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on Economics of Ageing |
| By: | Arie Kapteyn (University of Southern California, Dornsife Center for Economic and Social Research); Jinkook Lee (RAND); Gema Zamarro (University of Southern California, Dornsife Center for Economic and Social Research) |
| Abstract: | How does retirement influence subjective well-being? Some studies suggest retirement does not affect subjective well-being or may improve it. Others suggest it adversely affects it. This paper aims at advancing our understanding of the effect of retirement on subjective well-being by (1) using longitudinal data to tease out the retirement effect from age and cohort differences; (2) using instrumental variables to address potential reverse causation of subjective well-being on retirement decisions; and (3) conducting cross-country analyses, exploiting differences in eligibility ages for retirement benefits across countries and within countries. We use panel data from the US Health and Retirement Study and the Survey of Health, Ageing, and Retirement in Europe. This allows us to use a quasi-experimental approach where variations in public pension eligibility due to country and cohort specific retirement ages help identify retirement effects. For both the U.S. and Europe we find that retirement is associated with higher levels of depression. However, when we use instrumental variables we find the opposite result. Retirement induced through Social Security pension eligibility is found to have a positive effect, reducing depression symptoms, although only marginally significant for the U.S. when considering the depression indicator. Retirement is not found to have a significant effect on life satisfaction measures for either the U.S. or Europe. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp301&r=age |
| By: | Mashfiqur R. Khan; Matthew S. Rutledge; April Yanyuan Wu |
| Abstract: | Increasing life expectancy has made working longer both more necessary and more possible, but the relationship between an individual’s survival expectations and his planned retirement age is unclear in the existing literature. This study uses the Health and Retirement Study and an instrumental variables (IV) approach to examine how subjective life expectancy influences planned retirement ages and expectations of working at older ages, and how individuals update those expectations when they receive new information. The estimates in this paper suggest a large and statistically significant relationship between subjective life expectancy and retirement expectations: a one-standard-deviation increase in optimism about living to ages 75 or 85 is associated with an 8-percent to 24-percent increase over the mean probability of working at these ages. Actual retirement behavior also increases with subjective life expectancy, but the relationship is somewhat weaker. Our IV estimates using parents’ longevity as instruments are largely consistent with our reduced form estimates, strengthening the conclusion that subjective life expectancy impacts both retirement planning and actual retirement behaviors. Finally, we find that increases over time in subjective life expectancy are associated with increases in the probability of planning to work at ages 62 and 65. The results further our understanding of how survival and retirement expectations are “anchored” to the previous generation’s experience and suggest how targeted efforts at increasing knowledge about rising life expectancy may increase the proportion of younger cohorts who decide to work longer. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:crr:crrwps:wp2014-1&r=age |
| By: | Andreas Hubener (Goethe University of Frankfurt); Raimond Maurer (Goethe University of Frankfurt); Olivia S. Mitchell (The Wharton School, University of Pennsylvania) |
| Abstract: | Household decisions are profoundly shaped by a complex set of financial options due to Social Security rules determining retirement, spousal, and survivor benefits, along with benefit adjustments that vary with the age at which these are claimed. These rules influence optimal household asset allocation, insurance, and work decisions, given life cycle demographic shocks such as marriage, divorce, and children. Our model generates a wealth profile and a low and stable equity fraction consistent with empirical evidence. We also confirm predictions that wives will claim retirement benefits earlier than husbands, while life insurance is mainly purchased by younger men. Our policy simulations imply that eliminating survivor benefits would sharply reduce claiming differences by sex while dramatically increasing men’s life insurance purchases. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp293&r=age |
| By: | John Karl Scholz (University of Wisconsin-Madison); Ananth Seshadri (University of Wisconsin-Madison) |
| Abstract: | We develop a rich model to study the complex interrelationship between health insurance and retirement decisions. The decision to retire depends on a number of factors including availability of health insurance, health shocks, pensions, Social Security, and how consumption and health interact in the utility function. We incorporate these features in a computational model of optimal wealth and retirement decisions, solving the model household-by-household using data from the HRS. We use the model to study two important SSA priority areas: first, to what extent do people remain in the labor force until age 65 in order to maintain health insurance for themselves (and after age 65 to maintain health insurance for their spouses)? Second, do early retirees have poorer health than others and does the availability of Medicare interact with their decision to claim benefits? |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp292&r=age |
