nep-age New Economics Papers
on Economics of Ageing
Issue of 2013‒04‒13
eighteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. How best to measure pension adequacy By Aaron George Grech
  2. How sensitive are individual retirement expectations to raising the retirement age? By Fouarge D.; Grip A. de; Montizaan R.M.
  3. Bridge Unemployment in Germany: Response in Labour Supply to an Increased Early Retirement Age By Matthias Giesecke; Michael Kind
  4. Potentiality of reverse mortgages to supplement pension: the case of Chile By Javier Alonso; Maria Lamuedra; David Tuesta
  5. New Evidence on Self-Employment Transitions Among Older Americans with Career Jobs By Kevin E. Cahill; Michael D. Giandrea; Joseph F. Quinn
  6. 50 is the new 30: Long-run trends of schooling and retirement explained by human aging By Strulik, Holger; Werner, Katharina
  7. The Health Consequences of Retirement By Michael Insler
  8. The lifetime gender gap in Italy. Does the pension system countervail labour market outcomes? By Leombruni Roberto; Mosca Michele
  9. Do Income Projections Affect Retirement Saving? By Gopi Shah Goda; Colleen Flaherty Manchester; Aaron Sojourner
  10. Home Production and Social Security Reform By fang yang; Wenli Li; Michael Dotsey
  11. Unraveling Short- and Farsightedness in Politics By Gersbach, Hans; Ponta, Oriana
  12. Informal Care and Inter-vivos Transfers: Results from the National Longitudinal Survey of Mature Women By Edward C. Norton; Lauren Hersch Nicholas; Sean Sheng-Hsiu Huang
  13. Don't trust anybody over 30: Youth unemployment and Okun's law in CEE countries By Hutengs, Oliver; Stadtmann, Georg
  14. Optimal initiation of a GLWB in a variable annuity: no arbitrage approach By H. Huang; M. A. Milevsky; T. S. Salisbury
  15. The Impact of Changes in Health Status: An Economywide Analysis for Australia By George Verikios; Peter B. Dixon; Maureen T. Rimmer; Anthony H. Harris
  16. Life Expectancy, Schooling, and Lifetime Labor Supply: Theory and Evidence Revisited By Cervellati, Matteo; Sunde, Uwe
  17. Social Security, Unemployment Risk and Efficient Bargaining between Unions and Firms By Reichlin, Pietro
  18. As Easy as Pie: How Retirement Savers use Prescribed Investment Disclosures By Hazel Bateman; Isabella Dobrescu; Ben R. Newell; Andreas Ortmann; Susan Thorp

  1. By: Aaron George Grech
    Abstract: Though the main benchmark used to assess pension reforms continues to be the expected resulting fall in future government spending, the impact of policy changes on pension adequacy is increasingly coming to the fore. As yet, there does not seem to be a broad consensus in policymaking circles and academic literature on what constitutes the best measure of pension adequacy. While various indicators have been developed and utilised, no single measure appears to offer a clear indication of the extent to which reforms will impact on the achievement of pension system goals. Many indicators appear ill-suited to study the effective impact of reforms, particularly those that change the nature of the pension system from defined benefit to defined contribution. Existing measures are frequently hard to interpret as they do not have an underlying benchmark which allows their current or projected value to be assessed as adequate or inadequate. Currently used pension adequacy indicators tend to be point-in-time measures which ignore the impact of benefit indexation rules. They also are unaffected by very important factors, such as changes in the pension age and in life expectancy. This tends to make existing indicators minimise the impact of systemic reforms on the poverty alleviation and income replacement functions of pension systems. The emphasis on assumptions which are very unrepresentative of real-life labour market conditions also makes current indicators deceptive, particularly in relation to outcomes for women and those on low incomes. This paper posits that these defects can be remedied by using adequacy indicators based on estimates of pension wealth (i.e. the total projected flow of pension benefits through retirement) calculated using more realistic labour market assumptions. These measures are used to give a better indication of the effective impact of pension reforms enacted since the 1990s in ten major European countries. They suggest that these reforms have decreased generosity significantly, but that the poverty alleviation function remains strong in those countries where minimum pensions were improved. However, moves to link benefits to contributions have raised clear adequacy concerns for women and for those on low incomes which policymakers should consider and tackle.
