nep-age New Economics Papers
on Economics of Ageing
Issue of 2012‒01‒18
twelve papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Ottawa's Pension Gap: The Growing and Under-reported Cost of Federal Employee Pensions By Alexandre Laurin; William B.P. Robson
  2. Are defined contribution pension schemes socially sustainable? A conceptual map from a macroprudential perspective By Giuseppe Marotta
  3. “Honey, I shrunk the kids’ benefits!” — Revisiting intergenerational conflict in OECD countries. By Tim Krieger; Jens Ruhose
  5. Retaining through Training Even for Older Workers By M. PICCHIO; J. C. VAN OURS
  6. Financial Advisors' Role in Influencing Social Security Claiming By Mathew Greenwald; Andrew G. Biggs; Lisa Schneider
  7. Saving Pooled Registered Pension Plans: It's Up To the Provinces By Keith Ambachtsheer; Keith Waitzer
  8. Encouraging New Hires to Save for Retirement By Robert Clark; Melinda Sandler Morrill; Jennifer Maki
  9. Optimal Aging with Uncertain Death By Strulik, Holger
  10. Intervivos Giving Over the Lifecycle By Michael Hurd; James P. Smith; Julie Zissimopoulos
  11. Longevity hedging 101: A framework for longevity basis risk analysis and hedge effectiveness By Coughlan, Guy; Khalaf-Allah, Marwa; Ye, Yijing; Kumar, Sumit; Cairns, Andrew; Blake, David; Dowd, Kevin
  12. Health Expenditures And Life Expectancy Around The World: A Quantile Regression Approach By Maksym Obrizan; George L. Wehby

  1. By: Alexandre Laurin (C.D. Howe Institute); William B.P. Robson (C.D. Howe Institute)
    Abstract: Canadian public-sector pension plans typically do not use market yields to calculate their liabilities: if they did, Ottawa’s unfunded pension liability would stand at $227 billion – some $80 billion larger than reported in the Public Accounts. The value of the typical federal employee’s pension entitlement grows at more than 40 percent of pay annually – much faster than the contributions to fund it – putting taxpayers, most of whom face federal tax rules preventing them from funding as rich a retirement for themselves, at risk of having to bail out Ottawa’s pension plans.
    Keywords: Pension Papers, Canadian public-sector pension plans, unfunded pension liability, Public Accounts
    JEL: H55 G23
    Date: 2011–12
  2. By: Giuseppe Marotta
    Abstract: If the combined retirement income, provided by public and private defined contribution (DC) pension schemes, falls below socially acceptable standards, there is a political risk that consensus seeker policymakers could yield to pressures to commit future fiscal revenues. These contingent liabilities, when incorporated in markets’ expectations, are bound to create spillovers on sovereign risk, with negative feedback loops on the capital adequacy of banks and of other intermediaries, owing to losses on their government paper. Among the causes of reduced annuities out of the final assets in DC pension funds is an equity risk premium much lower than the commonly values advertised by the industry and by policymakers. From a macroprudential perspective, this political risk should be taken into account in stress tests assessing banks’ resilience to financial shocks.
    Keywords: pensions, equity risk premium, political risk, sovereign risk, stress test;
    JEL: D10 G23 H55 J14
    Date: 2011–11
  3. By: Tim Krieger (University of Paderborn); Jens Ruhose (Ifo Institut)
    Abstract: Intergenerational conflicts may arise when interests of different age groups do not align. We examine cross-country data to find evidence for this conflict in OECD countries. We derive our results from a FGLS estimation model, which is complemented by a System-GMM estimation. Data covers a panel of 22 OECD countries over the time period 1985-2005. We find little support for intergenerational conflict in general; however, those who are close to (statutory) retirement age dislike public expenditure for families and education because, once they retire, they have to adapt to lower retirement income levels compared to previous work income. This effect lasts for a transitory period only.
    Keywords: Intergenerational Conflict, Family Benefits, Population Ageing, Education Expenditure, Voting, Retirement Income Shock.
