nep-age New Economics Papers
on Economics of Ageing
Issue of 2014‒07‒21
nine papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Delaying the Normal and Early Retirement Ages in Spain: Behavioural and Welfare Consequences for Employed and Unemployed Workers By Alfonso R. Sánchez; J. Ignacio García-Pérez; Sergi Jiménez
  2. The role of economic, fiscal, and financial shocks in the evolution of public sector pension funding By Triest, Robert K.; Zhao, Bo
  3. The Impact of Informal Caregiving Intensity on Women's Retirement in the United States By Josephine Jacobs; Courtney Van Houtven; Audrey Laporte; Peter Coyte
  4. Pay with Promises or Pay as You Go? Lessons from the Death Spiral of Detroit By Holmes, Thomas J.; Ohanian, Lee E.
  5. Financial Literacy and Retirement Planning in Canada By David Boisclair; Annamaria Lusardi; Pierre-Carl Michaud
  6. Does Regulation Matter? Riskiness and Procyclicality of Pension Asset Allocation By Brière, Marie; Boon, Ling-Ni; Rigot, Sandra
  7. Baby Boomer caregivers in the workforce: Do they fare better or worse than their predecessors? By Josephine Jacobs; Courtney Van Houtven; Audrey Laporte; Peter Coyte
  8. Economic growth and funded pension systems By Michiel Bijlsma; Ferry Haaijen; Casper van Ewijk
  9. An Update on Pension Obligation Bonds By Alicia H. Munnell; Jean-Pierre Aubry; Mark Cafarelli

  1. By: Alfonso R. Sánchez; J. Ignacio García-Pérez; Sergi Jiménez
    Abstract: In this paper, we explore the links between pension reform, early retirement, and the use of unemployment as an alternative pathway to retirement. We use a dynamic rational expectations model to analyze the search and retirement behaviour of employed and unemployed workers aged 50 or over. The model is calibrated to reproduce the main reemployment and retirement patterns observed between 2002 and 2008 in Spain. It is subsequently used to analyze the effects of the 2011 pension reform in Spain, characterized by two-year delays in both the early and the normal retirement ages. We find that this reform generates large increases in labour supply and sizable cuts in pension costs, but these are achieved at the expense of very large welfare losses, especially among unemployed workers. As an alternative, we propose leaving the early retirement age unchanged, but penalizing the minimum pension (reducing its generosity in parallel to the cuts imposed on individual pension benefits, and making it more actuarially fair with age). This alternative reform strikes a better balance between individual welfare and labour supply stimulus.
    Date: 2014–05
  2. By: Triest, Robert K. (Federal Reserve Bank of Boston); Zhao, Bo (Federal Reserve Bank of Boston)
    Abstract: Many studies have documented the pervasive underfunding of public sector pension plans in the United States in recent years. The deterioration of the funded status of public pension plans coincided with severe fiscal crises that state and local governments experienced in the 2000s. This development has led to a suspicion that state and local governments have decreased employer pension contributions as a backdoor means of running fiscal deficits. In this paper, the authors investigate the extent to which this phenomenon has occurred. They estimate panel data regressions using the Boston College Center for Retirement Research's Public Plans Database, which provides data for 2001 through 2010. The authors find that contrary to popular belief, plan sponsors do not reduce their contributions in response to negative fiscal or economic shocks. In contrast, plan sponsors' contributions to their pension plans increase in response to growth in their unfunded liabilities. The authors document that the public pension underfunding crisis during the 2000s developed largely as a consequence of portfolio returns that fell short of expectations. Public pension plans' assets portfolios have a relatively high share of equities and other risky assets, leaving the plans' funded status vulnerable to asset price fluctuations. Although plan sponsors increased their contributions in response to the growth of unfunded liabilities, they did not do so by enough to fully counteract the effect of the subpar portfolio returns. This finding holds across the spectrum of plans ranked in terms of funded status in 2010.
    JEL: G11 H72 H75
    Date: 2013–12–27
  3. By: Josephine Jacobs; Courtney Van Houtven; Audrey Laporte; Peter Coyte
    Abstract: With increasing pressure on retirement-aged individuals to provide informal care while remaining in the workforce, it is important to understand the impact of informal care demands on individuals' retirement decisions. This paper explores whether different intensities of informal caregiving can lead to retirement for women in the United States. Using the National Longitudinal Survey of Mature Women, we control for time-invariant heterogeneity and for time-varying sources of bias with a two-stage least squares model with fixed effects. We find that there is no significant effect on retirement for all informal caregivers, but there are important incremental effects of caregiving intensity. Women who provide at least 20 hours of informal care per week are 3 percentage points more likely to retire relative to other women. We also find that when unobserved heterogeneity is controlled for with fixed effects, we cannot reject exogeneity. These findings suggest that policies encouraging both informal care and later retirement may not be feasible without allowances for flexible scheduling or other supports for working caregivers.
    Keywords: Informal caregiving, unpaid care, retirement, United States
    JEL: J22 J1 I11
    Date: 2014–04
  4. By: Holmes, Thomas J. (Federal Reserve Bank of Minneapolis); Ohanian, Lee E. (Federal Reserve Bank of Minneapolis)
    Abstract: As part of compensation, municipal employees typically receive promises of future benefits. Motivated by the recent bankruptcy of Detroit, we develop a model of the equilibrium size of a city and use it to analyze how pay-with-promises schemes interact with city growth. The paper examines the circumstances under which a death spiral arises, where cutbacks of city services and increases in taxes lead to an exodus of residents, compounding financial distress. The model is put to work to analyze issues such as the welfare effects of having cities absorb pension risk and how unions affect the likelihood of a death spiral.
