nep-age New Economics Papers
on Economics of Ageing
Issue of 2012‒02‒20
eighteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Announcing an Increase in the State Pension Age and the Recession: Which Mattered More for Expected Retirement Ages? By Barrett, Alan; Mosca, Irene
  2. Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts By James M. Poterba; Steven F. Venti; David A. Wise
  3. The financial well-being of older people in Europe and the redistributive effects of minimum pension schemes By Figari, Francesco; Matsaganis, Manos; Sutherland, Holly
  4. Mathematical analysis and numerical methods for pricing pension plans allowing early retirement By Calvo-Garrido, Maria del Carmen; Pascucci, Andrea; Vázquez Cendón, Carlos
  5. Optimal savings for retirement: The role of individual accounts and disaster expectations By Le Blanc, Julia; Scholl, Almuth
  6. Training and Retirement By Kristensen, Nicolai
  7. Pricing Longevity Bonds Using Affine-Jump Diffusion Models By Jorge Bravo
  8. The Propensity of Older Respondents to Participate in a General Purpose Survey By Lynn, Peter
  9. Prospective Lifetables: Life Insurance Pricing and Hedging in a Stochastic Mortality Environment By Jorge Bravo; Carlos Pereira da Silva
  10. International Comparisons in Health Economics: Evidence from Aging Studies By Banks, James; Smith, James P.
  11. Demographic Dividends, Dependencies and Economic Growth in China and India By Jane Golley; Rod Tyers
  12. The Impact of Colombia's Pension and Health Insurance Systems on Informality By Valentina Calderón; Ioana Marinescu
  13. Taking two to tango: the joint prospective assessment of pension sustainability and adequacy in Belgium By Dekkers, Gijs; Desmet, Raphaël
  14. "Silver" product design: Product innovation for older people By Herstatt, Cornelius; Kohlbacher, Florian; Bauer, Patrick
  15. The Demographic Transition: Causes and Consequences By Galor, Oded
  16. Why Are So Many Disabled Individuals Not Working in Spain? A Job Search Approach By Silva, José I.; Vall Castello, Judit
  17. Modelling Mortality Using Multiple Stochastic Latent Factors By Jorge Bravo
  18. When elders rule: is gerontocracy harmful for growth? By Atella, Vincenzo; Carbonari, Lorenzo

  1. By: Barrett, Alan (Trinity College Dublin); Mosca, Irene (Trinity College Dublin)
    Abstract: In March of 2010, the Irish government announced that the age at which the state pension is paid would be raised to 66 in 2014, 67 in 2021 and 68 in 2028. Also during 2010, the economic news became increasingly bad as the full scale of the fiscal and banking crises in Ireland emerged. The question we address in this paper is whether expected retirement ages of Irish individuals aged 50 to 64 changed as a result of the policy announcement and/or the bad economic news. The data we use are from the Irish Longitudinal Study on Ageing (TILDA). Between late 2009 and early 2011, over 8,500 people aged 50 and over in Ireland were interviewed about a wide range of issues including standard socio-economic items such as labour force status, earnings and education. Respondents were also asked at what age they expected to retire. Our findings show that there was no noticeable break in expected retirement ages before and after 3 March 2010 (the day on which the policy announcement was made). However, there was a clear shift of people into the categories "don't plan to retire" and "do not know" before and after September 30 2010. This was the day that the full scale of the banking crisis emerged (named by the media as "Black Thursday") and was followed by the set of events which led to the bailout of November 2010. Similarly, there was a shift away from modal expected retirement ages after that date.
    Keywords: expected retirement, recession, state pension age
    JEL: H55 J26 D84
    Date: 2012–01
  2. By: James M. Poterba; Steven F. Venti; David A. Wise
    Abstract: Many analysts have considered whether households approaching retirement age have accumulated enough assets to be well prepared for retirement. In this paper, we shift from studying household finances at the start of the retirement period, an ex ante measure of retirement preparation, to studying the asset holdings of households in their last years of life. The analysis is based on Health and Retirement Study with special attention to Asset and Health Dynamics Among the Oldest Old (AHEAD) cohort that was first surveyed in 1993. We consider the level of assets that households hold in the last survey wave preceding their death. We study how assets at the end of life depend on three family status pathways prior to death— (1) original one-person households in 1993, (2) persons in two-person household in 1993 with a deceased spouse in the last year observed, and (3) persons in two-person households in 1993 with the spouse alive when last observed. We find that a substantial fraction of persons die with virtually no financial assets—46.1 percent with less than $10,000—and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support. In addition this group is disproportionately in poor health. Based on a replacement rate comparison, many of these households may be deemed to have been well-prepared for retirement, in the sense that their income in their final years was not substantially lower than their income in their late 50s or early 60s. Yet with such low asset levels, they would have little capacity to pay for unanticipated needs such as health expenses or other financial shocks or to pay for entertainment, travel, or other activities. This raises a question of whether the replacement ratio is a sufficient statistic for the “adequacy” of retirement preparation.
