nep-age New Economics Papers
on Economics of Ageing
Issue of 2011‒08‒29
seventeen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Do Defined Contribution Pensions Correct for Short-Sighted Savings Decisions? Evidence from the UK By Van de Ven, Justin
  2. Does Raising the Retirement Age Increase Employment of Older Workers? By Staubli, Stefan; Zweimüller, Josef
  3. Pension reform and income inequality among the elderly in 15 European countries By Van Vliet, Olaf; Been, Jim; Caminada, Koen; Goudswaard, Kees
  4. Nonparametric Evidence on the Effects of Financial Incentives on Retirement Decisions By Dayanand S. Manoli; Andrea Weber
  5. Sustainable social security: four options By Sagiri Kitao
  6. Financial Literacy, Retirement Planning, and Household Wealth By Maarten van Rooij; Annamaria Lusardi; Rob J. Alessie
  7. Does it pay to be productive ?The case of age groups By Alessandra Cataldi; Stephan K. S. Kampelmann; François Rycx
  8. Upgrading investment regulations in second pillar pension systems : a proposal for Colombia By Castaneda, Pablo; Rudolph, Heinz P.
  9. Quality of work and health status: a multidimensional analysis By Tindara Addabbo; Marco Fuscaldo; Anna Maccagnan
  10. A Framework for Pension Policy Analysis in Ireland: PENMOD, a Dynamic Simulation Model By Callan, Tim; Van de Ven, Justin
  11. Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice By Ralph Koijen; Stijn Van Nieuwerburgh; Motohiro Yogo
  12. The Effects of Downturns on Labour Force Participation: Evidence and Causes By Romain Duval; Mehmet Eris; Davide Furceri
  13. Old-age Social Security vs. Forward Intergenerational Public Goods Provision By Ryo Arawatari; Tetsuo Ono
  14. WP 99 - Pension fund governance. The intergenerational conflict over risk and contributions By David Hollanders; Bersem, M.
  15. Was What Ail'd Ya' What Kill'd Ya'? By Robert W. Fogel; Louis Cain; Joseph Burton; Brian Bettenhausen
  16. Relative Cohort Size, Relative Income, and Women's Labor Force Participation 1968-2010 By Macunovich, Diane
  17. Working Paper 22-10 - Adéquation des pensions et coût budgétaire du vieillissement: impacts de réformes et de scénarios alternatifs By Greet De Vil; Gijs Dekkers; Raphael Desmet; Marie-Jeanne Festjens

  1. By: Van de Ven, Justin
    Abstract: Estimates for a structural model of savings and labour supply calculated on UK field data support the hypothesis of quasi-hyperbolic discounting. The estimated model indicates that a DC pension encourages increased saving and labour supply prior to pension age, and substantially reduced labour supply thereafter. These results are exaggerated when preferences are myopic. Welfare responses at the beginning of life to the DC pension improve with the extent of myopia, and with the return to the pension asset. Myopia represents an important factor in determining whether the DC pension results in a positive welfare response at plausible parameter values.
    Keywords: myopia,pension,saving,retirement/labour supply/data
    JEL: D12 D81 H31 J26
    Date: 2011–08
  2. By: Staubli, Stefan; Zweimüller, Josef
    Abstract: This paper studies how an increase in the minimum retirement age affects the labor market behavior of older workers. Between 2000 and 2006 the Austrian government gradually increased the early retirement age from 60 to 62.2 for men and from 55 to 57.2 for women. Using administrative data on the universe of Austrian private-sector employees, the results from the empirical analysis suggest that this policy change reduced retirement by 19 percentage points among affected men and by 25 percentage points among affected women. The decline in retirement was accompanied by a sizeable increase in employment of 7 percentage points among men and 10 percentage points among women, but had also a important spillover effects into the unemployment insurance program. Specifically, the unemployment rate increased by 10 percentage points among men and 11 percentage points among women. In contrast, the policy change had only a small impact on the share of individuals claiming disability or partial retirement benefits.
