nep-age New Economics Papers
on Economics of Ageing
Issue of 2015‒12‒08
twelve papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. An Economic Analysis of Pension Tax Proposals By Angus Armstrong; Philip Davis; Monique Ebell
  2. Indirect Fiscal Effects of Long-Term Care Insurance By Johannes Geyer; Peter Haan; Thorben Korfhage
  3. The growing intergenerational divide in Europe By Pia Hüttl; Karen E. Wilson; Guntram B. Wolff
  4. Is There a Role for Social Pensions in Asia? By Armando Barrientos
  5. The Welfare State and the demographic dividend: A cross-country comparison By Gemma Abio Roig; Concepció Patxot Cardoner; Miguel Sánchez-Romero; Guadalupe Souto Nieves
  6. Health, Work Capacity and Retirement in Sweden By Johansson, Per; Laun, Lisa; Palme, Marten
  7. The Effect of Health Reform on Retirement By Helen Levy; Thomas Buchmueller; Sayeh Nikpay
  8. Forensics and the Future of a Connecticut Pension Plan By Jean-Pierre Aubry; Alicia H. Munnell
  9. The grand divergence: global and European current account surpluses By Zsolt Darvas
  10. Strategic Intelligence Monitor on Personal Health Systems Phase 3 (SIMPHS3) - Cross-case analysis: models of organisation By Fabienne Abadie; Wilhelmus Cornelis Graafmans; Francisco Lupianez Villanueva; Cristiano Codagnone
  11. Health Disparities by Income in Spain before and after the Economic Crisis By Max Coveney; Pilar Garcia Gomez; Eddy Van Doorslaer; Tom Van Ourti
  12. Education Choices, Longevity and Optimal Policy in a Ben-Porath Economy By Yukihiro Nishimura; Pierre Pestieau; Gregory Ponthiere

  1. By: Angus Armstrong (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Philip Davis (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Monique Ebell (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM))
    Abstract: The Government has recently issued a consultation document which raises the possibility of a substantial change in the taxation of pensions. In this paper we assess the economic consequences of changing from the existing EET system (where pension savings and returns are exempt from income tax, but pension income is taxed) to a TEE system (pension savings would be from taxed income but with no further taxation thereafter), making use of two complementary approaches. First, we review the economic and empirical literature, and second we construct a general equilibrium overlapping generations (OLG) model parameterised to UK data and the UK tax system. Both approaches lead to the same outcome: that changing from EET to TEE would lead to a fall in personal savings. In addition, our analysis shows that the move would be counter to a series of pension reform principles the Government has set out. Our review of published literature shows most authors find EET (which is used in 22 of 30 OECD countries) more economically beneficial. This benefit manifests itself in an increased amount of personal and national saving, as well as in the risk on retirement portfolios, the effect on capital markets and overall benefits to economic growth. These findings are supported by our general equilibrium overlapping generations (OLG) model. OLG models are ideally suited to the analysis of life-cycle issues such as pensions, as they allow several cohorts or generations to be alive and interacting at once. General equilibrium allows us to capture all the complex feedback effects between taxes, savings decisions, and other variables such as investment, productivity, output (GDP), wages and interest rates. Our model shows that switching from EET to TEE would lead to a fall in personal savings, even if there are top-ups or subsidies from the Government. The intuition is simple: moving from EET to TEE frontloads the tax burden onto younger households. Bringing forward taxation would reduce the resources available to working aged households, leading to reductions in both consumption and savings. In addition, the current EET system provides added incentives for higher and additional rate taxpayers to save, in order to benefit from lower tax rates in retirement. This reduction in savings would have broader macroeconomic consequences including lower aggregate consumption, a lower capital stock, lower productivity and a higher real interest rate. The Government has stated that any reform must encourage people to save more; our analysis suggests that the proposed policy change will deliver the opposite outcome. Another principle set out by the Government is that the proposal ought to be consistent with its fiscal framework. The TEE system would lead to an immediate tax revenue gain from removing the current tax relief, which would improve today’s headline fiscal deficit. However, this would be at the expense of tomorrow’s fiscal accounts. We note that the only scenario where output (almost) and consumption return to the levels comparable to the current EET system are with a 50% government pension subsidy which would likely be detrimental on a Whole Government Accounts basis. Our model also reveals that a move from EET to TEE is inconsistent with the Government’s requirement that any reform should encourage individuals to take personal responsibility for adequate retirement savings. There is a dynamic inconsistency problem inherent in TEE because no government can credibly commit to never re-introducing taxation on pension income given likely challenges ahead. Retirement savings largely depend on future Government pension policy, and it is easy to see that the scrapping of taxation on pension income might be reversed in the future. As a result, individuals would be less, rather than more, willing to take personal responsibility under a TEE regime. The final principal set out by the Government is that the policy is simple and transparent. We note that the transition from EET to TEE would require earmarking different pension pots of savings as accumulated under different tax regimes. The transitional costs for defined contribution pensions could be considerable (assuming they would be forced to pay additional top-ups out of taxed income). We are unconvinced that having separate pension savings under different tax regimes would be beneficial in terms of transparency and simplicity.