    Keywords: Social Security and Public Pensions, Retirement, Poverty, Retirement Policies
    JEL: H55 I38 J26
    Date: 2013–04
  2. By: Fouarge D.; Grip A. de; Montizaan R.M. (ROA)
    Abstract: This paper investigates the causal effects of the announcement of an increase in the statutory pension age on employee retirement expectations. In June 2010, the Dutch government signed a new pension agreement with the employer and employee organizations that entailed an increase in the statutory pension age from 65 currently to 66 in 2020 for all inhabitants born after 1954. Given the expected increase in average life expectancy, it was also decided that in 2025 the pension age would be further increased to 67 for those born after 1959. This new pension agreement received huge media coverage. Using representative matched administrative and survey data of public sector employees, we find that the proposed policy reform increased the expected retirement age by 3.6 months for employees born between 1954 and 1959 and by 10.8 months for those born after 1959. This increase is reflected in a clear shift in the retirement peak from age 65 to ages 66 and 67 for the respective treated cohorts. Men respond less strongly to the policy reform than women, but within couples we find no evidence that the retirement expectations of one spouse are affected by an increase in the statutory pension age of the other. Furthermore, we show that treatment effects are largely driven by highly educated individuals but are lower for employees whose job involves physically demanding tasks or managerial and supervisory tasks.
    Keywords: Economics of the Elderly; Economics of the Handicapped; Non-labor Market Discrimination;
    Date: 2013
  3. By: Matthias Giesecke; Michael Kind
    Abstract: This study examines an increase in the early retirement age from 60 to 63 for the group of older unemployed men in Germany. As consequence of this policy reform, the time to retirement is increased from the perspective of recently unemployed individuals and therefore serves as a source of exogenous variation. We estimate continuous time hazard models for individuals at risk of leaving the state unemployment into employment or into early retirement due to exceptional rules. We find a positive impact of an increase in the early retirement age on the reemployment probability whereas the probability to retire early due to exceptional rules is not affected.
    Keywords: Labour supply; retirement behaviour; old age unemployment; duration analysis
    JEL: J14 J26 J64
    Date: 2013–03
  4. By: Javier Alonso; Maria Lamuedra; David Tuesta
    Abstract: Reverse mortgages have been established as an alternative for generating liquid flows of income during retirement in some developed countries. Given that the risks associated with lower income during old age are usually covered by a wide range of sources of funding, this paper analyses the potentiality of reverse mortgages as alternative income during old age. This work focuses on the case of Chile, based on information extracted from national surveys that map out the behaviour of representative individuals divided into income quintiles. The changes from 2010 to 2050 are observed on the basis of reasonable assumptions. The pension replacement rates have been found to have increased by nearly 30 points as a result of incorporating life annuities derived from property assets. This result supports the concept of not just fixing policies aimed at improving formal pension schemes, but facilitating private financial mechanisms that generate other suitable forms of income during old age derived from other assets.
    Keywords: reverse mortgage, private pensions, pension funds, defined contribution
    JEL: G23 J32 G22 D14 G21
    Date: 2013–02
  5. By: Kevin E. Cahill (Sloan Center on Aging and Work at Boston College); Michael D. Giandrea (U.S. Bureau of Labor Statistics); Joseph F. Quinn (Boston College)
    Abstract: How have post-career transitions into and out of self-employment been impacted by the Great Recession? Research from the 1990s and 2000s has shown that the prevalence of self employment increases substantially later in life, partly because self employment provides older workers with opportunities and flexibility not found in wage-and-salary jobs. Post-career transitions into and out of self employment have also been identified as an important pathway to retirement among older Americans. This paper examines post-career self-employment transitions during the recent recession that began in late 2007 and during the ensuing lackluster recovery. We utilize the Health and Retirement Study (HRS), a nationally-representative longitudinal dataset of older Americans, to investigate the role of self-employment in the retirement transitions of HRS Core respondents over nearly two decades, from 1992 to 2010, with particular emphasis on the most recent years. We find that post-career transitions into and out of self employment remain common in the face of the Great Recession, and that health status, occupation, and financial variables continue to be important determinants of switches from wage-and-salary career employment to self-employed bridge jobs. The latest evidence confirms that self employment continues to be an important pathway to retirement even during recessionary times.