    Keywords: early retirement; labor supply; policy reform; retirement age
    JEL: J14 J26
    Date: 2011–08
  3. By: Van Vliet, Olaf; Been, Jim; Caminada, Koen; Goudswaard, Kees
    Abstract: The ageing of populations and hampering economic growth increase pressure on public fi-nances in many advanced capitalist societies. Consequently, governments have adopted pen-sion reforms in order to relieve pressure on public finances. These reforms have contributed to a relative shift from public to private pension schemes. Since private social security plans are generally less redistributive than public social security, it can be hypothesized that the privatization of pension plans has led to higher levels of income inequality among the elderly. Existing empirical literature has mainly focused on cross-country comparisons at one moment in time or on time-series for a single country. This study contributes to the income inequality and pension literature by empirically analysing the distributional effects of shifts from public to private pension provision in 15 European countries for the period 1995-2007, using pooled time series cross-section regression analyses. Remarkably, we do not find empirical evidence that shifts from public to private pension provision lead to higher levels of income inequality or poverty among elderly people. The results appear to be robust for a wide range of econometric specifications.
    Keywords: income inequality; pension reform; public/private-mix; retirement; welfare state
    JEL: H55 H53 I32
    Date: 2011–08
  4. By: Dayanand S. Manoli; Andrea Weber
    Abstract: This paper presents new empirical evidence on the effects of retirement benefits on labor force participation decisions. We use administrative data on the census of private sector employees in Austria and variation from mandated discontinuous changes in retirement benefits from the Austrian pension system. We present graphical evidence documenting labor supply responses to the policy discontinuities. Next, we develop nonparametric procedures to estimate labor supply elasticities based on the graphical evidence and mandated financial incentives. We estimate elasticities of 0.12 for men and 0.38 for women. These relatively low elasticities highlight that many retirement decisions are likely to be affected by factors beyond only financial incentives from retirement benefits.
    JEL: H55 J22 J26
    Date: 2011–08
  5. By: Sagiri Kitao
    Abstract: This paper presents four policy options to make Social Security sustainable under the coming demographic shift: 1) increase payroll taxes by 6 percentage points, 2) reduce the replacement rates of the benefit formula by one-third, 3) raise the normal retirement age from sixty-six to seventy-three, or 4) means-test the benefits and reduce them one-to-one with income. While all four policies achieve the same goal, their economic outcomes differ significantly. Options 2 and 3 encourage own savings, and capital stock is more than 10 percent higher than in the other two options. The payroll tax increase in option 1 discourages work effort, but means-testing the benefits as outlined in option 4 yields the worst labor disincentives, especially among the elderly.
    Keywords: Social security ; Demography ; Retirement ; Payroll tax ; Labor market ; Employee fringe benefits
    Date: 2011
  6. By: Maarten van Rooij; Annamaria Lusardi; Rob J. Alessie
    Abstract: There is ample empirical evidence documenting widespread financial illiteracy and limited pension knowledge. At the same time, the distribution of wealth is widely dispersed and many workers arrive on the verge of retirement with few or no personal assets. In this paper, we investigate the relationship between financial literacy and household net worth, relying on comprehensive measures of financial knowledge designed for a special module of the Dutch Central Bank Household Survey (DHS). Our findings provide evidence of a strong positive association between financial literacy and net worth, even after controlling for many determinants of wealth. Moreover, we discuss two channels through which financial literacy might facilitate wealth accumulation. First, financial knowledge increases the likelihood of investing in the stock market, allowing individuals to benefit from the equity premium. Second, financial literacy is positively related to retirement planning, and the development of a savings plan has been shown to boost wealth. Overall, financial literacy, both directly and indirectly, is found to have a strong link to household wealth.
    JEL: D12 D91 J26
    Date: 2011–08
  7. By: Alessandra Cataldi; Stephan K. S. Kampelmann; François Rycx
    Abstract: Using longitudinal matched employer-employee data for the period 1999-2006, we investigate the relationship between age, wage and productivity in the Belgian private sector. More precisely, we examine how changes in the proportions of young (16-29 years), middle-aged (30-49 years) and older (more than 49 years) workers affect the productivity of firms and test for the presence of productivity-wage gaps. Results (robust to various potential econometric issues, including unobserved firm heterogeneity, endogeneity and state dependence) suggest that workers older than 49 are significantly less productive than prime age and young workers. In contrast, the productivity of middle-age workers is not found to be significantly different compared to young workers. Findings further indicate that average hourly wages within firms increase significantly and monotonically with age. Overall, this leads to the conclusion that young workers are paid below their marginal productivity while older workers appear to be “overpaid” and lends empirical support to theories of deferred compensation over the life-cycle (Lazear, 1979).