    JEL: D72 H50 J13 J14 I22
    Date: 2011–12
  4. By: Benoit Dostie (IEA, HEC Montréal); Pierre Thomas Léger (IEA, HEC Montréal)
    Abstract: We use longitudinal linked employer-employee data and find that the probability of participating in firm-sponsored classroom training diminishes rapidly for workers aged 45 years and older. Although the standard human capital investment model predicts such a decline, we also consider the possibility that returns to training decline with age. Taking into account endogenous training decisions, we find that the training wage premium diminishes only slightly with age. However, estimates of the impact of training on productivity decrease dramatically with age, suggesting that incentives for firms to invest in classroom training are much lower for older workers.
    Date: 2011–11
    Abstract: This paper investigates whether on-the-job training has an effect on the employability of workers. Using data from the Netherlands we disentangle the true effect of training incidence from the spurious one determined by unobserved individual heterogeneity. We also take into account that there might be feedback from shocks in the employment status to future propensity of receiving firm-provided training. We find that firm-provided training significantly increases future employment prospects. This also holds for older workers, suggesting that firm-provided training may be an important instrument to retain older workers at work.
    Keywords: training, employment, human capital, older workers.
    JEL: C33 C35 J21 J24 M53
    Date: 2011–10
  6. By: Mathew Greenwald; Andrew G. Biggs; Lisa Schneider
    Abstract: For millions of Americans, financial advisors are a trusted source of financial and retirement preparation information. This includes providing advice and information on Social Security benefits, a critical component of most Americans’ retirement finances. To gain greater insight into what financial advisors say to their clients about Social Security, an online survey of over 400 professional financial advisors was conducted in the Spring of 2011. The results reveal that a majority of advisors believe that they are responsible for educating their clients on the role Social Security will play in their retirement income. Moreover, advisors have the ability to influence their clients’ decisions about when to claim their Social Security retirement benefits. Three-quarters advise the majority of their clients on when to claim. In addition, the study finds that the Social Security Administration (SSA) is the leading and preferred source of information and education for financial advisors and their clients. Over half of advisors say it is a major source of Social Security-related information, more than any other source. However, advisors are critical of the job SSA does in educating advisors and the public, and are interested in additional resources from the Agency. Financial advisors also indicate that the financial services companies they work with could improve their communication and education efforts as it relates to Social Security. The research findings uncover a need for improved methods of educating and disseminating information to financial advisors and the public on Social Security.
    Date: 2011–11
  7. By: Keith Ambachtsheer (Rotman International Centre for Pension Management); Keith Waitzer (Stikeman Elliott LLP)
    Abstract: The Canadian federal government’s Bill C-25 provides for a new type of tax sheltered savings plan for Canadians called a pooled registered pension plan (PRPP). In its current form, however, the design blueprint falls short of its primary objective: to ensure that the majority of Canadians who do not have a workplace pension will have access to a well-regulated, low-cost, private sector capital accumulation plan. Provincial leadership is required to breathe life into the federal legislation, by requiring employers to offer PRPPs to employees, and provide well-thoughtout default options and an independent PRPP licensing system.
    Keywords: Pension Papers, Canada, Canadian provinces, tax sheltered savings plan, pooled registered pension plan (PRPP)
    JEL: G2 G23 J3 J32
    Date: 2011–12
  8. By: Robert Clark; Melinda Sandler Morrill; Jennifer Maki
    Abstract: This project examines the impact of employer-provided financial education for newly hired workers on contributions to voluntary retirement savings plans. Using administrative data from five large employers, the researchers assess the impact of information and delivery methods on the choice to participate in the plans and the deferral amount selected. The researchers collected additional data from one employer-partner covering the two years before and after their automatic enrollment policy was implemented. Average participation rates increased sharply, while the same fraction of workers took advantage of the full employer match once eligible. The researchers also conducted a survey of newly hired workers. The survey measured employees’ understanding of their company’s voluntary retirement savings plan, their assessment of the employer-provided information, and their reasons for limited or non-participation. Nonparticipants demonstrated lower overall financial literacy relative to participants, and many respondents felt that the information provided by their employers was not sufficient. Finally, the largest employer-partner, BB&T, implemented a field experiment where an on-line mailing was sent to a random subset of non-participating newly hired workers. Younger workers receiving the flyer were significantly more likely to enroll in the 401(k) plan, while older workers actually had lower initiation rates relative to their control group. The research presented provides insights into the efficacy and importance of financial education provided by employers to newly hired workers and how it impacts their retirement saving decisions.
