nep-age New Economics Papers
on Economics of Ageing
Issue of 2011‒10‒01
eleven papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Teacher Pension Incentives and the Timing of Retirement By Shawn Ni; Michael Podgursky
  2. The Recent Evolution of Retirement Patterns in Canada By Lefebvre, Pierre; Merrigan, Philip; Michaud, Pierre-Carl
  3. Age Before Beauty? Productivity and Work vs. Seniority and Early Retirement By Giovanni Mastrobuoni; Filippo Taddei
  4. Financial Literacy, Retirement Planning, and Household Wealth By Maarten van Rooij; Annamaria Lusardi; Rob Alessie
  5. “Better Safe than Sorry” - Individual Risk-free Pension Schemes in the European Union - Macroeconomic Benefits, the Mobile Working Citizen’s Perspective and Why Nots By Peeters, Marga
  6. The Impact of Cutting Social Security Cost of Living Adjustments on the Living Standards of the Elderly By Dean Baker; David Rosnick
  7. Should the Indonesian pension funds invest abroad? By Kariastanto, Bayu
  8. Pension-Induced Rigidities in the Labor Market for School Leaders By Cory Koedel; Jason A. Grissom; Shawn Ni; Michael Podgursky
  9. The role of demography on per capita output growth and saving rates By Miguel Sánchez Romero
  10. Does Widowhood Explain Gender Differences in Out-of-Pocket Medical Spending Among the Elderly? By Gopi Shah Goda; John B. Shoven; Sita Nataraj Slavov
  11. Insuring Long Term Care In the US By Jeffrey Brown; Amy Finkelstein

  1. By: Shawn Ni (Department of Economics, University of Missouri-Columbia); Michael Podgursky (Department of Economics, University of Missouri-Columbia)
    Abstract: The rising costs and large unfunded liabilities of defined benefit (DB) teacher retirement systems raise questions about their efficacy and viability. Reform of teacher pension plans depends critically on reliable predictions of behavioral responses to alternative pension rules. We estimate an option-value model of individual teacher retirement using administrative data for Missouri teachers. The model fits the observed aggregate retirement behavior very well. We use the estimated structural parameters to simulate retirement behavior under alternative pension rules. Our simulations show that on net the enhancements of Missouri teacher pension benefits in the 1990's lowered the average retirement age for teachers. Conversion from the current DB plan to a defined contribution (DC) plan would have the opposite effect, and would dampen "spikes" in teacher retirement timing. The 1990's enhancements raised welfare for all teachers, however, the DC plan that we simulate has a mixed welfare impact, raising welfare for teachers near retirement but reducing it for teachers with less experience.
    Keywords: teacher pensions, school staffing, school finance
    JEL: H30 I22 J26 J38
    Date: 2011–09–14
  2. By: Lefebvre, Pierre (University of Québec at Montréal); Merrigan, Philip (University of Québec at Montréal); Michaud, Pierre-Carl (University of Québec at Montréal)
    Abstract: Using data from three waves of the General Social Survey on retirement and older workers (1994, 2002 and 2007), we document the evolution of retirement patterns over the last three decades. We combined the analysis of retirement ages of actual retirees with data on expected retirement ages of current workers to create a longer perspective on changes in retirement behaviour in Canada. We also investigate trends in work after retirement. Our findings are in line with findings from other countries. There is an upward trend in retirement ages which likely started around year 2000 for cohorts born after 1945. This trend contrasts with the slow decline in retirement ages observed prior to the end of the millennium. While the downward trend was likely due to factors such as the offering of early retirement programs in private firms, the upward trend is likely to be caused by a wider variety of sources, including better health, less pervasive defined benefit pensions and in general less generous pensions.