    Keywords: Wages; Productivity; Aging; Matched panel data
    JEL: J14 J24 J31
    Date: 2011–08
  8. By: Castaneda, Pablo; Rudolph, Heinz P.
    Abstract: The passivity of the demand for pension products is one of the striking features of mandatory pension systems. Consequently, the provision of multiple investment alternatives to households (multifund schemes) does not ensure that contributions are invested efficiently. In addition, despite the theoretical findings that short term return maximization is not conductive to long-term return maximization, the regulatory framework of pension fund management companies puts excessive emphasis on short-term maximization. Therefore, it is not obvious that typical regulatory framework of pension funds is conductive to optimal pensions. By establishing a set of default options on investment portfolios, this paper proposes a mechanism to align the incentives of the pension fund management companies with the long-term objectives of the contributors. The paper provides a methodology, which is subsequently applied to Colombia.
    Keywords: Debt Markets,Emerging Markets,Financial Literacy,Mutual Funds,Investment and Investment Climate
    Date: 2011–08–01
  9. By: Tindara Addabbo; Marco Fuscaldo; Anna Maccagnan
    Abstract: Quality of work has been found to significantly affect health outcomes. In this paper we analyse the extent to which the quality of the work done in the past affects the health of the elderly in Italy. For this purpose, we use data drawn from the Italian sample of the Survey of Health, Ageing and Retirement in Europe (SHARE) and focus on individuals aged over 60. Using different types of factor analysis, we identify three dimensions of quality of work and five factors of health status. In particular, as regards the former, we distinguish among the physical dimension, the control dimension and the socioeconomic dimension of work quality. As regards health, using a nested factor model we obtain a factor of global health problems and four residual factors of cognitive problems, mobility problems, affective problems and motivational problems. These factors are then analysed by gender using a multivariate analysis. Our findings suggest that good quality of work in terms of the socioeconomic and control dimensions significantly decreases the probability of being globally unhealthy during the elder phase of one’s life cycle as well as of displaying motivational problems, the effect being similar in both genders. We also find that a higher level of control in men’s work increases their affective problems when they are older and have left the labour force, suggesting a loss in men’s social sphere after retirement from a rewarding job and a likely underdevelopment of their relational dimension outside their work activity.
    Keywords: Quality of work, health status, elderly.
    JEL: J14 J28
    Date: 2011–08
  10. By: Callan, Tim; Van de Ven, Justin
    Abstract: This paper describes a structural dynamic microsimulation model of the household that has been developed to explore behavioural responses to pensions policy counterfactuals in Ireland. The model is based upon the life-cycle theory of behaviour, which assumes that individuals make their decisions to maximise expected lifetime utility, subject to expectations that are consistent with the prevailing decision making environment. The model is calibrated to match Irish survey data.
    Keywords: data/Dynamic Programming,Savings,Labor Supply,Pensions/Individuals/Ireland
    JEL: C51 C61 C63 H31
    Date: 2011–08
  11. By: Ralph Koijen; Stijn Van Nieuwerburgh; Motohiro Yogo
    Abstract: We develop a pair of risk measures for the universe of health and longevity products that includes life insurance, annuities, and supplementary health insurance. Health delta measures the differential payoff that a policy delivers in poor health, while mortality delta measures the differential payoff that a policy delivers at death. Optimal portfolio choice simplifies to the problem of choosing a combination of health and longevity products that replicates the optimal exposure to health and mortality delta. For each household in the Health and Retirement Study, we calculate the health and mortality delta implied by its ownership of life insurance, annuities including private pensions, supplementary health insurance, and long-term care insurance. For the median household aged 51 to 58, the lifetime welfare cost of market incompleteness and suboptimal portfolio choice is 28 percent of total wealth.