    JEL: D14 D91 J14
    Date: 2012–02
  3. By: Figari, Francesco; Matsaganis, Manos; Sutherland, Holly
    Abstract: This study analyses the financial well-being of elderly people across Europe. Using the European microsimulation model EUROMOD, which facilitates the identification of minimum pension schemes in a comparable way across countries, we show the extent to which these schemes serve to reduce the risk of poverty among elderly. The main findings show that there is a strong correlation between the resources allocated to the minimum pension schemes and the reduction in poverty risk among the elderly. Nevertheless, the financial well-being of older people depends crucially on the pension system as a whole. Countries with generous minimum pension schemes seem to allocate relatively fewer resources to other pillars of the pension system. On the one hand, they are more effective in reducing elderly poverty rates. On the other hand, they fail to ensure a level of financial well-being of older people in line with the overall population.
    Date: 2011–12–23
  4. By: Calvo-Garrido, Maria del Carmen; Pascucci, Andrea; Vázquez Cendón, Carlos
    Abstract: In this paper, we address the mathematical analysis and numerical solution of a model for pricing a defined benefit pension plan. More precisely, the benefits received by the member of the plan depend on the average salary and early retirement is allowed. Thus, the mathematical model is posed as an obstacle problem associated to a Kolmogorov equation in the time region where the salary is being averaged. Previously to the initial averaging date, a nonhomogeneous one factor Black-Scholes equation is posed. After stating the model, existence and regularity of solutions are studied. Moreover, appropriate numerical methods based on a Lagrange-Galerkin discretization and an augmented Lagrangian active set method are proposed. Finally, some numerical examples illustrate the performance of the numerical techniques and the properties of the solution and the free boundary.
    Keywords: retirement plans; options pricing; Kolmogorov equations; complementarity problem; numerical methods; augmented Lagrangian formulation
    JEL: G23 G13 G00
    Date: 2012–02–06
  5. By: Le Blanc, Julia; Scholl, Almuth
    Abstract: We employ a life-cycle model with income risk to analyze how tax-deferred individual accounts affect households' savings for retirement. We consider voluntary accounts as opposed to mandatory accounts with minimum contribution rates. We contrast add-on accounts with carve-out accounts that partly replace social security contributions. Quantitative results suggest that making add-on accounts mandatory has adverse welfare effects across income groups. Carve-out accounts generate welfare gains for high and middle income earners but welfare losses for low income earners. In the presence of rare stock market disasters, individual accounts with default portfolio allocation crowd out direct stockholding and substantially reduce welfare. --
    Keywords: individual retirement accounts,household portfolio choice,consumption and saving over the life-cycle
    JEL: E21 H55 G11
    Date: 2011
  6. By: Kristensen, Nicolai (AKF, Danish Institute of Governmental Research)
    Abstract: This paper presents results on the effect of formal life-long learning on the decision to retire early. Specifically, I estimate an Option Value model based on individual employer-employee longitudinal data including comprehensive government co-sponsored training records dating back more than 30 years. Human capital theory predicts that the amount of training and the length of working life will be positively correlated in order to recoup investment and yield a higher return. Significant upper bound effects of training in prolonging working life are found for certain types of training and certain groups of workers. However, out-of-sample simulations indicate that on average one year of training only adds up to one month to the career length. This means that training in itself is not enough to substantially prolong careers and increase the workforce.
    Keywords: training, retirement, option value, upper bound identification
    JEL: H55 I21 J26
    Date: 2012–01
  7. By: Jorge Bravo (University of Évora, Department of Economics and CEFAGEUE)
    Abstract: Historically, actuaries have been calculating premiums and mathematical reserves using a deterministic approach, by considering a deterministic mortality intensity, which is a function of the age only, extracted from available (static) life tables and by setting a flat ("best estimate") interest rate to discount cash flows over time. Since neither the mortality intensity nor interest rates are actually deterministic, life insurance companies and pension funds are exposed to both financial and mortality (systematic and unsystematic) risks when pricing and reserving for any kind of long-term living benefits, particularly on annuities and pensions. In this paper, we assume that an appropriate description of the demographic risks requires the use of stochastic models. In particular, we assume that the random evolution of the stochastic force of mortality of an individual can be modelled by using doubly stochastic processes. The model is then embedded into the well known affine-jump framework, widely used in the term structure literature, in order to derive closed-form solutions for the survival probability. We show that stochastic mortality models provide an adequate framework for the development of longevity risk hedging tools, namely mortality-linked contracts such as longevity bonds or mortality derivatives.
