nep-age New Economics Papers
on Economics of Ageing
Issue of 2011‒02‒26
eighteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Assessing the sustainability of pension reforms in Europe By Aaron George Grech
  2. Private wealth and planned early retirement: A panel data analysis for the Netherlands 1994-2009 By Mauro Mastrogiacomo; Rob Euwals
  3. Macroeconomic Effects of Public Pension Reforms By Anita Tuladhar; Philippe D Karam; Dirk Muir; Joana Pereira
  4. Tracing the Origins of Successful Aging: The Role of Childhood Conditions and Societal Context By Brandt, Martina; Deindl, Christian; Hank, Karsten
  5. Self-Employment around Retirement Age By Stefan Hochguertel
  6. Population Aging, the Composition of Government Spending,and Endogenous Economic Growth in Politico-Economic Equilibrium By Kuehnel, Johanna
  7. Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle By Pfau, Wade Donald
  8. The Transition from Work to Retirement By Eichhorst, Werner
  9. Job Search Requirements for Older Unemployed: Transitions to Employment, Early Retirement and Disability Benefits By Hans Bloemen; Stefan Hochguertel; Marloes Lammers
  10. Macroeconomic Aspects of Italian Pension Reforms of 1990s By Tetyana Dubovyk
  11. The Economics of State and Local Public Pensions By Jeffrey R. Brown; Robert Clark; Joshua Rauh
  12. The Origins and Severity of the Public Pension Crisis By Dean Baker
  13. Social Security Tax and Endogenous Technical Change in an Economy with an Aging Population By Codrina Rada
  14. Are older workers overpaid? A literature review By Daniel van Vuuren; Paul de Hek
  15. Stress Tests for Defined Benefit Pension Plans - A Primer By Gregorio Impavido
  17. Pension awareness and nation-wide auto-enrolment: the Italian experience By Ambrogio Rinaldi
  18. Retirement Choices in Italy: What an Option Value Model tells us By Michele Belloni; Rob Alessie

  1. By: Aaron George Grech
    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: Mauro Mastrogiacomo; Rob Euwals
    Abstract: We study the causal relation between private wealth and retirement age. We propose two estimation strategies based on expected retirement age.
    JEL: C23 J26
    Date: 2010–11
  3. By: Anita Tuladhar; Philippe D Karam; Dirk Muir; Joana Pereira
    Abstract: The paper explores the macroeconomic effects of three public pension reforms, namely an increase in retirement age, a reduction in benefits and an increase in contribution rates. Using a five-region version of the IMF‘s Global Integrated Monetary and Fiscal model (GIMF), we find that public pension reforms can have a positive effect on growth in both the short run, propelled by rising consumption, and in the long run, due to lower government debt crowding in higher investment. We also find that a reform action undertaken cooperatively by all regions results in larger output effects, reflecting stronger capital accumulation due to higher world savings. An increase in the retirement age reform yields the strongest impact in the short run, due to the demand effects of higher labor income and in the long run because of supply effects.
    Keywords: Aging , Asia , Cross country analysis , Developed countries , Emerging markets , Euro Area , Fiscal policy , Monetary policy , Pension reforms , Pensions , Public sector , United States ,
    Date: 2010–12–22
  4. By: Brandt, Martina; Deindl, Christian; Hank, Karsten (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: This study investigates the role of childhood conditions and societal context in older Europeans’ propensity to age successfully, controlling for later life risk factors. Successful aging was assessed following Rowe and Kahn’s conceptualization, using baseline interviews from the first two waves of the Survey of Health, Ageing and Retirement in Europe (SHARE). These data were merged with retrospective life-histories of participants from 13 Continental European countries, collected in 2008-09 as part of the SHARELIFE project. Our sample consists of 22,474 men and women, who are representative of the non-institutionalized population aged 50 or older (mean age: 63.3) in their respective country. Estimating multilevel logistic models, we controlled for demographics (age, sex), childhood conditions (SES, health, cognition), later life risk factors (various dimensions of SES and health behaviors), as well as country-level measures of public social expenditures and social inequality. There is an dependent association of childhood living conditions with elders’ odds of aging well. Higher parental SES, better math and reading skills, as well as self-reports of good childhood health were positively associated with successful aging, even if contemporary characteristics were controlled for. Later-life SES and health behaviors exhibited the expected correlations with our dependent variable. Moreover, higher levels of public social expenditures and lower levels of income inequality were associated with a greater probability to meet Rowe and Kahn’s successful aging criterion. We conclude that unfavorable childhood conditions exhibit a harmful influence on individuals’ chances to age well across all European welfare states considered in this study. Policy interventions should thus aim at improving the conditions for successful aging throughout the entire life-course.
