nep-age New Economics Papers
on Economics of Ageing
Issue of 2017‒04‒30
eighteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Transitions in Late-Life Living Arrangements and Socio-economic Conditions of the Elderly in Egypt, Jordan and Tunisia By Aurora Angeli; Marco Novelli
  2. How the Growing Gap in Life Expectancy May Affect Retirement Benefits and Reforms By Alan J. Auerbach; Kerwin K. Charles; Courtney C. Coile; William Gale; Dana Goldman; Ronald Lee; Charles M. Lucas; Peter R. Orszag; Louise M. Sheiner; Bryan Tysinger; David N. Weil; Justin Wolfers; Rebeca Wong
  3. Labor Market Effects of Pension Reform :an overlapping genenrations general equilibrium model applied to Tunisia By MOUNA BEN OTHMAN; Mohamed Ali MAROUANI
  4. Towards an equitable and sustainable points system By SCHOKKAERT Erik; DEVOLDER Pierre; HINDRIKS Jean; VANDENBROUCKE Frank
  5. Why Are U.S. Households Claiming Social Security Later? By Wenliang Hou; Alicia H. Munnell; Geoffrey T. Sanzenbacher; Yinji Li
  6. Réforme des pensions légales : le système de pension à points By Jean Hindriks; Pierre Devolder; Erik Schokkaert; Frank Vandenbroucke
  7. Population Aging, Health Care, and Fiscal Policy Reform: The challenges for Japan By HSU Minchung; YAMADA Tomoaki
  8. Older people's willingness to delay social security claiming By Maurer, Raimond; Mitchell, Olivia S.
  9. Jumping the welfare gap in designing public transfers By Simonovits Andras
  10. X-efficiency and economies of scale in pension fund administration and investment By Gosse A.G. Alserda; J.A. Bikker; Fieke (S.G.) van der Lecq
  11. Risky Choices: Simulating Public Pension Funding Stress with Realistic Shocks By Farrell, James; Shoag, Daniel
  12. Pension fund's illiquid assets allocation under liquidity and capital constraints By Dirk Broeders; Kristy Jansen; Bas Werker
  13. Individual Heterogeneity and Pension Choices: How to Communicate an Effective Message? By Giovanni Gallo; Costanza Torricelli; Arthur van Soest
  14. Improving the Supplemental Poverty Measure: Two proposals By John A. Bishop; Jonathan Lee; Lester A. Zeager
  15. Adaptation and the Mortality Effects of Temperature Across U.S. Climate Regions By Garth Heutel; Nolan H. Miller; David Molitor
  16. "Falling Labor Force Participation: Demographics or Lack of Jobs?" By Flavia Dantas; L. Randall Wray
  17. Long Term Growth Perspectives in Japan and the Euro Area By Christian Dreger
  18. The Nordic model of economic development: Shocks, reforms and future prospects By Iacono, Roberto

  1. By: Aurora Angeli (University of Bologna); Marco Novelli
    Abstract: Middle East and North Africa’s demographic trends reveal together a growing ageing population and an exceptional growth of the youth population. Increasing elderly population leads to significant consequences for the cost and organization of health systems. The rise in life expectancy has changed the arrangement of multigenerational families; relationships in ageing families have become more unstable and less predictable. In this paper, we investigate - in a gender and geographic perspective – differences in the socio-economic situation of the elderly and the determinants of late-life living arrangements in Egypt, Jordan and Tunisia starting from Labor Market Panel Surveys. Results are in line with both the different countries’ stages of the demographic transition and welfare state coverages. The family continues to be the basis for support to older people, as in general in the Arab area. A relevant socio-political group, calling for policy interventions, is represented by the elderly living alone.
    Date: 2017–04–20
  2. By: Alan J. Auerbach; Kerwin K. Charles; Courtney C. Coile; William Gale; Dana Goldman; Ronald Lee; Charles M. Lucas; Peter R. Orszag; Louise M. Sheiner; Bryan Tysinger; David N. Weil; Justin Wolfers; Rebeca Wong
    Abstract: Older Americans have experienced dramatic gains in life expectancy in recent decades, but an emerging literature reveals that these gains are accumulating mostly to those at the top of the income distribution. We explore how growing inequality in life expectancy affects lifetime benefits from Social Security, Medicare, and other programs and how this phenomenon interacts with possible program reforms. We first project that life expectancy at age 50 for males in the two highest income quintiles will rise by 7 to 8 years between the 1930 and 1960 birth cohorts, but that the two lowest income quintiles will experience little to no increase over that time period. This divergence in life expectancy will cause the gap between average lifetime program benefits received by men in the highest and lowest quintiles to widen by $130,000 (in $2009) over this period. Finally we simulate the effect of Social Security reforms such as raising the normal retirement age and changing the benefit formula to see whether they mitigate or enhance the reduced progressivity resulting from the widening gap in life expectancy.