    Date: 2015–11
  2. By: Johannes Geyer; Peter Haan; Thorben Korfhage
    Abstract: Informal care by close family members is the main pillar of most longterm care systems. However, due to demographic ageing the need for long-term care is expected to increase while the informal care potential is expected to decline. From a budgetary perspective, informal care is often viewed as a cost-saving alternative to subsidized formal care. This view, however neglects that many family carers are of working age and face the difficulty to reconcile care and paid work which might entail sizable indirect fiscal effects related to forgone tax revenues, lower social security contributions and higher transfer payments. In this paper we use a structural model of labor supply and the choice of care arrangement to quantify these indirect fiscal effects of informal care. Moreover based on the model we discuss the fiscal effects related to non-take up of formal care.
    Keywords: labor supply, long-term care, long-term care insurance, structural model
    JEL: J22 H31 I13
    Date: 2015
  3. By: Pia Hüttl; Karen E. Wilson; Guntram B. Wolff
    Abstract: Highlights During the economic and financial crisis, the divide between young and old in the European Union increased in terms of economic well-being and allocation of resources by governments. As youth unemployment and youth poverty rates increased, government spending shifted away from education, families and children towards pensioners. To address the sustainability of pension systems, some countries implemented pension reforms. We analysed changes to benefit ratios, meaning the ratio of the income of pensioners to the income of the active working population, and found that reforms often favoured current over future pensioners, increasing the intergenerational divide. We recommend reforms in three areas to address the intergenerational divide - improving European macroeconomic management, restoring fairness in government spending so the young are not disadvantaged, and pension reforms that share the burden fairly between generations. 1. The emergence of an intergenerational divide During seven years of economic crisis, the intergenerational income and wealth divide has increased in many European Union countries. In the bloc as a whole, young people on average have become significantly poorer, while poverty among pensioners has been reduced (Figure 1). Unemployment among the under-25s has risen notably while older workers (aged 50-64) have been less affected (Figure 2). While this pattern has been particularly pronounced in southern Europe, it can also be observed for the European Union as a whole. In the EU as a whole, unemployment in the 15-24 age group increased by 7.8 percentage points between 2007 and 2013, peaking at 23.7 percent in 2013, while unemployment among older workers in the 50-64 age group increased somewhat less, by 2.4 percentage points to 7.8 percent in 2013. A more precise measure of forced inactivity of young people is the 'not in employment, education or training' (NEET) rate, which varies significantly between countries. In the countries most hit by the crisis (Cyprus, Greece, Ireland, Italy and Spain), the NEET rate increased by more than 7 percentage points between 2007 and 2013, peaking at over 20 percent in Greece and Italy (Figure 2). By contrast, the NEET rate declined in Germany in the same period, from 8.9 to 6.3 percent. Figure 1 - Pre and post-crisis material deprivation rate and unemployment rate in the EU Source - Bruegel based on Eurostat. Note - The material deprivation rate is defined as the enforced inability (rather than the choice not) to pay for at least three of - unexpected expenses; a one-week annual holiday away from home; a meal involving meat, chicken or fish every second day; adequate heating; durable goods such as washing machines, colour televisions, telephones or cars; or being confronted with payment arrears. Figure 2 - 15-24 year olds not in employment, education or training (%) Source - Eurostat. Material deprivation rates are typically higher for young people than for those aged 65 or over (Figure 1). In 2007, 20 percent of young people below the age of 18 were materially deprived, compared to 16 percent of people aged over 65. As with the NEET rates, there are major differences between countries. While less than 10 percent of young people faced poverty in Denmark, Finland and Sweden in 2007 (the proportion is even smaller for older people), more than 20 percent of young and old people were materially deprived in