    Date: 2011–02–15
  5. By: Stefan Hochguertel (VU University Amsterdam, and Netspar)
    Abstract: This paper uses panel data from the pan-European SHARE survey to study labor market behavior of older male self-employed vis-a-vis wage employed workers. We find the self-employed to work longer hours, to be more flexible in their hours allocation, and to retire later in all countries. We relate these differences in observed behavior to individual characteristics, economic resources, and to documented cross-national variation in labor market and social security institutions. Differential incentives matter for the retirement behavior of the self-employed. We also provide evidence of the self-employed not wanting to retire as early as possible, and contrast these expectation data with realized retirement transitions. The overall picture that emerges is that older self-employed have a very strong labor market attachment and they use their degrees of freedom to work more and retire later accordingly.
    Keywords: self-employment; labor supply; retirement; pensions; Europe; institutions
    JEL: J14 J22 J26 L26
    Date: 2010–07–13
  6. By: Kuehnel, Johanna
    Abstract: This paper introduces a democratic voting process into an OLG economy in order to analyze the effects of a rising old-age dependency ratio on the composition of government spending and endogenous economic growth. Forward-looking agents vote each period on the public policy mix between productive government expenditure and public consumption spending that benefits the elderly. Population aging shifts political power from the young to the old. While this does not affect public productive expenditure, it leads to an increase in public spending on the elderly and a slowdown in economic growth. However, the overall effect on long-term economic growth is positive. This is due to reduced capital dilution or increased saving.
    Keywords: Demographics; Endogenous Economic Growth; Government Spending; Markov Perfect Equilibrium; Probabilistic Voting
    JEL: D72 E62 O41
    Date: 2011–02–17
  7. By: Pfau, Wade Donald
    Abstract: Focusing on a “safe withdrawal rate” and then deriving a “wealth accumulation target” to achieve by the retirement date is the wrong way to think about retirement planning. Such a formulation isolates the working (accumulation) and retirement (decumulation) phases. When considered together, the lowest sustainable withdrawal rates (which give us our idea of the safe withdrawal rate) tend to follow prolonged bull markets, while the highest sustainable withdrawal rates tend to follow prolonged bear markets. The focus of retirement planning should be on the savings rate rather than the withdrawal rate. The “safe savings rate” may be based on historical simulations as the savings rate which proves sufficient to support the desired retirement expenditures from a lifecycle perspective including both the accumulation and decumulation phases. Safe savings rates derived in this manner are less volatile than withdrawal rates and imply a lower ex-post cost to having been overly conservative. Unlike the 4 percent rule, there is not a universal "safe savings rate," but guidelines can be created. Starting to save early and consistently for retirement at a reasonable savings rate will provide the best chance to meet retirement expenditure goals. Actual withdrawal rates and wealth accumulations at retirement may be treated as almost an afterthought in this framework. But the savings plan should be adhered to regardless of whether it seems one is accumulating either more or less wealth than is needed based on traditional criteria.
    Keywords: safe withdrawal rates; retirement planning; lifetime perspective; safe savings rate; wealth accumulation targets; retirement spending goals; SAFEMAX; SAFEMIN
    JEL: G11 N22 C15 N21 D14
    Date: 2011–02–11
  8. By: Eichhorst, Werner (IZA)
    Abstract: The European Employment Strategy has set the goal of raising the retirement age of workers in the EU through a strategy of "active ageing". Yet despite some progress over the last decade, empirical data show persistent diversity across EU member states. Institutional arrangements of social and labor market policies can be seen as the core factors behind cross-national diversity. Hence, institutional change is crucial to explain structural changes. The paper tries to assess the role of supranational policy initiatives and national politico-economic factors in shaping the transition from work to retirement in EU member states which is still governed by the national political economy. Taking the German case as an example in point, the paper shows the dynamic interaction between policy changes, in particular in benefit systems and activation, and changes in the approach of firms and workers to early retirement. Policy changes influence actors’ behavior in the medium run and open up opportunities for subsequent reforms.