| By: | Yuriy Gorodnichenko (University of California - Berkley); Jae Song (Social Security Administration); Dmitriy Stolyarov (Dmitriy Stolyarov) |
| Abstract: | We analyze lifetime earnings histories of white males during 1960-2010 and categorize the labor force status of every worker as either working full-time, partially retired or fully retired. We find that the fraction of partially retired workers has risen dramatically (from virtually zero to 15 percent for 60-62 year olds), and that the duration of partial retirement spells has been steadily increasing. We estimate the response of retirement timing to variations in unemployment rate, inflation and house prices. Flows into both full and partial retirement increase significantly when the unemployment rate rises. Workers around normal retirement age are especially sensitive to variations in unemployment rate. Workers who are partially retired show a differential response to high unemployment rate: younger workers increase their partial retirement spell, while older workers accelerate their transition to full retirement. We also find that high inflation discourages full-time work and encourages partial and full retirement. House prices do not have a significant impact on retirement timing. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp281&r=age |
| By: | Alan L. Gustman (Dartmouth College); Thomas L. Steinmeier (Texas Tech University); Nahid Tabatabai (Dartmouth College) |
| Abstract: | This paper uses data from the Health and Retirement Study to investigate the effects of Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) provision on Social Security benefits received by individuals and households. WEP reduces the benefits of individuals who worked in jobs covered by Social Security and also worked in uncovered jobs where a pension was earned. WEP also reduces spouse benefits. GPO reduces spouse and survivor benefits for persons who worked in uncovered government employment where they also earned a pension. Unlike previous studies, we take explicit account of pensions earned on jobs not covered by Social Security, a key determinant of the size of WEP and GPO adjustments. Also unlike previous studies, we focus on the household. This allows us to incorporate the full effects of WEP and GPO on spouse and survivor benefits, and to evaluate the effects of WEP and GPO on the assets accumulated by affected families. Among our specific findings: About 3.5 percent of households are subject to either WEP or to GPO. The present value of their Social Security benefits is reduced by roughly one fifth. This amounts to five to six percent of the total wealth they accumulate before retirement. Households affected by both WEP and GPO lose about one third of their benefit. Limiting the Social Security benefit to half the size of the pension from uncovered employment reduces the penalty from WEP for members of the original HRS cohort by about 60 percent. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp288&r=age |
| By: | Andrew M. Parker (RAND); Leandro S. Carvalho (RAND); Susann Rohwedder (RAND) |
| Abstract: | Recent advances in behavioral decision research, behavioral economics, and life-span development psychology provide leverage for expanding our understanding of the decision to retire earlier versus later. This report examines how cognitive abilities, perceptions about the future, and other psychological characteristics affect retirement decisions. We use existing and new data collected through the RAND-USC American Life Panel, including detailed assessments of fluid and crystallized intelligence, financial literacy, expectations for the future, future time perspective, and maximizing versus satisficing decision styles. We find those with high levels of cognitive ability are more likely to retire later, as are those with greater longevity expectations. We also find those with lower cognitive ability have less coherent expectations of retirement—suggesting a need for planning assistance. We also find expectation of lower Social Security benefits is associated with plans to retire later—contrary to our hypothesis that such expectation might spur early retirement in an effort to lock in benefits. Finally, we find that tendencies maximize (versus satisfice) had mixed effects on retirement decision making, with different aspects of maximizing tendencies showing different relationships with retirement decision making. Future work should expand these data in a targeted direction. Recent research notes that decision-making competence can be improved with training, and to the extent this trainability extends to older adults, decision skills may be a useful target for intervention. Stronger longitudinal design and analysis can also help demonstrate possible endogenities between retirement and psychological variables. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp298&r=age |
| By: | David Blau (The Ohio State University and IZA) |