    Keywords: City growth; Pay with promises; Death spiral; Defined benefit pension plans; Retiree health benefits; Detroit
    JEL: H20 H75 R23 R51
    Date: 2014–07–14
  5. By: David Boisclair; Annamaria Lusardi; Pierre-Carl Michaud
    Abstract: Financial literacy and Canadians’ capacity to plan for retirement is of primary importance for the policy debate over pension system reform in Canada. In this paper, we draw on internationally comparable survey evidence on financial literacy and retirement planning in Canada to investigate how financially literate Canadians are and who does plan for retirement. We find that 42 percent of respondents are able to correctly answer three simple questions measuring knowledge of interest compounding, inflation, and risk diversification. This is consistent with evidence from other countries, and Canadians perform relatively well in comparison to Americans but worse than individuals in other countries, such as Germany. Among Canadian respondents, the young and the old, women, minorities, and those with lower educational attainment do worse, a pattern that has been consistently found in other countries as well. Retirement planning is strongly associated with financial literacy; those who responded correctly to all three financial literacy questions are 10 percentage points more likely to have retirement savings.
    JEL: D14 D91
    Date: 2014–07
  6. By: Brière, Marie; Boon, Ling-Ni; Rigot, Sandra
    Abstract: In this paper, we investigate the relative importance of drivers to pension funds’ asset allocation choices. We specifically test if the contrast between regulatory approaches of public and private Defined Benefits (DB) pension funds in the US, Canada and the Netherlands have an impact on the riskiness and procyclicality of their asset allocation. Derived from panel data analysis of a unique database comprising of more than 800 pension funds’ detailed asset allocations, our results underscore the economic importance of regulation in the funds’ asset allocation choices, relative to institutional and individual funds’ characteristics. In particular, quantitative risk-based capital requirements, and to a lesser extent valuation and funding requirements (i.e., the choice of the liability discount rate) or the presence of quantitative investment restrictions, induce pension funds to significantly decrease their asset allocation to risky assets, especially to equities. Allocation to alternatives, which are comparatively treated quite favorably by solvency standards, is higher in the presence of risk-based capital requirements. Contrary to popular conviction that regulatory mechanisms encourage procyclical asset allocation, we find that funds subject to risk-based capital requirements were likely to be less procyclical during the last crisis – an outcome possibly tempered by temporary regulatory slackening in response to the crisis.
    Keywords: Solvency; Pension funds; Financial stability; Regulation;
    JEL: G11 G28 H55
    Date: 2014–05
  7. By: Josephine Jacobs; Courtney Van Houtven; Audrey Laporte; Peter Coyte
    Abstract: Since the 1960's there have been substantial increases in women's labor force attachment. Meanwhile, increases in life expectancy and a shifting focus to care in community settings have increased the odds of becoming a caregiver. In light of these changes and the unpaid leave policies introduced in the 1990s to reduce this role strain, it is important to assess whether the labor market outcomes of caregivers have changed over time. We explored the impact of caregiving on women's labor force outcomes and whether this effect was different for women in the Baby Boomer generation versus women born in the pre-World War II years. Using data from the American National Longitudinal Surveys of Young Women and Mature Women, we followed two cohorts of pre-retirement aged women at similar points in their careers. We used pooled and fixed-effects regressions and found that intensive informal caregiving was negatively associated with labor force participation for both pre-Baby Boomers and Baby Boomers. Further, the caregiving effects were not significantly different across cohorts. Caregiving was not significantly associated with the hours worked or wages. This study provides a first step in establishing that caregiving labor market penalties have persisted over time, despite the introduction of offsetting policies.
    Keywords: Informal caregiving, unpaid caregiving, labor force participation, cohort, gender, United States
    JEL: J22 J1 I11
    Date: 2014–01
  8. By: Michiel Bijlsma; Ferry Haaijen; Casper van Ewijk
    Abstract: Growing pension savings lead to deeper capital markets. This can have a positive effect on economic growth by allowing firms that are more dependent on external finance to grow faster. We study this effect using data on 69 industrial sectors in 34 OECD countries for the period 2001-2010 through a difference-in-differences approach that interacts financial development with industry dependence on external finance. We take into account unobserved heterogeneity by including country-time, industry-time and industry-country fixed effects. We find a significant impact of higher level of pension savings on growth in sectors that are more dependent on external financing. The financial crisis does not significantly affect this relation.
    JEL: C23 J26 O43
    Date: 2014–07
  9. By: Alicia H. Munnell; Jean-Pierre Aubry; Mark Cafarelli
    Abstract: The brief’s key findings are: The brief’s key findings are: *Some state and local governments issue Pension Obligation Bonds (POBs) to cover their required pension contributions. *POBs offer budget relief and potential cost savings, but also carry significant risk. *POBs had a negative average real return from 1992-2009, but show a small gain when the time period is extended to 2014. *POBs could be a useful tool for fiscally sound governments or as part of a broader pension reform package for fiscally stressed governments. *But results to date suggest that, instead, POBs tend to be issued by governments under financial pressure who have little control over the timing.
    Date: 2014–07

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