    JEL: D14 D91 G11 G22 I10
    Date: 2011–08
  12. By: Romain Duval; Mehmet Eris; Davide Furceri
    Abstract: This paper uses an impulse-response function approach to assess the magnitude and persistence of the effects of downturns on labour force participation for a sample of 30 countries over the period 1960-2008. Past severe recessions appear to have had a significant and persistent impact on participation, while moderate downturns did not. The aggregate participation rate effect of severe downturns peaked on average at about 1½ to 2½ percentage points five to eight years after the cyclical peak, and was still significant after almost a decade. Youths and older workers account for the bulk of this effect. Institutional and policy settings are found to be an important factor having shaped the response of participation to economic downturns. In particular, early retirement incentives embedded in old-age pension schemes and other social transfer programmes are found to amplify the responsiveness of older workers’ participation to economic conditions. However, the findings in this paper do not seem to apply to the most recent crisis, partly because the labour market situation did not deteriorate as much as the magnitude of the recession would have suggested in a number of OECD countries.<P>Les effets des retournements de conjoncture sur la participation au marché du travail : Evidence et causes<BR>Cet article utilise une approche impulsion-réponse pour évaluer l’ampleur et la persistance des effets des retournements de conjoncture sur la participation au marché du travail pour un échantillon de 30 pays de l’OCDE sur la période 1960-2008. Il apparaît que les récessions sévères ont eu un impact significatif et persistant sur la participation dans le passé, au contraire des retournements de cycle plus modérés. L’effet agrégé des récessions sévères sur la participation a atteint un pic de 1½ à 2½ points de pourcentage cinq à huit ans après le point haut du cycle, et était toujours significatif après presque une décennie. Les jeunes et les seniors ont contribué à l’essentiel de cet effet. Les facteurs politiques et institutionnels jouent un rôle important dans la réponse de la participation aux retournements conjoncturels. En particulier, il apparaît que les incitations au départ anticipé à la retraite contenues dans les régimes de retraite et les autres systèmes de transferts sociaux accroissent la sensibilité de la participation des seniors aux conditions économiques. Pour autant, les résultats de cet article ne semblent pas s’appliquer à la crise récente, en partie parce que la situation du marché du travail ne s’est pas détériorée autant que l’ampleur de la récession aurait pu le suggérer dans un certain nombre de pays de l’OCDE.
    Keywords: retirement, labour force participation, downturn, crisis, recession, hysteresis, retraites, participation au marché du travail, crise, récession, hystérésis, retournements de conjoncture
    JEL: C23 E32 H55 J21 J26
    Date: 2011–06–21
  13. By: Ryo Arawatari (yGraduate School of Economics, Nagoya University, Furo-cho, Chikusa-ku, Nagoya); Tetsuo Ono (Graduate School of Economics, Osaka University)
    Abstract: This paper introduces an overlapping-generations model with earnings hetero- geneity and borrowing constraints. The labor income tax and the allocation of tax revenue across social security and forward intergenerational public goods are determined in a bidimensional majoritarian voting game played by successive gen- erations. The political equilibrium is characterized by an ends-against-the-middle equilibrium where low- and high-income individuals form a coalition in favor of a low tax rate and less social security while middle-income individuals favor a high tax rate and greater social security. Government spending then shifts from social security to public goods provision if higher wage inequality is associated with the borrowing constraint and a low interest-rate elasticity of consumption.
    Keywords: Borrowing constraint; Old-age social security; Forward intergenera- tional public goods; Ends-against-the-middle equilibrium; Wage inequality
