nep-age New Economics Papers
on Economics of Ageing
Issue of 2014‒02‒15
eight papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Health, financial incentives, and early retirement: Micro-simulation evidence for Germany By Hendrik Jürges; Lars Thiel; Tabea Bucher-Koenen; Johannes Rausch; Morten Schuth; Axel Börsch-Supan
  2. A model for the pension system in Mexico. Diagnosis and recommendations By Javier Alonso; Carmen Hoyo; David Tuesta
  3. Prospective Ageing and Economic Growth in Europe By Jesus Crespo Cuaresma; Martin Lábaj; Patrik Pruzinský
  4. Defined Contribution Pension Plans: Sticky or Discerning Money? By Clemens Sialm; Laura Starks; Hanjiang Zhang
  5. Social Security and Divorce Decisions By Marcus Dillender
  6. Employment Transitions Among Older Workers Leaving Long-term Jobs: Evidence from Administrative Data By Bonikowska, Aneta Schellenberg, Grant
  7. The Causes and Consequences of the Rising Costs of Public Employee Pensions By Joshua Rauh
  8. It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans By Veronika Pool; Clemens Sialm; Irina Stefanescu

  1. By: Hendrik Jürges (University of Wuppertal); Lars Thiel (University of Wuppertal); Tabea Bucher-Koenen (Munich Center for the Economics of Aging); Johannes Rausch (Munich Center for the Economics of Aging); Morten Schuth (Munich Center for the Economics of Aging); Axel Börsch-Supan (Munich Center for the Economics of Aging)
    Abstract: About 20% of German workers retire on disability pensions. Disability pensions provide fairly generous benefits for those who are not already age-eligible for an old-age pension and who are deemed unable to work for health reasons. In this paper, we use two sets of individual survey data to study the role of health and financial incentives in early retirement decisions in Germany, in particular disability benefit uptake. We show that financial incentives to retire do affect sick individuals at least as much as healthy individuals. Based on 25 years of individual survey data and empirical models of retirement behavior, we then simulate changes in the generosity of disability pensions to understand how these changes would affect retirement behavior. Our results show that making the disability benefit award process more stringent without closing other early retirement routes would not greatly increase labor force participation in old age.
    JEL: H55 J14 J26
    Date: 2014–02
  2. By: Javier Alonso; Carmen Hoyo; David Tuesta
    Abstract: The reform of the pension system of the Mexican Social Security Institute (IMSS) in 1997, limited the growing fiscal cost of the previous pay-as-you-go scheme. Sixteen years on from its creation, the Retirement Savings System (SAR) has had favourable macroeconomic effects for Mexico, as it has significantly increased financial savings and encouraged the development of local financial markets. The reform of the pension system of the Mexican Social Security Institute (IMSS) in 1997, limited the growing fiscal cost of the previous pay-as-you-go scheme. Sixteen years on from its creation, the Retirement Savings System (SAR) has had favourable macroeconomic effects for Mexico, as it has significantly increased financial savings and encouraged the development of local financial markets.
    Keywords: defined contribution, pensions, replacement rates
    JEL: G23 H55 J11 J26
    Date: 2014–02
  3. By: Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Martin Lábaj (Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava); Patrik Pruzinský (Department of Economic Policy, Faculty of National Economy, University of Economics in Bratislava)
    Abstract: We assess empirically the role played by prospective ageing measures as a predictor of income growth in Europe. We show that prospective ageing measures which move beyond chronological age and incorporate changes in life expectancy are able to explain better the recent long-run growth experience of European economies. The improvement in explanatory power of prospective ageing indicators as compared to standard measures based on chronological age is particularly relevant for long-run economic growth horizons.