| Abstract: | Employment trends in the US were similar across age groups in the 1960s, 1970s, and 1980s: male employment rates declined or were flat at all ages and female employment rates increased or were flat at all ages. But employment trends diverged more recently, with employment rising at older ages and falling at younger ages, for both men and women. This paper seeks to explain this divergence. We estimate labor supply models for men and women, allowing differences in behavior across age groups. The results indicate that changes in the educational composition of the population and Social Security reforms can account for a modest proportion of the divergence. An additional factor for men was the increase in age at first marriage. However, much of the divergence remains unexplained. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp285&r=age |
| By: | Yuriy Gorodnichenko (University of California - Berkley); John Laitner (University of Michigan); Jae Song (Social Security Administration); Dmitriy Stolyarov (Dmitriy Stolyarov) |
| Abstract: | Economists’ standard model assumes that improvements in total factor productivity (TFP) raise the marginal product of labor for all workers evenly. This paper uses an earnings dynamics regression model to study whether, in practice, older workers benefit less from TFP growth than younger workers. We utilize panel earnings data from the Social Security Administration’s Continuous Work History Sample. The data include workers of all ages, and we use annual figures for 1950-2004. Our first specification relies on BLS measurements of TFP. Our second model develops a new TFP measure using a principal components analysis. We find that although the earnings of younger workers track TFP growth 1-for-1, the earnings of older workers do not: we find, for example, that a 60-year-old male’s earnings grow only 85-90% as fast as TFP. Nevertheless, our analysis implies that in an economy with an aging labor force, gains from experience tend to outweigh older workers’ inability to benefit fully from TFP improvements. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp280&r=age |
| By: | John Bound (University of Michigan); Helen Levy (University of Michigan); Lauren Hersch Nicholas (Johns Hopkins University and University of Michigan) |
| Abstract: | Are early Social Security claimers too sick to work? We linked Health and Retirement Study data to Medicare claims to study health care utilization at ages 65 and 70. We find that Social Security Disability Insurance recipients use more health care on average than those who never received DI. At age 65, Medicare spending on SSDI recipients was $4,440 less than spending on retirees who claimed Social Security benefits prior to Full Retirement Age (FRA) and $4,727 less than those claiming at FRA. Differences in Medicare spending persist at all points of the spending distribution. They are robust to a variety of methodological approaches including general linear models, quantile regression, and reweighting, and in specifications limiting comparisons to beneficiaries claiming benefits at initial EEA. Our results suggest that poor health may contribute to EEA claiming decisions, though this group is considerably healthier than those who were too disabled to work and qualified for DI benefits. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp297&r=age |
| By: | Marco Angrisani (University of Southern California and RAND Corporation); Michael D. Hurd (RAND Corporation); Erik Meijer (University of Southern California and RAND Corporation); Andrew M. Parker (RAND Corporation); Susann Rohwedder (RAND Corporation) |
| Abstract: | Besides compensation and financial incentives, several other work-related factors may affect individual retirement decisions. Specifically, job characteristics such as autonomy, skill variety, task significance and difficulty, stress and physical demands, peer pressure and relations with co-workers, play a crucial role in determining psychological commitment to work at older ages. While financial preparedness for retirement and health shocks are often cited as main predictors of the choice to exit the labor force, there exists relatively little research documenting the extent to which the work environment itself and its interaction with economic variables influence retirement decisions. We document that job characteristics are associated with labor force transitions at older ages, in particular transitions to retirement and part-time employment. Additionally, we show that while personality traits do not directly drive labor force transitions, the effect of job characteristics on labor supply outcomes varies with the “intensity” of personality traits. We also document that job characteristics themselves are strongly related to personality traits. This suggests that, depending on their personality, individuals may select into specific jobs, whose characteristics ultimately shape their retirement paths. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp295&r=age |
| By: | Rietveld, C.A.; Groenen, P.J.F.; Koellinger, Ph.D.; van der Loos, M.J.H.M.; Thurik, A.R. |
| Abstract: | Overconfidence has been proposed as an explanation for excess market entry by entrepreneurs and low returns in entrepreneurial activities. However, establishing that entrepreneurs are more overconfident than non-entrepreneurs requires the use of representative population samples; in addition, econometric endogeneity issues in survey data must be addressed. To overcome these methodological challenges, we use a measure of overconfidence that employs self-reports of life expectancy. These self-reports are compared to actual life spans in a large sample of the US population. We show that entrepreneurs are indeed more overconfident than non-entrepreneurs. By using fixed-effects panel regression—and thus by exploiting the longitudinal nature of our data—we provide evidence that changes in entrepreneurial status are not associated with changes in subjective life expectancy. These two findings in combination offer evidence that overconfident individuals self- select into entrepreneurship. |