    Keywords: Economics of Aging, Partial Retirement, Self Employment
    JEL: J26 J14 J32 H55
    Date: 2013–04
  6. By: Strulik, Holger; Werner, Katharina
    Abstract: Workers in the US and other developed countries retire no later than a century ago and spend a significantly longer part of their life in school, implying that they stay less years in the work force. The facts of longer schooling and simultaneously shorter working life are seemingly hard to square with the rationality of the standard economic life cycle model. In this paper we propose a novel theory, based on health and aging, that explains these long-run trends. Workers optimally respond to a longer stay in a healthy state of high productivity by obtaining more education and supplying less labor. Better health increases productivity and amplifies the return on education. The health accelerator allows workers to finance educational efforts with less forgone labor supply than in the previous state of shorter healthy life expectancy. When both life-span and healthy life expectancy increase, the health effect is dominating and the working life gets shorter if the preference for leisure is sufficiently strong or the return on education is sufficiently large. We calibrate an extended version of the model and show that it is capable to predict the historical trends of schooling and retirement. --
    Keywords: healthy life expectancy,longevity,education,retirement,labor supply,compression of morbidity
    JEL: E20 I25 J22 O10 O40
    Date: 2013
  7. By: Michael Insler (United States Naval Academy)
    Abstract: This paper examines the impact of retirement on individuals' health. Declines in health commonly compel workers to retire, so the challenge is to disentangle the simultaneous causal effects. The estimation strategy employs an instrumental variables specification. The instrument is based on workers' self-reported probabilities of working past ages 62 and 65, taken from the first period in which they are observed. Results indicate that the retirement effect on health is beneficial and significant. Investigation into behavioral data, such as smoking and exercise, suggests that retirement may affect health through such channels; with additional leisure time, many retirees practice healthier habits.
    Date: 2013–03
  8. By: Leombruni Roberto; Mosca Michele (University of Turin)
    Abstract: In Italy large work career gender gaps currently ex ist, particularly regarding wages and activity rates. This paper investigates the issue looking at lifetime incomes, where from the one side all the career gaps are sum med up, from the other the redistribution acted by the pension system may mitigate the differences. Exploiting an original database on entire work careers, we document how the pay gap constantly widens with age and how women tend to cumulate a lower number of eligible working years. Both gaps have an impact on the pension calculation, so that at retirement gender differences are even higher. By means of a microsimulation model we show that the pension system partially countervails labour market outcomes, implying lower differences in lifetime in comes. However, due to the current transition to an actuarially neutral system, the effect will vanish, posing some concerns about the future prospects of gender income inequality
    Date: 2013–01
  9. By: Gopi Shah Goda; Colleen Flaherty Manchester; Aaron Sojourner
    Abstract: Americans’ retirement security increasingly depends on how much they save during their working years. One impediment to making good saving decisions may be a lack of knowledge on how saving translates into income in retirement. To address this issue, the U.S. Congress has considered whether to require 401(k) plans to project the value of a lifetime annuity that the participant could purchase at retirement given his current savings. By explicitly showing the connection between saving and income in retirement, the hope is that workers will generally make better saving decisions. This brief is based on a recent field experiment, conducted with employees of the University of Minnesota, which tested the effect of retirement income projections on saving decisions. The brief proceeds as follows. The first section describes the experimental treatments and the methodology used to analyze the results. The second section presents the results, which address three specific questions: 1) Did subjects receiving the treatments change their saving and by how much? 2) Was any change random or did the treatments improve subjects’ knowledge and confidence? and 3) Did personal characteristics influence the saving decisions? The final section concludes that providing individuals with retirement income projections, along with related information on retirement planning, could modestly increase saving at low marginal cost.
