific protective social backgrounds: son of agricultural workers in Belgium, and son of technicians or fathers in armed forces in Spain. Parents' longevity has a significant protective effect on adult health. Differences in inequalities of opportunities in health between European countries emphasize the importance of policies reducing either social reproduction or intergenerational reproduction of health.
    Keywords: Europe; equality of opportunity; inequality in health; intergenerational transmission; older adults; Gini index
    JEL: D63 I12
    Date: 2010–10
  12. By: Nicola Duell; David Grubb; Shruti Singh; Peter Tergeist
    Abstract: The Japanese labour market is characterised by high employment rates for men and older workers, and a low unemployment rate. Over the past two decades, female participation has risen, while disparities in the labour market conditions of workers have grown. Further efforts are needed to promote increases in female and older-worker employment rates so as to combat the trend decline in the working-age population, and to reduce dualism in the labour market.<BR>Le marché du travail japonais est caractérisé par des taux d’emploi de travailleurs masculins et de travailleurs âgés élevés ainsi que d’un taux de chômage bas. Au cours des deux dernières décennies le taux d’activité des femmes a augmenté, alors que pour l’ensemble des travailleurs les disparités des conditions du marché du travail se sont accentuées. Des efforts supplémentaires sont nécessaires pour augmenter davantage les taux d’emploi des femmes et des travailleurs âgés, afin de faire face à la baisse de la population en âge de travailler, et réduire le dualisme du marché du travail.
    JEL: H53 H83 I38 J08 J63 J65 J68
    Date: 2010–12–07
  13. By: Pfau, Wade Donald
    Abstract: This study attempts to quantify whether a 4 percent withdrawal rate can still be considered as safe for U.S. retirees in recent years when earnings valuations have been at historical highs and the dividend yield has been at historical lows. We find that the traditional 4 percent withdrawal rule is likely to fail for recent retirees. The maximum sustainable withdrawal rate (MWR) for retirees may continue declining even after the peak in earnings valuations in 2000. Our lowest point estimate for an MWR with a 60/40 allocation between stocks and bonds is 1.46 percent for new retirees in 2008. We also discuss confidence intervals for these predictions. The regression framework with variables to predict long-term stock returns, bond returns, and inflation (the components driving the retiree's remaining portfolio balance) produces estimates that fit the historical data quite well, and we use backtesting for a further robustness check. Nevertheless, there are important qualifications for these predictions. In particular, they depend on out-of-sample estimates as the circumstances of the past 15 years have not been witnessed before, and there is always potential for structural changes which could leave recent retirees in better shape than suggested by the model. Looking forward, this methodology can guide new retirees toward a reasonable range for their MWR so that the 4 percent rule need not be blindly followed.
    Keywords: safe withdrawal rates; retirement planning; market valuation; price-earnings ratio; dividend yield. stock returns; bond returns
    JEL: G11 C20 N22 D14
    Date: 2010–12–16
  14. By: Arezki, Rabah
    Abstract: This paper examines the consequences of an asymmetric negative fertility shock on capital formation, saving/investment imbalance, and welfare. The framework of analysis is a Diamond-type overlapping-generations small open economy with capital market imperfection. The capital market imperfection is modelled through a symmetric wedge between foreign investor and domestic investor return on capital. The shock is transmitted to the small open economy depending on whether the wedge is below a given threshold. If the wedge is not too high, capital first flows in the small open economy to exploit the di¤erence in returns on capital. After the shock has occurred, capital is repatriated in order to …nance the old age consumption of rest of the world investors. If capital flows internationally, lifetime utility in the small open economy decreases unambiguously for individuals born one period before the shock occurs. Provided that the small open economy is initially below its golden rule, individuals born after the time the shock has occurred experience an increase in their lifetime utility.
    Keywords: population aging; capital market imperfection; open economy; capital flows; welfare
    JEL: H55 F32 J10 F21
    Date: 2010–12–25
  15. By: Robert B. Avery; Kenneth P. Brevoort; Glenn B. Canner
    Abstract: The widespread use of credit scoring in the underwriting and pricing of mortgage and consumer credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By "disparate impact" we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership. Using a unique source of data that combines a nationally representative sample of credit bureau records with demographic information from the Social Security Administration and a demographic information company, we examine the extent to which credit history scores may have such a disparate impact. Our examination yields no evidence of disparate impact by race (or ethnicity) or gender. However, we do find evidence of limited disparate impact by age, in which the use of variables related to an individual's credit history appear to lower the credit scores of older individuals and increase them for the young.
    Date: 2010
  16. By: Michael Dotsey; Wenli Li; Fang Yang
    Abstract: The authors incorporate home production in a dynamic general equilibrium model of consumption and saving with illiquid housing and a collateralized borrowing constraint. They show that the model is capable of explaining life-cycle patterns of households' time use and consumption of different categories. Specifically, households' market hours and home hours are fairly stable early in the life cycle. Market hours start to decline sharply at age 50, while home hours begin to increase at age 55. Households' consumption of the market good, home input, and housing services all exhibit hump shapes over the life cycle, with the market good having the most pronounced hump, followed by the home input, and then housing services. A plausibly parameterized version of the authors' model predicts that the interaction of the labor efficiency profile and the availability of home production technology explain households' time use over the life cycle. The resulting income profiles, the endogenous borrowing constraint and the presence of home production account for the initial hump in all three consumption goods. The consumption profiles in the second half of the life cycle are mostly driven by the complementarity of home hours, home input, and housing in home production.
    Keywords: Consumption (Economics) ; Production (Economic theory)
    Date: 2010

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