    Keywords: early retirement, older workers, Germany, European Employment Strategy
    JEL: J14 J26
    Date: 2011–02
  9. By: Hans Bloemen (VU University Amsterdam); Stefan Hochguertel (VU University Amsterdam); Marloes Lammers (VU University Amsterdam)
    Abstract: In this paper, we use a recent policy change in the Netherlands to study how changes in search requirements for the older unemployed affect their transition rates to employment, early retirement and sickness/disability benefits. The reform, becoming effective on January 1st 2004, required the elderly to formally report their job search efforts to the employment office in order to avoid a (temporary) cut in benefits. Before the new law was passed, unemployed were allowed to stop all search activity at the moment they turned 57.5. Estimating various duration models using difference-in-difference and regression discontinuity approaches, we find that for several groups of individuals that were affected by the policy change, the stricter search requirements did significantly increase their entry rate into employment. However, we also find evidence of a higher outflow to sickness/disability insurance schemes, a presumably unwanted side-effect of the policy change.
    Keywords: Duration Analysis; Policy Evaluation; Search effort; Substitution
    JEL: C31 J26 J64 J68
    Date: 2011–01–13
  10. By: Tetyana Dubovyk (CeRP-Collegio Carlo Alberto)
    Abstract: In 1990s, several pension reforms had been adopted to insure financial sustainability of Italian Social Security system. This paper studies two main features of Amato and Dini reforms: (i) adoption of notional defined contributions formula; (ii) price indexation of benefits as compared to wage indexation prior to 1992. As the reforms envision a long phase-in period, I consider the effect of the reforms on different generations. This paper studies household decisions and welfare consequences of the reforms using general equilibrium overlapping generations framework. The major focus is on time allocation and human capital accumulation decisions of transition generations. The economic and demographic structure of the economy is calibrated to (i) Italian macroeconomic variables in 1992, (ii) observed earnings profiles in Survey of Household Income and Wealth by Banca d'Italia (SHIW). The reforms decrease financial obligations of the pension system. The paper quantifies the effect of the reforms on transition generations.
    Date: 2010–11
  11. By: Jeffrey R. Brown; Robert Clark; Joshua Rauh
    Abstract: This paper provides an overview of an economics-based perspective on the financial aspects of state and local public pensions in the U.S. Drawing on the research commissioned for an NBER research program on this topic, we discuss the large degree to which public pension liabilities exceed the assets set aside to fund them. We summarize issues related to the optimality of pre-funding, portfolio allocation, the discounting of liabilities, as well as how plans operate in practice. We also lay out an agenda for future research related to financial aspects of public pensions, retiree health plans for public employees, as well as issues related to plan design and labor market outcomes.
    JEL: G18 G23 H55 H7
    Date: 2011–02
  12. By: Dean Baker
    Abstract: There has been considerable attention given in recent months to the shortfalls faced by state and local pension funds. Using the current methodology of assessing pension obligations, the shortfalls sum to nearly $1 trillion. Some analysts have argued that by using what they consider to be a more accurate methodology, the shortfalls could be more than three times this size. Based on these projections, many political figures have argued the need to drastically reduce the generosity of public sector pensions, and possibly to default on pension obligations already incurred. This paper shows: * Most of the pension shortfall using the current methodology is attributable to the plunge in the stock market in the years 2007-2009. * The argument that pension funds should only assume a risk-free rate of return in assessing pension fund adequacy ignores the distinction between governmental units, which need be little concerned over the timing of market fluctuations, and individual investors, who must be very sensitive to market timing. * The size of the projected state and local government shortfalls measured as a share of future gross state products appear manageable.