Cyprus, Greece and Portugal. In Latvia, Hungary and Poland about 40 percent of young people were poor. Figure 3 shows the percentage change per country in the material deprivation rate during the crisis (2007-13). The rate increased substantially more for the young compared to the old, especially in the countries hit most by the crisis (except Ireland), meaning that already high levels before the crisis in those countries were exacerbated. Only Italy and to a lesser extent the United Kingdom experienced deteriorating ratios for both the young and old. By contrast, Finland and Sweden, with low levels to start with, saw their respective material deprivation rates decline for both young and old people over the same period. The same is valid for Poland1. Figure 3 - Change in material deprivation rate (2007-13, %) Source - Bruegel based on Eurostat. Overall, a worrying picture emerges. First, poverty indicators have shown the emergence of an intergenerational divide, especially in crisis-hit southern Europe. Second, unemployment has become a major concern, with young people hit hardest during the crisis in the most stressed countries. Surges in youth unemployment and youth poverty are particularly worrying because they have long-lasting effects on productivity and potential growth, marking young people for their lifetimes, reducing their productivity and often excluding them from the labour market for an extended period of time (Bell and Blanchflower, 2010; Arulampalam, 2001; Gregg and Tominey, 2005).
    Date: 2015–11
  4. By: Armando Barrientos
    Abstract: Rapid population ageing and economic transformation in Asia underline the policy challenges associated with ensuring income security in old age. This article examines the potential role of social pensions in securing old-age income security in Asia. It assesses the main policy trade-offs associated with adopting alternative social pension designs, especially around two critical policy points: the comparative advantages of social assistance and social pensions; and the integration of non-contributory transfers within advanced contributory pension schemes.
    Keywords: pensions;income security;poverty;old age
    Date: 2014–12–11
  5. By: Gemma Abio Roig (Universitat de Barcelona); Concepció Patxot Cardoner (Universitat de Barcelona); Miguel Sánchez-Romero (Wittgenstein Centre (IIASA, VID/OAW and WU)); Guadalupe Souto Nieves (Universitat Autònoma de Barcelona)
    Abstract: The sustainability of the welfare state is in doubt in many developed countries due to drastic population ageing. The extent of the problem and the margin for reforms depend - among other factors - on the size of the ageing process and the size of the public transfer system. The latter has a crucial impact on the extent to which the first demographic dividend previous to the ageing process turns into a second demographic dividend. The contribution of the different factors driving the demographic dividend is, ultimately, an empirical question. In this paper we contribute to the debate, exploding the cross-country comparison potentialities of the National Transfer Accounts (NTA) database. In particular, we introduce different configurations of the welfare state transfers – Sweden, United States and Spain - into a realistic demography Overlapping Generations (OLG) model and simulate its effects on the second demographic dividend.
    Keywords: Ageing, demographic dividend, intergenerational transfers, national transfer accounts, overlapping generations model, welfare state.
    JEL: J11 J18 E21 H53
    Date: 2015
  6. By: Johansson, Per (Uppsala University); Laun, Lisa (Institute for Evaluation of Labor Market and Education Policy (IFAU)); Palme, Marten (Dept. of Economics, Stockholm University)
    Abstract: Following an era of a development towards earlier retirement, there has been a reversed trend to later exit from the labor market in Sweden since the late 1990s. We investigate whether or not there are potentials, with respect to health and work capacity of the population, for extending this trend further. We use two different methods. First, the Milligan and Wise (2012) method, which calculates how much people would participate in the labor force at a constant mortality rate. Second, the Cutler et al. (2012) method, which asks how much people would participate in the labor force if they would work as much as the age group 50-54 at a particular level of health. We also provide evidence on the development of self-assessed health and health inequality in the Swedish population.