    Keywords: Stochastic mortality intensity; Longevity risk; Affine models; Projected lifetables.
    JEL: G22
    Date: 2011
  8. By: Lynn, Peter
    Abstract: This paper, 1) outlines some of the challenges in obtaining participation from older sample members in a survey that is not specifically tailored to older people, 2) provides evidence of the relative response propensity of older people in such a survey and, 3) provides experimental evidence of potential influences on age-related response propensity. Specifically, we analyse differences between younger and older sample members in response propensity to each of a number of components of the Understanding Society survey and we examine the interaction between respondent age and each of two experimentally-manipulated features of the Understanding Society Innovation Panel.
    Date: 2012–02–01
  9. By: Jorge Bravo (University of Évora, Department of Economics and CEFAGEUE); Carlos Pereira da Silva (Department of Management, ISEG - Technical University of Lisbon/Portugal and CIEF)
    Abstract: In life insurance, actuaries have traditionally calculated premiums and reserves using a deterministic mortality intensity, which is a function of the age of the insured only. Over the course of the 20th century, the population of the industrialized world underwent a major mortality transition, with a dramatic decline in mortality rates. The mortality decline has been dominated by two major trends: a reduction in mortality due to infectious diseases affecting mainly young ages, and a decrease in mortality at old ages. These mortality improvements have to be taken into account to price long-term life insurance products and to analyse the sustainability of social security systems. In this paper, we argue that pricing and reserving for pension and life insurance products requires dynamic (or prospective) lifetables. We briefly review classic and recent projection methods and adopt a Poisson log-bilinear approach to estimate Portuguese Prospective Lifetables. The advantages of using dynamic lifetables are twofold. Firstly, it provides more realistic premiums and reserves, and secondly, it quantifies the risk of the insurance companies associated with the underlying longevity risks. Finally, we discuss possible ways of transferring the systematic mortality risk to other parties.
    Date: 2012
  10. By: Banks, James (Institute for Fiscal Studies, London); Smith, James P. (RAND)
    Abstract: We provide an overview of the growing literature that uses micro-level data from multiple countries to investigate health outcomes, and their link to socioeconomic factors, at older ages. Since the data are at a comparatively young stage, much of the analysis is at an early stage and limited to a handful of countries, with analysis for the US and England being the most common. What is immediately apparent as we get better measures is that health differences between countries amongst those at older ages are real and large. Countries are ranked differently according to whether one considers life-expectancy, prevalence or incidence of one condition or another. And the magnitude of international disparities may vary according to whether measures utilize doctor diagnosed conditions or biomarker-based indicators of disease and poor health. But one key finding emerges – the US ranks poorly on all indicators with the exception of self-reported subjective health status.
    Keywords: international health, labor markets
    JEL: I0 H0
    Date: 2012–01
  11. By: Jane Golley; Rod Tyers
    Abstract: The world's two population giants have undergone significant, and significantly different, demographic transitions since the 1950s. The demographic dividends associated with these transitions during the first three decades of this century are examined using a global economic model that incorporates full demographic behavior and measures of dependency that reflect the actual number of workers to non-workers, rather than the number of working aged to non-working aged. While much of China's demographic dividend now lies in the past, alternative assumptions about future trends in fertility and labor force participation rates are used to demonstrate that China will not necessarily enter a period of “demographic taxation” for at least another decade, if not longer. In contrast with China, much of India's potential demographic dividend lies in waiting for the decades ahead, with the extent and duration depending critically on a range of policy choices.
    JEL: C68 E27 F43 J11 O53
    Date: 2012–02
  12. By: Valentina Calderón; Ioana Marinescu
    Abstract: This paper examines how changes in the legislation governing health and pension benefits that took place between 2003 and 2008 in Colombia affected the informal and formal labor markets. In particular, this paper examines two major changes in the legislation. First, it looks at the effects of imposing the requirement to use the same base income to contribute to both health insurance and pensions for independent workers using a difference-in-differences strategy. Second, this document addresses the effects of unifying health and pension system payments, which required employers to make contributions to these two plans through a unified payment system, making it more difficult to contribute differently to the one plan versus the other. The results presented in this paper suggest that this reform increased both full formality and full informality, but with larger positive effects on full formality.
    Keywords: Labor :: Social Security, Health :: Health Policy, Social Development :: Social Policy & Protection, Informal Sector, Pensions, Health Insurance, Social Protection
    JEL: I11 I18 O17
    Date: 2011–03
  13. By: Dekkers, Gijs; Desmet, Raphaël
    Abstract: This presentation discusses how such integrated approach using shared demographic and macroeconomic assumptions has been developed in Belgium. It describes the dynamic microsimulation model MIDAS, highlighting how it aligns to the simulation results of the semi-aggregate model MALTESE. The authors would like to thank Jean-Maurice Frère and Michel Englert for their valuable comments on a previous version of this paper.