    Date: 2013–04
  10. By: fang yang (SUNY albany); Wenli Li (Federal Reserve Bank of Philadelphia); Michael Dotsey (Federal Reserve Bank of Philadelphia)
    Abstract: This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we find that eliminating the current pay-as-you-go Social Security system has important implications for both labor supply and consumption decisions and that these decisions are influenced by the presence of a home production technology. Specifically, without Social Security benefits households work much more in the market, especially in old age, while young households also engage more in home production. For consumption, households increase their consumption of housing services -- an input for home production -- to a greater extent than for other market-produced goods. Comparing our benchmark economy to one with differentiated goods but no home production, we find that eliminating Social Security benefits generates larger welfare gains in the presence of home production. This result is due to the self insurance aspects generated by the presence of home production. Comparing our economy to a one-good economy without home production, we show that the welfare gains of eliminating Social Security are magnified even further. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production.
    Date: 2012
  11. By: Gersbach, Hans; Ponta, Oriana
    Abstract: The absence of the deselection threat in incumbents' last term in office can be negative or positive for society. Some politicians may reduce their efforts, while others may pursue beneficial long-term policies that may be unpopular in the short term. We propose a novel pension system that solves the effort problem while preserving willingness to implement long-term policies. The idea is to give politicians the option to choose between a flexible and a fixed pension scheme. In the flexible pension scheme, the pension increases with short-term performance, using the vote share of the officeholder's party in the next election as an indicator. Self-selection yields welfare optimality as officeholders are encouraged to invest in those activities that benefit society most. We analyze the properties and consequences of such a system. Finally, we extend the pension system with choice to non-last-term situations and derive a general welfare result.
    Keywords: effort; elections; incumbents; political contracts; selection; vote share thresholds
    JEL: D7
    Date: 2013–01
  12. By: Edward C. Norton; Lauren Hersch Nicholas; Sean Sheng-Hsiu Huang
    Abstract: Informal care is the largest source of long-term care for elderly, surpassing home health care and nursing home care. By definition, informal care is unpaid. It remains a puzzle why so many adult children give freely of their time. Transfers of time to the older generation may be balanced by financial transfers going to the younger generation. This leads to the question of whether informal care and inter-vivos transfers are causally related. We analyze data from the 1999 and 2003 waves of National Longitudinal Survey of Mature Women. We examine whether the elderly parents give more inter-vivos monetary transfers to adult children who provide informal care, by examining both the extensive and intensive margins of financial transfers and of informal care. We find statistically significant results that a child who provides informal care is more likely to receive inter-vivos transfers than a sibling who does not. If a child does provide care, there is no statistically significant effect on the amount of the transfer.
    JEL: I10
    Date: 2013–04
  13. By: Hutengs, Oliver; Stadtmann, Georg
    Abstract: In recent years youth unemployment rates across Europe soared, causing the European Commission to take actions through initiatives to counter this development. This article examines youth unemployment development in selected CEE countries and compares them to the EU 15. We use Okun's law and estimate age and country specific Okun coefficients for five different age cohorts. Our results show that young people display much higher Okun coefficients than their older peers, thus confirming that young people are more prone to macroeconomic shocks. This result might be a justification for additional governmental intervention and active labour market policies favouring young people. --
    Keywords: Okun's law,labor market,youth unemployment
    JEL: E24 F50 C23
    Date: 2013
  14. By: H. Huang; M. A. Milevsky; T. S. Salisbury
    Abstract: This paper offers a financial economic perspective on the optimal time (and age) at which the owner of a Variable Annuity (VA) policy with a Guaranteed Living Withdrawal Benefit (GLWB) rider should initiate guaranteed lifetime income payments. We abstract from utility, bequest and consumption preference issues by treating the VA as liquid and tradable. This allows us to use an American option pricing framework to derive a so-called optimal initiation region. Our main practical finding is that given current design parameters in which volatility (asset allocation) is restricted to less than 20%, while guaranteed payout rates (GPR) as well as bonus (roll-up) rates are less than 5%, GLWBs that are in-the-money should be turned on by the late 50s and certainly the early 60s. The exception to the rule is when a non-constant GPR is about to increase (soon) to a higher age band, in which case the optimal policy is to wait until the new GPR is hit and then initiate immediately. Also, to offer a different perspective, we invert the model and solve for the bonus (roll-up) rate that is required to justify delaying initiation at any age. We find that the required bonus is quite high and more than what is currently promised by existing products. Our methodology and results should be of interest to researchers as well as to the individuals that collectively have over \$1 USD trillion in aggregate invested in these products. We conclude by suggesting that much of the non-initiation at older age is irrational (which obviously benefits the insurance industry.)