    Keywords: SHARE; Health inequality
    JEL: I10 J26
    Date: 2015–11–15
  7. By: Helen Levy (University of Michigan); Thomas Buchmueller (University of Michigan); Sayeh Nikpay (University of Michigan)
    Abstract: Many studies have shown that the availability of health insurance is an important determinant of the retirement decision. Beginning in January 2014, the Affordable Care Act (ACA) made affordable alternatives to employer-sponsored health insurance much more widely available than they had been previously through the establishment of health insurance exchanges and, in some states, the expansion of Medicaid eligibility to low-income, childless adults. We analyze whether these new health insurance options led to an increase in retirement or part-time work among individuals ages 55 through 64 during the first 18 months after the policy took effect. Using data from the basic monthly Current Population Survey from January 2005 through June 2015, we find that there was no increase in retirement in 2014 either overall or in Medicare expansion states relative to nonexpansion states. We also find no change in the fraction of older workers who are working part-time.
    Date: 2015–09
  8. By: Jean-Pierre Aubry; Alicia H. Munnell
    Abstract: The State of Connecticut administers six retirement systems. The two largest are the State Employees Retirement System (SERS) and the Teachers’ Retire­ment System (TRS). Over the past decade, despite a concerted effort by the State, the funded status for both these systems declined by about 20 percentage points and, as of 2014, stood at 42 percent for SERS and 59 percent for TRS – among the lowest in the na­tion. The State requested that the Center for Retire­ment Research provide an assessment of both SERS and TRS to: identify factors that have led to today’s unfunded liability; project the systems’ finances under their current funding approaches; and present alternatives to shore up the systems’ finances and improve budget flexibility. This brief reports on the results of that effort for one of the Connecticut plans – SERS – and shows how a look backward helps define the options going forward. The discussion proceeds as follows. The first section describes how the plan’s initial legacy costs, combined with subsequent inadequate contributions, returns falling short of assumptions (after 2000), and adverse actuarial experience, contributed to SERS’ current low funded ratio and large unfunded liability. The second section describes the potential for rapidly rising pension costs if Connecticut continues to target full funding by 2032, and it offers two options for more realistic financing of the unfunded liability: 1) replace the 2032 target with a reasonable rolling amortization period; or 2) separately finance the ben­efits for members hired prior to pre-funding on some other basis. The trade-off is that any such relaxation in timing would be accompanied by more serious funding of the plan, using a lower assumed rate of re­turn and amortization based on level-dollar payments. The third section lays out the case for separately financing legacy costs: more equitable and predictable financing of benefits for those hired before pre-fund­ing and a more accurate representation of the cost of benefits for current employees. The final section concludes that adopting a realistic funding scheme is a high priority and that separately financing the legacy costs is a promising approach not only for Connecticut but also for other states that established plans early and accumulated a large unfunded liability before entering the era of pre-funding.