    Keywords: Pensions; adequacy; sustainability; microsimulation
    JEL: D31 J14 I32
    Date: 2011–11
  14. By: Herstatt, Cornelius; Kohlbacher, Florian; Bauer, Patrick
    Abstract: Aging populations challenge companies across different countries and industries to respond to the changing needs, demands and expectations of their growing shares of older customers. This opens room for improving or developing innovations - products as well as services - that correspond to the diverse expectations. New product development for older customers or 'Silver' product design is one way to approach the 'silver' market - without explicitly excluding younger customers. Research in this field is still in its infancy. Silver product design focuses on individual autonomy, representing an elementary aspect of good life, disappearing in a more or less continuous manner over the life cycle of a human being. Offering solutions that will allow people to maintain or recover autonomy and to use products and services in an independent manner therefore seems to be a promising avenue for companies innovating across different industries. The general concept of autonomy can be perceived as a boundary-spanning argument and a common denominator for starting development initiatives leading to innovations targeting the silver market. Cross-case analysis based on four different product innovations addressing typical needs of older people are used to present how firms in different industrial contexts and user-settings address such needs, which have their roots in a need to stay autonomous and independent. Technological, marketing and strategy-related observations as well as communalities and differences of the cases are being discussed and very first implications for managing the front end of silver product development sketched. --
    Keywords: Demographic change,aging,older users,silver market,innovation management,silver product design,individual autonomy
    Date: 2011
  15. By: Galor, Oded (Brown University)
    Abstract: This paper develops the theoretical foundations and the testable implications of the various mechanisms that have been proposed as possible triggers for the demographic transition. Moreover, it examines the empirical validity of each of the theories and their significance for the understanding of the transition from stagnation to growth. The analysis suggests that the rise in the demand for human capital in the process of development was the main trigger for the decline in fertility and the transition to modern growth.
    Keywords: demographic transition, gender gap, human capital, fertility, mortality, Unified Growth Theory
    JEL: O10 J1
    Date: 2012–01
  16. By: Silva, José I. (Universitat de Girona); Vall Castello, Judit (Universitat de Girona)
    Abstract: Unlike other disability systems in developed economies, the Spanish system allows partially disabled individuals to work while receiving disability benefits. The puzzle is, however, that employment rates in this group of individuals are very low. The aim of this paper is to understand the incentives and disincentives to work provided by the partial disability scheme in Spain. We first present a theoretical job search model for partially disabled individuals and then estimate a complementary log-log duration model. According to both models, the probability of finding a job falls with the level of disability, the age at which the individual starts receiving disability benefits, and the increase in the local unemployment rate. Moreover, as a result of an increase in the level of disability benefits we find a strong substitution effect that reduces the probability of disabled individuals older than 55 years finding a job to almost zero, in both of the two models. We simulate that the strong substitution effect would be replaced by an equally large income effect even if the increase in the benefits would not be suspended if the individual finds a job.
    Keywords: job search model, disability benefits, duration analysis
    JEL: C41 I18 J64
    Date: 2012–01
  17. By: Jorge Bravo (University of Évora, Department of Economics and CEFAGEUE)
    Abstract: In this paper we develop a new model for stochastic mortality that considers the possibility of both positive and negative catastrophic mortality shocks. Specifically, we assume that the mortality intensity can be described by an affine function of a finite number of latent factors whose dynamics is represented by affine-jump diffusion processes. The model is then embedded into an affine-jump framework, widely used in the term structure literature, in order to derive closed-form solutions for the survival probability. This framework and model application to the classical Gompertz-Makeham mortality law provides a theoretical foundation for the pricing and hedging of longevity-linked derivatives.
    Keywords: Stochastic mortality intensity; Longevity risk; Affine-jump models.
    JEL: G22
    Date: 2011
  18. By: Atella, Vincenzo; Carbonari, Lorenzo
    Abstract: We study the relationship between gerontocracy and aggregate economic perfomance in a simple model where growth is driven by human capital accumulation and productive government spending. We show that gerontocratic élites display the tendency to underinvest in public education and productive government services and thereby may be harmful growth. In absence of intergenerational altruism, the damage caused by gerontocracy is mainly due to the lack in long-term delayed-return investment originated by the shorter life horizon of the ruling class with respect to the rest of the population. An empirical analysis is carried out on a rich data set that al lows to test theoretical results across different countries and different sectors. The econometric results confirm our main hypotheses.
    Keywords: Gerontocracy; Economic Growth and Aggregate Productivity
    JEL: J1 O4
    Date: 2012–01–12

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