    Keywords: Economic growth, ageing, prospective age, old age dependency ratio
    JEL: I15 O15 O52
    Date: 2014–01
  4. By: Clemens Sialm (University of Texas at Austin); Laura Starks (Stanford University); Hanjiang Zhang (Stanford University)
    Abstract: Participants in defined contribution (DC) retirement plans rarely adjust their portfolio allocations, suggesting that their investment choices and consequent money flows are sticky and not discerning. Yet, the participants’ inertia could be offset by the DC plan sponsors, who adjust the plan’s investment options. We examine these countervailing influences on flows into U.S. mutual funds. We find that flows into funds that derive from DC assets are more volatile and exhibit more performance sensitivity than non-DC flows, primarily due to the adjustments of the investment options by the plan sponsors. Thus, DC retirement money is less sticky and more discerning.
    Date: 2014–01
  5. By: Marcus Dillender (W.E. Upjohn Institute for Employment Research)
    Abstract: People who have divorced are entitled to Social Security spousal benefits if their marriages lasted at least ten years. This paper uses 1985-1995 Vital Statistics data and the 2008-2011 American Community Surveys to analyze how this rule affects divorce decisions. I find evidence that the ten-year rule results in a small increase in divorces for the general population; however, the effects vary greatly by age. Divorce decisions change very little for people under the age of 35. For people 55 and older, however, divorces increase by approximately 20 percent around the ten-year cutoff, which leads to an increase in the likelihood of being divorced of 11.7 percent at ten years of marriage. For people between the ages of 35 and 55, who account for over half of divorces, the likelihood of being divorced increases by almost 6 percent as marriages cross the ten-year mark. This heterogeneity across ages likely exists because older people are more focused on retirement and have less time to remarry. These results indicate many people delay divorcing because they need Social Security benefits.
    Keywords: Marriage, Divorce, Social Security
    JEL: J12 H5 J18
    Date: 2014–01
  6. By: Bonikowska, Aneta Schellenberg, Grant
    Abstract: This study documents the prevalence and nature of re-employment among workers who left long-term jobs in paid employment at age 50 or older. The analysis is based on a 28-year administrative panel dataset, the Longitudinal Worker File, capitalizing on its large sample size and detailed information on mobility across employers. The study examines the prevalence, time and covariates of re-employment as a paid employee and in unincorporated self-employment; the nature of paid re-employment, including job duration, mobility across industry and firm size; the distribution of average earnings in re-employment compared with the long-term job; and the covariates of low and high relative earnings in re-employment.
    Keywords: Labour, Seniors, Employment and unemployment, Work transitions and life stages, Labour mobility, turnover and work absences, Income, pensions and wealth, Work and retirement
    Date: 2014–01–28
  7. By: Joshua Rauh (Stanford University)
    Abstract: This paper posits a political economy explanation for why the public sector has remained on the deferred compensation defined benefit (DB) model of pension provision while the private sector has transitioned to defined contribution (DC) plans. Budgeting for deferred compensation in the public sector is generally done on the basis of targeting the mean of a distribution of outcomes of investments in the pension fund’s risky assets. The budget is viewed as balanced under the assumption that the mean is attained. I document that the loading on the stock market of public pension fund assets has increased very dramatically over the past several decades. The mean outcome on which the budget is based therefore is increasingly less reflective of the wide distribution of outcomes that might obtain, and the “expected return†is often an outcome that is substantially less likely than 50% to be realized. Using CalPERS and CalSTRS as examples, I show that the growth in unfunded liabilities since 2000 has been due to a combination of benefit increases, insufficient funding, and poor investment returns. Pension contributions across many US cities have increased substantially since 2000, although nationally benefit payments are exceeding contributions by increasingly wider margins. Cities that are contributing more are reducing some public safety coverage, particularly fire forces.
    Date: 2014–01
  8. By: Veronika Pool (Indiana University, Bloomington); Clemens Sialm (University of Texas at Austin); Irina Stefanescu (Board of Governors of the Federal Reserve System)
    Abstract: This paper investigates whether mutual fund families acting as trustees of 401(k) plans display favoritism toward their own funds. Using a hand-collected dataset on retirement investment options, we show that poorly-performing funds are less likely to be removed from and more likely to be added to a 401(k) menu if they are affiliated with the plan trustee. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, the subsequent performance of poorly-performing affiliated funds indicates that these trustee decisions are not information driven and are costly to retirement savers.
    Date: 2014–01

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