nep-age New Economics Papers
on Economics of Ageing
Issue of 2011‒03‒19
ten papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. How Powerful is Demography? The Serendipity Theorem Revisited By David De La Croix; Pierre Pestieau; Grégory Ponthière
  2. Economy wide risk diversification in a three-pillar pension system By Cai Cai Du; Joan Muysken; Olaf Sleijpen
  3. Pensions, Household Saving, and Welfare: A Dynamic Analysis By Blau, David M.
  4. Senior activity rate, retirement incentives, and labor relations By Blake, Hélène; Sangnier, Marc
  5. Choosing between subsidized or unsubsidized private pension schemes: a random parameters bivariate probit analysis By Pfarr, Christian; Schneider, Udo
  6. Asymptotic age structures and intergenerational trade By Grégory Ponthière
  7. Optimal Aging and Death: Understanding the Preston Curve By Carl-Johan Dalgaard; Holger Strulik
  8. Economic Rationality, Risk Presentation, and Retirement Portfolio Choice. By Bateman, Hazel; Ebling, Christine; Geweke, John; Jordan, Louviere; Stephen, Satchell; Susan, Thorp
  9. Time Compression By Aadland, David; Shaffer, Sherrill
  10. The Potential Savings to Social Security from Means Testing By Dean Baker; Hye Jin Rho

  1. By: David De La Croix (CORE - Department of Economics - Université Catholique de Louvain); Pierre Pestieau (CREPP - Center of Research in Public Economics and Population Economics - Université de Liège, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain, CEPR - Center for Economic Policy Research - CEPR, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris); Grégory Ponthière (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris)
    Abstract: Introduced by Samuelson (1975), the Serendipity Theorem states that the competitive economy will converge towards the optimum steady-state provided the optimum population growth rate is imposed. This paper aims at exploring whether the Serendipity Theorem still holds in an economy with risky lifetime. We show that, under general conditions, including a perfect annuity market with actuarially fair return, imposing the optimum fertility rate and the optimum survival rate leads the competitive economy to the optimum steady-state. That Extended Serendipity Theorem is also shown to hold in economies where old adults work some fraction of the old-age, whatever the retirement age is fixed or chosen by the agents.
    Keywords: serendipity Theorem ; fertility ; mortality ; overlapping generations ; retirement
    Date: 2011–03–09
  2. By: Cai Cai Du; Joan Muysken; Olaf Sleijpen
    Abstract: We model a three-pillar pension system and analyse in this context the impact of exogenous shocks on an open economy, using an overlapping generations model where individuals live for two periods. The three-pillar pension system consists of (1) a PAYG pension system, (2) a defined benefit pension fund, and (3) private savings. The economy is exposed to an ageing trend, inflation and a stock market crash. We show that in the three-pillar pension system the impact of these shocks on the economy is mitigated when compared to a two- pillar system, since each shock has a different impact on the three pillars. In order to illustrate the working of the model with respect to the impact of these shocks, both in magnitude and the development over time, we provide simulation results for the Netherlands.
    Date: 2011–03
  3. By: Blau, David M. (Ohio State University)
    Abstract: Empirical analyses of the effects of public and private pensions on household saving impose strong assumptions in order to obtain a tractable empirical model: fixed retirement and pension claiming ages, no borrowing constraint, little or no uncertainty, and no institutional restrictions on pension claiming. I specify a richer version of the life cycle model that relaxes these assumptions. I calibrate, solve, and simulate the model and use the results to study three issues: (1) How much household wealth is crowded out by pensions? (2) Can linear regression analysis accurately estimate the magnitude of crowdout when the assumptions used in the empirical analysis are invalid? (3) How valuable are pensions to households? Simulation results indicate that private pensions in the US crowd out less than $0.15 of household saving per dollar of pension wealth. Crowdout by Social Security is larger at $0.33, but far smaller than the one-for-one offset predicted by a stylized version of the life cycle model. Regression estimates of crowdout using the simulated data are systematically larger than simulated crowdout, indicating that empirical estimates of crowdout are quite sensitive to the assumptions required in order to use the regression approach. The welfare analysis implies that, conditional on Social Security, DB pensions are worth less than their expected present discounted value to households, while DC pensions are worth more than their dollar value. In the absence of a private pension, Social Security is worth 50% more to households than its expected dollar value.