    Date: 2011–11
  9. By: Strulik, Holger
    Abstract: This note extends the theory of optimal aging and death (Dalgaard and Strulik, 2010) towards uncertain death. Specifically, it is assumed that at any age the probability to survive depends on the number of health deficits accumulated. It is shown that the results in Dalgaard and Strulik (2011) on the foundation of the Preston curve (the association between income and life-expectancy across countries) are robust against this extension. While results virtually coincide at high income levels, the stochastic version predicts somewhat more curvature of the Preston curve at low income levels. Taking uncertain death and a precautionary motive for health investment into account thus further improves a bit the anyway good fit of the Preston curve.
    Keywords: Aging, Longevity, Health, Savings, Preston Curve
    JEL: D91 J17 J26 I12
    Date: 2011–12
  10. By: Michael Hurd; James P. Smith; Julie Zissimopoulos
    Abstract: Inter-vivos cash transfers and bequests between family members total hundreds of billions of dollars each year. They may equalize resources within a generation of a family as well as across family generations. Transfers delayed to the end of life may represent a significant motive for saving. The authors use longitudinal data from the Health and Retirement Study on inter-vivos transfers that span up to twelve years to: describe financial transfers made by parents to children and their correlation with donor characteristics, examine age patterns in giving behavior, the persistence of transfers, and how transfers change in response to changes in marital status, economic status and health. Their empirical analysis is motivated by a dynamic life-cycle model with intervivos transfers as an argument in the utility function which generates hypotheses about the age pattern of transfers and how mortality risk, risk aversion and economic resources affect giving behavior.
    Keywords: Intergenerational transfers, life-cycle consumption, household behavior
    JEL: D91 J14
    Date: 2011–10
  11. By: Coughlan, Guy; Khalaf-Allah, Marwa; Ye, Yijing; Kumar, Sumit; Cairns, Andrew; Blake, David; Dowd, Kevin
    Abstract: Basis risk is an important consideration when hedging longevity risk with instruments based on longevity indices, since the longevity experience of the hedged exposure may differ from that of the index. As a result, any decision to execute an index-based hedge requires a framework for (1) developing an informed understanding of the basis risk, (2) appropriately calibrating the hedging instrument, and (3) evaluating hedge effectiveness. We describe such a framework and apply it to a U.K. case study, which compares the population of assured lives from the Continuous Mor- tality Investigation with the England and Wales national population. The framework is founded on an analysis of historical experience data, together with an appreciation of the contextual relationship between the two related populations in social, economic, and demographic terms. Despite the different demographic profiles, the case study provides evidence of stable long-term relationships between the mortality experiences of the two populations. This suggests the important result that high levels of hedge effectiveness should be achievable with appropriately cali- brated, static, index-based longevity hedges. Indeed, this is borne out in detailed calculations of hedge effectiveness for a hypothetical pension portfolio where the basis risk is based on the case study. A robustness check involving populations from the United States yields similar results.
    Keywords: Longevity risk; basis risk; hedge effectiveness
    JEL: G22 G23 J11
    Date: 2011
  12. By: Maksym Obrizan (Kyiv School of Economics, Kyiv Economic Institute); George L. Wehby (University of Iowa)
    Abstract: Previous literature has produced mixed results on the effects of country health expenditures on longevity. More importantly, all previous studies have evaluated the expenditure effects on the mean of the life expectancy distribution, ignoring the possibility that the expenditure returns may not be the same for countries that differ in their life expectancies. In this paper, we evaluate the heterogeneity in country health expenditure effects throughout the life expectancy distribution applying quantile regression to an assembled dataset of 177 countries. We find significant heterogeneities in expenditures effects on life expectancy that are completely masked by ordinary least squares (OLS), which underestimates (overestimates) the expenditure returns for countries ranking at low (high) life-expectancy quantiles. The largest returns from increased spending are for countries at the left margin of the life expectancy distribution (mainly at quantiles 0.25 and lower), for which a $100 increase in per capita spending leads to 11.5 and 11 months of life for males and females, respectively. The results suggest that increasing healthcare spending in these countries may have significant population-wide life expectancy returns.
    Keywords: Health Expenditures, Life Expectancy, Quantile Regression
    JEL: I1 C2
    Date: 2012–01

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