    Keywords: pension funds, pensions
    JEL: H H5 H55
    Date: 2011–02
  13. By: Codrina Rada
    Abstract: This paper presents a classical model of economic growth which incorporates class conflict and induced technological change to show how demographic changes can affect future income distribution and production relations in industrialized countries. Specifically, I use an extended real wage Phillips curve to account for the effects of a social security tax on income distribution and therefore on capital accumulation and employment. In this framework output growth is determined from the supply side by available savings. Analytical and simulation results indicate that the sustainability of an economy with fast population aging over transient paths hinges upon improvements in labor productivity, hence, the specific mechanism of technical progress in place.
    Keywords: Population aging; Social security tax; Endogenous technical change
    JEL: E62 E24 O30
    Date: 2011
  14. By: Daniel van Vuuren; Paul de Hek
    Abstract: It is widely believed that wage and productivity profiles of individual workers do not coincide at all ages. We give an overview of the theories which provide a rationale for this, and discuss the empirical literature.
    JEL: J24 J31 J33 J51 J62
    Date: 2010–12
  15. By: Gregorio Impavido
    Abstract: Stress testing is a useful and increasingly popular, yet sometimes misunderstood, method of analyzing the resilience of financial systems to adverse events. This paper aims to help demystify stress tests and illustrate their strengths and weaknesses. Using an Excel-based template with institution-specific data, readers are walked through the basics of liability valuation and stress testing of assets and liabilities of a typical defined benefit plan.
    Keywords: Economic models , Pension regulations , Pension supervision , Pensions ,
    Date: 2011–02–03
  16. By: Brandt, Martina (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: The comparative analysis of intergenerational support patterns based on SHARE, the Survey of Health, Ageing, and Retirement in Europe, with about 30.000 respondents from eleven European countries reveals a distinct geographical distribution of private support patterns: In Northern Europe help between parents and children is very common, but typically little time-consuming. The contrary is true for Southern Europe, where comparably few support relations are very intense in terms of time. Central Western Europe lies in-between with average transfer rates and intensities. Using multilevel modeling, these different support patterns can be explained by the prevalence of public assistance according to the specialization hypothesis: With increased public transfers and social services, sporadic help is more likely (crowding in), and less time consuming support between generations (crowding out) occurs. Accordingly, most support is provided voluntarily in Northern Europe, whereas it is more often perceived as obligatory in Continental and Mediterranean countries.
    Date: 2011–02–15
  17. By: Ambrogio Rinaldi (Covip and OECD)
    Abstract: The paper discusses the Italian experience in developing its system of private, supplementary pensions, as a case study of the implementation of nation-wide auto-enrolment mechanisms; in the discussion, attention is devoted to pension awareness issues. Auto-enrolment (i.e. the automatic enrolment of workers in a private pension plan, with the individual allowed to opt out) can be seen as an effective means to increase participation in supplementary pension plans, as the process of raising pension awareness is slow, and mandatory participation may be distortive of individuals’ preferences and politically unfeasible. The paper summarizes the reasons for the limited success of auto-enrolment in Italy. Besides the importance of country-specific structural issues, the need for an overall, coherent, pension strategy is underlined, together with a consistent use of the different policy instruments available: not only in order to achieve the desired membership targets, but also as a prerequisite for effective awareness campaigns and education efforts. In addition, the importance is emphasized of a balance of responsibilities between the individual, the State, and intermediate bodies (such as social partners), with appropriate default options that should back-up the individual when he/she is unable or unwilling to choose; default options are important not only because they gently force individuals to “take” the right decisions, but also as complements to education and information efforts, because they convey information and advice in a simple and effective way.
    Date: 2011–02
  18. By: Michele Belloni (CeRP, Collegio Carlo Alberto, Italy); Rob Alessie (University of Groningen, Netspar, the Netherlands)
    Abstract: Using Italian data, we estimate an option value model to quantify the effect
    Keywords: retirement; option value model; dynamic self-selection; unobserved preference heterogeneity
    JEL: J26 H55 C33 C34 C35
    Date: 2010–10–14

This nep-age issue is ©2011 by Claudia Villosio. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.