    Date: 2015–12
  9. By: Zsolt Darvas
    Abstract: Global current account imbalances widened before the 2007/2008 crisis and have narrowed since. While the post-crisis adjustment of European current account deficits was in line with global developments (though more forceful), European current account surpluses defied global trends and increased. We use panel econometric models to analyse the determinants of medium-term current account balances. Our results confirm that higher fiscal balances, higher GDP per capita, more rapidly aging populations, larger net foreign assets, larger oil rents and better legal systems increase the medium-term current account balance, while a larger growth differential and a higher old-age dependency ratio reduce it. European current account surpluses became excessive during the past twelve years according to our estimates, while they were in line with model predictions in the preceding three decades. Generally, the gap between the actual current account and its fitted value in the model has a strong predictive power for future current account changes. Excess deficits adjust more forcefully than excess surpluses. However, in the 2004-07 period, excess imbalances were amplified, which was followed by a forceful correction in 2008-15, with the exception of European surpluses
    Date: 2015–08
  10. By: Fabienne Abadie (European Commission – JRC - IPTS); Wilhelmus Cornelis Graafmans (European Commission – JRC - IPTS); Francisco Lupianez Villanueva (European Commission – JRC - IPTS); Cristiano Codagnone (European Commission – JRC - IPTS)
    Abstract: This SIMPHS3 report on models of organisation aims to identify key elements of the integrated care and independent living models implemented in 23 initiatives (cases) identified across 18 regions in 14 countries - 12 EU Member States plus Israel and the US. These cases cover diverse institutional, organisational, human (in terms of people involved in launching the initiatives) and socio-economic settings which allowed us to gather evidence on a variety of contextual conditions. In spite of having looked for deployed services, and despite a very thorough approach to the selection of cases, a number of cases still have to prove their viability and full deployment is still to be realised. In addition, one case focused on pre-commercial procurement of innovation in healthcare, so as to gain understanding of this rather new approach. This case is out of the scope of the analysis presented here.
    Keywords: Europe 2020, Digital Agenda for Europe, Digital Living, Digital Society, Digital Economy, Information Society Technologies, Health, Emerging ICT technologies, Personal Health Systems, Remote Monitoring and Treatment, SIMPHS3, SIMPHS, ageing, integrated care, independent living, case studies, facilitators, governance, impact, drivers, barriers, integration, organisation
    Date: 2015–11
  11. By: Max Coveney (Erasmus University Rotterdam); Pilar Garcia Gomez (Erasmus University Rotterdam); Eddy Van Doorslaer (Erasmus University Rotterdam); Tom Van Ourti (Erasmus University Rotterdam, the Netherlands)
    Abstract: Little is known about what the economic crisis has done to health disparities by income. We apply a decomposition method to unravel the contributions of income growth, income inequality and differential income mobility across socio-demographic groups to changes in health disparities by income in Spain using longitudinal data from the Survey of Income and Living Conditions (SILC) for the period 2004-2012. We find a modest rise in health inequality by income in Spain in the five years of economic growth prior to the start of the crisis in 2008, but a sharp fall after 2008. The drop mainly derives from the fact that loss of employment and earnings has disproportionately affected the incomes of the younger and healthier groups rather than the (mainly stable pension) incomes of the over 65s. This suggests that unequal distribution of income protection by age may reduce health inequality in the short run after an economic recession.
    Keywords: economic crisis; health inequality; Spain
    JEL: D30 D63 I14 I15
    Date: 2015–12–03
  12. By: Yukihiro Nishimura (Osaka University [Osaka]); Pierre Pestieau (CEPR - Center for Economic Policy Research - CEPR, CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - Institut national de la recherche agronomique (INRA) - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics); Gregory Ponthiere (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - Institut national de la recherche agronomique (INRA) - École des Ponts ParisTech (ENPC) - CNRS - Centre National de la Recherche Scientifique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)
    Abstract: We develop a 3-period overlapping generations (OLG) model where individuals borrow at the young age to finance their education. Education does not only increase future wages, but, also, raises the duration of life, which, in turn, affects education choices, in line with Ben Porath (1967). We first identify conditions that guarantee the existence of a stationary equilibrium with perfect foresight. Then, we reexamine the conditions under which the Ben-Porath effect prevails, and emphasize the impact of human capital decay and preferences. We compare the laissez-faire with the social optimum, and show that the latter can be decentralized provided the laissez-faire capital stock corresponds to the one satisfying the modified Golden Rule. Finally, we introduce intracohort heterogeneity in the learning ability, and we show that, under asymmetric information, the second-best optimal non-linear tax scheme involves a downward distortion in the level of education of less able types, which, quite paradoxically, would reinforce the longevity gap in comparison with the laissez-faire.
    Keywords: Education,Life expectancy,OLG models,Optimal policy
    Date: 2015–11

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