| Keywords: | entrepreneurship, life expectancy, overconfidence, selection, self-employment |
| JEL: | D21 L20 |
| Date: | 2013–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureri:40673&r=age |
| By: | Alicia H. Munnell; Steven A. Sass |
| Abstract: | Accessing home equity will become increasingly important in a world where retirement needs are expanding – people are living longer and face rapidly rising health care costs – and the retirement system is contracting – Social Security replacement rates are declining and employer-provided pensions have shifted from defined benefit plans to 401(k)s where balances are modest. Reverse mortgages offer a mechanism for tapping home equity for those who want to stay in their home. Nearly all reverse mortgages today are government-insured Home Equity Conversion Mortgages (HECMs). The financial crisis put pressure on both the insurance program and on the borrowers. Declining home prices meant that lenders could not recoup the full amount of the loan when the houses were sold, requiring the government to make up the difference. And financially troubled borrowers withdrew much of their money at closing, leaving them with few resources to sustain homeownership, which led a number to default. In response, the government has redesigned the HECM program. This brief describes this redesign and its impact on borrowers and government finances. The discussion proceeds as follows. The first section describes the HECM program. The second section covers the impact of the financial crisis on how borrowers used the program and on the program’s finances. The third section reviews the recent changes and their likely effects. The final section concludes that the redesigned HECM program should make reverse mortgages better for borrowers and significantly improve the solvency of the HECM insurance program. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:crr:issbrf:ib2014-1&r=age |
| By: | David Neumark (University of California, Irvine); Patrick Button (University of California, Irvine) |
| Abstract: | We examine whether stronger age discrimination laws at the state level moderated the impact of the Great Recession on older workers. We use a difference-in-difference-in-differences strategy to compare older workers in states with stronger and weaker laws, to their younger counterparts, both before, during, and after the Great Recession. We find very little evidence that stronger age discrimination protections helped older workers weather the Great Recession, relative to younger workers. The evidence sometimes points in the opposite direction, with stronger state age discrimination protections associated with more adverse effects of the Great Recession on older workers. We suggest that this may be because during an experience like the Great Recession, severe labor market disruptions make it difficult to discern discrimination, weakening the effects of stronger state age discrimination protections, or because higher termination costs associated with stronger age discrimination protections do more to deter hiring when future product and labor demand is highly uncertain. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp287&r=age |
| By: | J. Michael Collins (University of Wisconsin-Madison); John Karl Scholz (University of Wisconsin-Madison); Ananth Seshadri (University of Wisconsin-Madison) |
| Abstract: | This paper uses repeated cross-sectional data from the Surveys of Consumer Finances (SCF) to characterize cohort patterns of net worth and debt of American households. Cohort patterns provide a useful benchmark for identifying potentially vulnerable households based on relative financial positions over time at similar ages. We also summarize attitudinal measures thought to be related financial capability. Both sets of descriptive data are useful in assessing the well-being of households over the life course and ultimately preparation for retirement. We find a striking rise in debt across cohorts over time, relative to total assets and relative to income, although debt-holding declines with age as is expected. Debt is dominated by mortgages, particularly for more recent cohorts relative to similar aged cohorts 15 year prior. Tabulations of age cohorts by race or education level show predictable similar patterns. An analysis of panel data using the 2007-2009 SCF provides some support for the idea that older households lost more during the recession, as did minorities and people of higher levels of net worth. While primarily descriptive in nature, the stylized facts presented in this paper are suggestive of the trajectory for households moving into retirement age over the next decade. We do not find substantial evidence of more recent generations falling behind, nor major shifts in attitudes towards risk taking or other attitudes that might be reasonably correlated with asset or debt levels. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp296&r=age |
| By: | Glenn P. Jenkins (Department of Economics, Queen's University, Canada, Eastern Mediterranean University, North Cyprus); Hasan U. Altiok (Eastern Mediterranean University, North Cyprus) |