    Keywords: retirement, pensions, Canada
    JEL: J26
    Date: 2011–09
  3. By: Giovanni Mastrobuoni (Collegio Carlo Alberto, CeRP and Netspar); Filippo Taddei (Collegio Carlo Alberto and CeRP)
    Abstract: We show how the age prole of earnings, retirement rules and retirement behavior are tightly linked through the general equilibrium of the economy. Generous Social Security benets nanced by large Social Security taxes discourage human capital accumulation. In Social Security systems where Social Security benets prioritize redistribution less productive workers with lower levels of human capital tend to retire earlier. These out ows of workers from the labor force tend to generate wage proles that are monotonically increasing over age and labor markets that display larger seniority premia. This paper theoretically rationalizes the links between retirement rules and the wage structures over the life cycle and uses data on European countries to show how social security taxes, the age prole of earnings, and retirement behavior are related.
    Keywords: Social Security tax, early retirement, age prole of earnings, human capital, seniority premium
    JEL: H53 H55 D72
    Date: 2011–05
  4. By: Maarten van Rooij (De Nederlandsche Bank and Netspar); Annamaria Lusardi (The George Washington University School of Business and Netspar); Rob Alessie (University of Groningen, Netspar and Tinbergen Institute)
    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 DNB (De Nederlandsche Bank) Household Survey. 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.
    Keywords: Financial education; Savings and wealth accumulation; Retirement preparation; Knowledge of finance and economics; Overconfidence; Stock market participation.
    JEL: D91 D12 J26
    Date: 2011–08
  5. By: Peeters, Marga
    Abstract: Variations between the diverse pension systems in the member states of the European Union hamper labour market mobility, across country borders but also within the countries of the European Union. From a macroeconomic perspective, and in the light of demographic pressure, this paper argues that allowing individual instead of collective pension building would greatly improve labour market flexibility and thus enhance the functioning of the monetary union. I argue that working citizens would benefit, for three reasons, from pension saving in a risk-free savings account. First, citizens would have a clear picture of the accumulation of their own pension savings throughout their working life. Second, they would pay hardly any extra costs and, third, once retired they would not be subject to the whims of government or other pension fund managers. This paper investigates the feasibility of individual pension building under various parameter settings by calculating the pension saved during a working life and the pension dis-saved after retirement. The findings show that there are no reasons why the European Union and individual member states should not allow individual risk-free pension savings accounts. This would have macroeconomic benefits and provide a solid pension provision that can enhance mobility, instead of engaging workers in different mandatory collective pension schemes that exist around in the European Union.
    Keywords: pensions; labour market; monetary union; mobility; migration;
    JEL: H55 J32 G23 R23 J11 H75 H83 J61 E5 J26
    Date: 2011–09–20
  6. By: Dean Baker; David Rosnick
    Abstract: During the negotiations over raising the debt ceiling, President Obama proposed cutting the annual cost of living adjustment for Social Security by switching to an index that would show a lower measured rate of inflation. This alternative index, the chained consumer price index (CCPI-U), shows an annual rate of inflation that averages approximately 0.3 percentage points less than the consumer price index (CPI-W) that is currently used to index benefits. While this change would lead to $122 billion in savings to the government over the next decade, it also means that beneficiaries would receive lower benefits. Since the vast majority of retirees rely on Social Security for the bulk of their retirement income, this cut in the cost of living adjustment would imply a substantial reduction in the standard of living of retirees, unless they offset it by saving more during their working years or retiring later in life. While we cannot know for sure how workers in future years will adjust their behavior, this paper assesses their past response to changes in the cost of living adjustment. It finds that they were not able to raise their non-Social Security income in response to cuts in Social Security benefits.
    Keywords: social security, retirement, COLA, CPI
    JEL: H H5 H55 J J1 J14
    Date: 2011–09
  7. By: Kariastanto, Bayu
    Abstract: Currently, the Indonesian pension fund is prohibited from investing in international assets. In this paper, I quantitatively investigate the benefit and/or the cost, if any, caused by this constraint. Standard mean-variance techniques will be used along with Monte Carlo simulation to check the robustness of the findings. Under various assumptions, including international assets in the pension fund’s portfolio could potentially aid pension funds to have higher returns and accumulated wealth. Accordingly, the findings suggest possible reform to lessen these restrictions. Given the controversy over international diversification, a reasonable compromise that would help capture many of the potential benefits for risk-averse investors could be to create a ceiling of 20 percent for international assets.