    Date: 2013–04
  15. By: George Verikios; Peter B. Dixon; Maureen T. Rimmer; Anthony H. Harris
    Abstract: We construct a dynamic, computable general equilibrium model of the Australian economy that incorporates a detailed representation of demographic and health trends of the labour force. We project the economywide effects of changes in the health status of the workforce associated with a change in chronic disease prevalence. Our results show that reductions in chronic disease and the associated rate of health decline of older workers have a much greater effect than similar reductions for younger workers. Traded sectors benefit much more than nontraded sectors, with a consequent improvement in the trade balance and a real depreciation of the exchange rate. The increase in workforce participation also decreases the capital-labour ratio and raises the returns to capital relative to labour.
    Keywords: chronic disease, computable general equilibrium, health status, labour supply
    JEL: C68 I15 J11
    Date: 2013–02
  16. By: Cervellati, Matteo; Sunde, Uwe
    Abstract: This paper presents a theoretical and empirical analysis of the role of life expectancy for optimal schooling and lifetime labor supply. The results of a simple prototype Ben-Porath model with age-specific survival rates show that an increase in lifetime labor supply is not a necessary, nor a sufficient, condition for greater life expectancy to increase optimal schooling. The observed increase in survival rates during working ages that follows from the ``rectangularization'' of the survival function is crucial for schooling and labor supply. The empirical results suggest that the relative benefits of schooling have been increasing across cohorts of US man born 1840-1930. A simple quantitative analysis shows that a realistic shift in the survival function can lead to an increase in schooling and a reduction in lifetime labor hours.
    Keywords: Life Expectancy; Lifetime Labor Supply; Longevity; Rectangularization of the Survival Function; Schooling
    JEL: E20 J22 J24 J26 O11
    Date: 2013–03
  17. By: Reichlin, Pietro
    Abstract: We construct an overlapping generations model with unemployment risk where wages, employment and severance payments are set through efficient bargaining between risk averse Unions and risk neutral firms. Assuming that a First Best cannot be achieved due to workers' shirking incentives, we characterize a Second Best allocation and show how this can be implemented in a market economy. We prove that the latter generates too little employment and consumption smoothing, an excessive young age consumption and too much saving with respect to the Second Best. This inefficiency can be reduced by increasing the intensity of a pay-as-you-go social security system even if the economy is dynamically efficient.
    Keywords: Labor Markets; Risk; Social Security; Unemployment
    JEL: A1 H2 J5
    Date: 2013–02
  18. By: Hazel Bateman (School of Risk and Actuarial Studies, University of New South Wales); Isabella Dobrescu (CEPAR and School of Economics, University of New South Wales); Ben R. Newell (School of Psychology, University of New South Wales); Andreas Ortmann (School of Economics, University of New South Wales); Susan Thorp (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: : We report the results of two laboratory experiments that study how university student and staff participants chose retirement savings investment options using ?user-friendly? information prescribed by regulators. We demonstrate that choices of more than 20% of participants cannot be predicted using any of the prescribed information items but that 30% of participants used all, or almost all, items, frequently in unexpected ways. A pie-chart showing asset allocation had the largest marginal impact on investment choices. Participants preferred options with more segmented pies (lower concentration) and with equally sized segments (lower deviation froma 1/n allocation). This choice behavior is consistent with the application of a simple diversification heuristic. Participants cannot choose more than one investment but are guided by the extent to which a pre-mixed investment option appears evenly balanced across asset classes. This novel application of a 1/n strategy is distinct from existing findings of na?ve diversification in ?mix-it-yourself? conditions where participants spread resources evenly across funds or categories. The results highlight that information contained in prescribed investment disclosures may not be used in the manner intended by the regulator. The results also pose interesting methodological questions about the way ?user-friendly? information prescribed by regulators is validated before being legislated.
    Keywords: consumer finance; diversification heuristics; pensions; choice experiment
    JEL: G11 D14 C91
    Date: 2013–03–01

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