| Abstract: | This paper estimates the fiscal burden of the Pay-As-You-Go (PAYGO) civil service pension systems that were closed in 2008 to new members in North Cyprus. At that time, a new pension system was introduced for the newly hired government employees and new private sector workers. Estimates are made of the difference between the present values of future contributions and the pension benefits. This approach measures the government’s net liabilities related to the accruals of the pension rights received by the individuals covered through these plans for the period from 2009 to the death of the last member in the system. The estimated unfunded cost of these civil service pension plans is 7.3 billion euros or 276% of GDP. This amount of implicit debt is significantly higher than 5.8 billion euros that has been estimated as the amount of cash compensation for land and property that would need to be paid in order to reach an agreement for a solution to the Cyprus conflict. |
| Keywords: | civil service pensions, pension liabilities, implicit pension debt, pension indexing, North Cyprus |
| JEL: | H55 H68 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:qed:dpaper:230&r=age |
| By: | Annamaria Lusardi (The George Washington University School of Business); Olivia S. Mitchell (The Wharton School, University of Pennsylvania) |
| Abstract: | Of particular interest in the present economic environment is whether access to credit is changing peoples’ indebtedness over time, particularly as they approach retirement. This project analyzes older individuals’ debt, debt management practices, and financial fragility using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, we examine three different cohorts (individuals age 56–61) in different time periods, 1992, 2002 and 2008, in the HRS to evaluate cross-cohort changes in debt over time. We also draw on recent data from the National Financial Capability Study (NFCS) which provides detailed information on how families manage their debt. Our goal is to assess how wealth and debt among older persons has evolved over time, along with the potential consequences for retirement security. We find that more recent cohorts have taken on more debt and face more financial insecurity, mostly due to having purchased more expensive homes with smaller down payments. In addition, Baby Boomers are more likely to have engaged in expensive borrowing practices. Factors associated with better debt outcomes include having higher income, more education, and greater financial literacy; those associated with financial fragility include having more children and experiencing unexpected large income declines. Thus, shocks do play a role in the accumulation of debt close to retirement. But it is not enough to have resources, people also need the capacity to manage those resources if they are to stay out of debt as they head into retirement. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp291&r=age |
| By: | Olivia S. Mitchell (The Wharton School, University of Pennsylvania); Christopher C. Geczy (The Wharton School, University of Pennsylvania); Robert Novy-Marx (Simon School of Business, University of Rochester); Raimond Maurer (Finance Department, Goethe University); Donald E. Fuerst (Mercer Human Resource Consulting); Christopher M. Bone (Edth Limited LLC); Donald J. Segal (Society of Actuaries); Martin G. Clarke (Pension Protection Fund); Frank J. Fabozzi (EDHEC Business School, EDHEC Risk Institute); Deborah Lucas (Sloan School of Management, Massachusetts Institute of Technology); David F. Babbel (The Wharton School, University of Pennsylvania) |
| Abstract: | In April of 2013, the Pension Research Council of the Wharton School at the University of Pennsylvania convened a Technical Review Panel, comprising ten experts whose task it was to review the Pension Benefit Guaranty Corporation’s (PBGC) Pension Insurance Modeling System (PIMS), including inputs, outputs, and model assumptions. The review was intended to provide a formal evaluation of the technical adequacy of the model by outside experts. Each expert participating on the Technical Panel was asked to review background material (see References) and focus on a particular aspect of the PIMS model. The list of panelists and topics was developed by the Council in discussion with the Social Security Administration (SSA). This report and the appended papers herein from our Technical Panel comprise the Final Report under this project. The Panel’s key findings may be summarized as follows: (1) The PIMS models are an important and valuable tool in modeling the Agency’s liability risk. To the best of our knowledge, there is no other model that can do a comparable job. (2) Nevertheless, some improvements could be integrated in the Agency’s approach to modeling. Those deserving highest priority attention in the experts’ view are the following: (a) Incorporating systematic mortality risk (i.e., treat mortality and longevity as stochastic variables); (b) Including new asset classes increasingly found in defined benefit plan portfolios (e.g., commercial real estate, private equity funds, infrastructure, hedge funds, and others); (c) Developing a more complex model for the term structure of interest rates; and (d) Incorporating an option value approach to pricing the insurance provided. (3) The Agency could also do more to communicate the range of uncertainty and potential for problems associated with the PBGC’s financial status. This could include additional information including the Conditional Value at Risk (CVaR), and perhaps an ‘intermediate,’ ‘optimistic,’ and ‘pessimistic’ set of projected outcomes, as well as the expected ‘date of exhaustion’ for assets backing pension benefits insured by the PBGC. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp290&r=age |