    Keywords: Pension Fund; International Diversification; Asset Allocation; Hypothetical Worker; Indonesia
    JEL: G11
    Date: 2011–09–19
  8. By: Cory Koedel (Department of Economics, University of Missouri-Columbia); Jason A. Grissom; Shawn Ni (Department of Economics, University of Missouri-Columbia); Michael Podgursky (Department of Economics, University of Missouri-Columbia)
    Abstract: Educators in public schools in the United States are typically enrolled in defined-benefit pension plans, which penalize across-plan mobility. We use administrative data from Missouri to examine how the mobility penalties affect the labor market for school leaders. We show that pension borders greatly affect leadership flows across schools – for two groups of schools separated by a pension border, our estimates indicate that removing the border will increase leadership mobility between them by 97 to 163 percent. We consider the implications of the pension-induced rigidities in the leadership labor market for schools near pension borders in Missouri. Our findings are of general interest given that thousands of public schools operate near pension boundaries nationwide.
    Keywords: Educator pensions, backloaded compensation, principal quality, leadership quality, compensation in education
    JEL: H5 I2 J3
    Date: 2011–09–15
  9. By: Miguel Sánchez Romero (Max Planck Institute for Demographic Research, Rostock, Germany)
    Abstract: Computable OLG growth models and "convergence models" differ in their assessment of the extent to which demography influences economic growth. In this paper, I show that computable OLG growth models produce results similar to those of convergence models when more detailed demographic information is used. To do so, I implement a general equilibrium overlapping generations model to explain Taiwan's economic miracle during the period 1965-2005. I find that Taiwan's demographic transition accounts for 22% of per capita output growth, 16.4% of the investment rate, and 18.5% of the savings rate for the period 1965-2005. Decomposing the demographic effect into its components, I find that fertility alone explains the impact of demographic changes in per capita output growth, while both fertility and mortality explain investment and saving rates. Assuming a small open economy, I find that investment rates increase with more rapid population growth, while saving rates follows the dependence hypothesis (Coale and Hoover, 1958). Under a closed-economy, the population growth rate has a negative influence on economic growth.
    Keywords: Taiwan, demography, economic growth
    JEL: J1 Z0
    Date: 2011–09
  10. By: Gopi Shah Goda; John B. Shoven; Sita Nataraj Slavov
    Abstract: Despite the presence of Medicare, out-of-pocket medical spending is a large expenditure risk facing the elderly. While women live longer than men, elderly women incur higher out-of-pocket medical spending than men at each age. In this paper, we examine whether differences in marital status and living arrangements can explain this difference. We find that out-of-pocket medical spending is approximately 29 percent higher when an individual becomes widowed, a large portion of which is spending on nursing homes. Our results suggest a substantial role of living arrangements in out-of-pocket medical spending; however, our estimates combined with differences in rates of widowhood across gender suggest that marital status can explain only one third of the gender difference in total out-of-pocket medical spending, leaving a large portion unexplained. On the other hand, gender differences in widowhood more than explain the observed gender difference in out-of-pocket spending on nursing homes.
    JEL: I11 J12 J14 J16
    Date: 2011–09
  11. By: Jeffrey Brown; Amy Finkelstein
    Abstract: Long-term care expenditures constitute one of the largest uninsured financial risks facing the elderly in the United States. This paper provides an overview of the economic and policy issues surrounding insuring long-term care expenditure risk. Through this lens we also discuss the likely impact of recent long-term care public policy initiatives at both the state and federal level.
    JEL: I11 I28
    Date: 2011–09

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