    Keywords: pensions, saving, retirement
    JEL: J26
    Date: 2011–03
  4. By: Blake, Hélène; Sangnier, Marc
    Abstract: In order to face the aging of their populations governments of developed countries reformed their retirement systems during the last two decades, by discouraging early retirement and increasing incentives to work for older workers. Senior participation rates to the labor force not only differ strikingly in level from one country to another, they also differ in their reaction to retirement incentives set by governments. This paper highlights how disutility to work can merely influence the effectiveness of such reforms. The authors build a highly stylized model according to which the reaction of senior activity rate to monetary incentives to work depends on the properties of the specific distribution of working conditions in the country. Second, taking the quality of labor relations as a proxy for working conditions, the authors show empirically that aggregate reactions to retirement incentives depend on the distribution of labor relations at country level. They use panel data for nineteen OECD countries from 1980 to 2004. They show that the elasticity of senior male labor force participation rate to retirement incentives is stronger in countries with better and more homogeneously distributed labor relations. --
    Keywords: early retirement incentives,labor relations,senior activity rate
    JEL: J14 J26 Z10
    Date: 2011
  5. By: Pfarr, Christian; Schneider, Udo
    Abstract: In 2002, the German government tried to increase private old-age provisions by introducing incentives such as supplementary subsidies and tax credits. Since then, the so-called “Riester pension” has grown in popularity. Apart from subsidized pension plans, unsubsidized private pension insurances as an instrument for old-age have been enormously important for a long time. With data for the years 2005 to 2009 from the German SAVE study, we analyze whether the decision for a “Riester pension” is independent of the decision for unsubsidized private pension insurance using methods for simultaneous equations. Our estimation results indicate that decisions on “Riester” and private pensions are not independent and the proposed random-parameters bivariate probit model results in efficiency gains compared to single probit estimations. Regarding governmental subsidies, we find positive incentive effects of child subsidies whereas low income earners are not induced to increase their old-age provisions. Further, there is strong evidence for a “crowding-in” among alternative assets as well as a significant effect of demand inducement. Finally, considering the saving motives, individuals do not take a “Riester pension” because of securing pension payments only but to pick up granted subsidies.
    Keywords: subsidized pension; saving incentives; bivariate probit panel
    JEL: H31 D12 I38
    Date: 2011–03–07
  6. By: Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: While demographers Lotka (1939) and Lopez (1961) proposed conditions on (exogenous) fertility and mortality laws under which populations with distinct initial age structures exhibit the same asymptotic age structure, this paper re-examines the issues of age structure stabilization and convergence, by considering a population whose fertility and mortality are endogenously determined in the economy. For that purpose, we develop a three-period OLG model where human capital accumulation and intergenerational trade affect fertility and longevity. It is shown that the age structure must converge asymptotically towards a stable structure, whose form depends on the structural parameters of the economy. Moreover, populations with distinct initial age structures will end up with the same long-run age structure when fertility and mortality laws are converging, which requires converging terms of trade between coexisting generations in the different populations under study.
    Keywords: age structure ; OLG model ; fertility ; mortality ; demographic transition ; intergenerational trade
    Date: 2011–03–09
  7. By: Carl-Johan Dalgaard (Department of Economics, University of Copenhagen); Holger Strulik (University of Hannover)
    Abstract: The present study examines whether the Preston curve reflects a causal impact of income on longevity or, for example, factors correlated with both income and life expectancy. In order to understand the Preston curve better, we develop a model of optimal intertemporal consumption in which the representative consumer is subject to physiological aging. In modeling aging we draw on recent research in the fields of biology and medicine. The speed of the aging process, and thus the time of death, are endogenously determined by optimal health investments. We calibrate the model to US data and proceed to show that the model accounts for nearly 80% of the cross-country differences in life expectancy that the Preston curve captures.
    Keywords: aging; longevity; health investments; savings; Preston curve
    JEL: D91 J17 J26 I12
    Date: 2010–07
  8. By: Bateman, Hazel; Ebling, Christine; Geweke, John; Jordan, Louviere; Stephen, Satchell; Susan, Thorp
    Abstract: This research studies the propensity of individuals to violate implications of expected utility maximization in allocating retirement savings within a compulsory de- …ned contribution retirement plan. The paper develops the implications and describes the construction and administration of a discrete choice experiment to almost 1200 members of Australias mandatory retirement savings scheme. The experiment …nds overall rates of violation of roughly 25%, and substantial variation in rates, depend- ing on the presentation of investment risk and the characteristics of the participants. Presentations based on frequency of returns below or above a threshold generate more violations than do presentations based on the probability of returns below or above thresholds. Individuals with low numeracy skills, assessed as part of the ex-periment, are several times more likely to violate implications of the conventional expected utility model than those with high numeracy skills. Older individuals are substantially less likely to violate these restrictions, when risk is presented in terms of event frequency, than are younger individuals. The results pose significant questions for public policy, in particular compulsory de…ned contribution retirement schemes, where the future welfare of participants in these schemes depends on quantitative decision-making skills that a signi…cant number of them do not possess.
    Keywords: discrete choice; retirement savings; investment risk; household finance; financial literacy
    JEL: G23 G28 D14
    Date: 2011–12
  9. By: Aadland, David; Shaffer, Sherrill
    Abstract: Economists have generally ignored the notion that perceived time may differ from clock time. Borrowing from the behavioral psychology literature, we investigate the case of time compression whereby perceived time passes more quickly than actual time. A framework is presented to embed time compression in economic models. We then apply the principle to a standard lifecycle permanent income model with endogenous labor. Time compression provides an alternative explanation of why older individuals, even those without declining labor productivity, may choose to reduce their work effort.
    Keywords: Time Compression; Discounting; Lifecycle Permanent Income Model; Retirement
    JEL: D91
    Date: 2010–10–01
  10. By: Dean Baker; Hye Jin Rho
    Abstract: Many people in policy debates have argued that means testing, or reducing Social Security payments to affluent beneficiaries, can be an effective way to save money for the program and to reduce the federal budget deficit. This paper examines the feasibility of saving money through various types of means tests and suggests that is likely to be very limited unless the means test is applied to individuals who are very much middle class by any reasonable definition. The percentage of benefits that go to affluent seniors is too small to make very much difference to the program’s finances.
    Keywords: social security, retirement, means testing
    JEL: H H5 H55
    Date: 2011–03

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.