    JEL: H41 H55 D72
    Date: 2011–08
  14. By: David Hollanders (Amsterdams Instituut voor ArbeidsStudies , Universiteit van Amsterdam); Bersem, M.
    Abstract: Many pension funds have a mismatch between assets and liabilities, taking more risks than securing liabilities implies. This puts .xed claims of retirees at risk. For the cases with and without macro-risk, this paper analyses the implications of this asset-liability mismatch for welfare, contribution policy and pension fund governance. The first result is that borrowing against human capital can be optimal if young workers are borrowing constrained. However, then contributions need be raised in case of underfunding. This implies that the ex ante risk level cannot be separated from the contribution policy ex post. An optimal governance structure addresses this; otherwise a risk immunization policy -with the pension fund taking less risk- is second-best. In the presence of macro-risk it is not optimal to avoid losses for retirees. Optimal intergenerational risk sharing then implies retirees bear risks. The price and allocation of risk are determined endogenously with the result that losses are shared by higher contributions and lower pensions. This case applies in particular to large and nation-wide funds in a closed economies where the working participants coincide with tax-payers who underwrite “riskfree†government bonds. _JEL classification: D74; G11; G23; G32_ *Nederlandse samenvatting (Dutch summary)* Veel pensioenfondsen nemen meer risico dan nodig is om aan de verplichtingen te voldoen. Dit betekent dat deelnemers met een gemaximaliseerde aanspraak op het fonds -slapers en gepensioneerden- een verhoogde kans lopen om bij onderdekking gekort te worden op die aanspraak. Omgekeerd hebben werkende deelnemers en mogelijk de sponsor het voordeel dat zij de opbrengsten van het risicovolle beleid ontvangen in de vorm van premiekorting maar de verliezen deels kunnen afwentelen. Zo een zogenaamde “asset-liability mismatch†kan optimaal zijn, maar is dat onder een belangrijke voorwaarde. Bij onderdekking dienen de premies verhoogd te worden; premiebeleid en risicobeleid hangen op deze wijze nauw samen. Feitelijk lenen jongere van oudere deelnemers met menselijk kapitaal als onderpand. Indien dit niet mogelijk is omdat premies niet kunnen stijgen, dan is een alternatieve, sub-optimale oplossing om het risico te beperken. Deze resultaten gelden zowel in een situatie waarin het pensioenfonds klein is en geen invloed heeft op kapitaalmarkten als in de situatie waarin een groot pensioenfonds de prijzen beïnvloedt en er risico.s zijn op macroniveau die het fonds niet kan vermijden. Dit laatste geval onderscheidt zich wel in een ander opzicht. Het is dan niet optimaal dat gepensioneerden geen (macro)risico lopen; dat betekent namelijk dat actieve deelnemers inefficient veel risico lopen. Het is dan optimaal dat het risico gedeeld wordt door een combinatie van hogere premies en lagere uitkeringen in geval van onderdekking.
    Date: 2010–09
  15. By: Robert W. Fogel; Louis Cain; Joseph Burton; Brian Bettenhausen
    Abstract: Making use of those Union Army veterans for whom death certificates are available, we compare the conditions with which they were diagnosed by Civil War pension surgeons to the causes of death on the certificates. We divide the data between those veterans who entered the pension system early because of war injuries and those who entered the pension system after the 1890 reform that made it available to many more veterans. We examine the correlation between specific conditions and death causes to gauge support for the hypothesis that death is attributable to something specific. We also examine the correlation between the accumulation of rated conditions to time until death to gauge support for the “insult hypothesis.” In general, we find support for both hypotheses. Examining the hazard ratios for dying of a specific condition, there is support for the idea that what ail’d ya’ is what kill’d ya’.
    JEL: I1 N11
    Date: 2011–08
  16. By: Macunovich, Diane (University of Redlands)
    Abstract: Relative cohort size – the ratio of young to prime-age adults – and relative income – the income of young adults relative to their material aspirations, as instrumented using the income of older families their parents' age – have experienced dramatic changes over the past 40 years. Relative cohort size has been shown to cause a decline in men's relative wages – the wages of young relative to prime-age workers – due to imperfect substitutability, and the results here show that this applies perhaps even more strongly to women's relative – and absolute – starting wage. Relative cohort size first declined by 30% and then increased by 47%. Results here show that those changes explain about 60% of the declines in women's starting wage – both relative and absolute – in the first period, and 100% of its increase in the second. Relative income is hypothesized to affect a number of demographic choices by young adults, including marriage, fertility and female labor force participation, as young people strive to achieve their desired standard of living. Older family income – the denominator in a relative income variable – increased by 58.6% between 1968 and 2000, and then declined by 9%. Its changes explain 66% of the increase in the labor force participation of women in their first five years out of school between 1968 and 2000, and 75% of its decline thereafter. The study makes use of individual-level measures of labor force participation, with instrumented wages, and employs the lagged income of older families in a woman’s year-state-race-education group to instrument parental income and hence material aspirations.
    Keywords: women's labor force participation, relative income, relative cohort size, sex ratio, women's hours worked
    JEL: J22
    Date: 2011–08
  17. By: Greet De Vil; Gijs Dekkers; Raphael Desmet; Marie-Jeanne Festjens
    Keywords: Statutory pensions, Adequacy, Microsimulation, Social security
    JEL: H53 H55 I3 J14 D31 I32
    Date: 2010–12–30

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