    JEL: H50 J10
    Date: 2017–04
    Abstract: Capture the interactions among pension reform, labor market and inter-generational distribution issues We use an overlapping generation general equilibrium model. The impact on the labor market is addressed on the aggregate level but also y distinguishing different age categories. Results: Increasing the contribution rate is the worst solution in terms of welfare and unemployment, particularly of the youth.Postponing the retirement age is the best option and it does not entail an increase of youth unemployment contrary to the traditional wisdom. The middle-aged are those who benefit the most from the reforms in terms of welfare.
    Keywords: TUNISIA, Labor market issues, General equilibrium modeling
    Date: 2016–07–04
  4. By: SCHOKKAERT Erik (KU Leuven and CORE); DEVOLDER Pierre (Université catholique de Louvain, ISBA, Belgium); HINDRIKS Jean (Université catholique de Louvain, CORE, Belgium); VANDENBROUCKE Frank (Universiteit Amsterdam)
    Abstract: We describe the points system that has been proosed by the Belgian Commission for Pension Reform 2020-2040. Intragenerational equity can be realised in a flexible and transparent way through the allocation of points within a cohort. The intergenerational distribution is determined by fixing the value of a point for the newly retired and a sustainability parameter for the actual retirees. The value of the point links future pensions to the future average living standard of the populuation in employment. This implies that credible promises can be made to the younger contributing generations. To keep the system economically sustainable, we propose an automatic adjustment mechanism, in which a key role is played by the career length. This adjustment mechanism implements the Musgrave rule by stating that the ratio of pensions over labour earnings net of pension contributions should remain constant. This induces a balanced distribution of the burden of demographic and economic shocks oveor the different cohorts and canbe seen as a transparent mechanism of intergenerational risk sharing.
    Keywords: retirement; pension reform, Musgrave rule; intergenerational risk sharing
    JEL: H55 I38 J18 J26
    Date: 2017–02–27
  5. By: Wenliang Hou; Alicia H. Munnell; Geoffrey T. Sanzenbacher; Yinji Li
    Abstract: Over the past two decades, the share of individuals claiming Social Security at the Early Eligibility Age has dropped and the average retirement age has increased. At the same time, Social Security rules have changed substantially, employer-sponsored retirement plans have shifted from defined benefit (DB) to defined contribution (DC), health has improved, and mortality has decreased. In theory, all of these changes could lead to a trend towards later claiming. Disentangling the effect of any one change is difficult because they have been occurring simultaneously. This paper uses the Gustman and Steinmeier structural model of retirement timing to investigate which of these changes matter most by simulating their effects on the original cohort (1931-1941 birth years) of the Health and Retirement Study (HRS). The predicted behavior is then compared to the actual retirements of the Early Baby Boomer cohort (1948-1953 birth years) to see how much of the later cohort’s delayed claiming and retirement can be explained by these changes.
    Date: 2017–04
  6. By: Jean Hindriks (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE) and Itinera Institute); Pierre Devolder (UNIVERSITE CATHOLIQUE DE LOUVAIN,Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)); Erik Schokkaert (KULeuven and UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Frank Vandenbroucke (Université d’Amsterdam)
    Abstract: Le gouvernement s'est engagé à mettre en place un système de pension à points comme proposé par la Commission de réforme des pensions 2020-2040. Nous expliquons comment ce système fonctionne et sa flexibilité pour intégrer la pénibilité des métiers et la pension à temps partiel. Nous discutons des mécanismes de pilotage du système face au vieillissement et à l'évolution de l'emploi.
    Date: 2017–03–14
  7. By: HSU Minchung; YAMADA Tomoaki
    Abstract: This paper quantitatively studies the influence of a rapidly aging population on the financing of a public universal health insurance system and the corresponding fiscal policies. We construct a general equilibrium life-cycle model to investigate the effects of aging and evaluate various policy alternatives designed to lessen the negative influence of aging. In particular, we analyze the reforms of insurance benefits and tax financing tools that were the recent focus of a great amount of attention and debate in Japan because of the tense financial situation. We show that although the potential reforms significantly improve the welfare of future generations, political implementation of such reforms is difficult because of the large welfare costs for the current population. Our analysis suggests that a gradual reform with an intergenerational redistribution will be more implementable politically than a sudden reform.
    Date: 2017–03
  8. By: Maurer, Raimond; Mitchell, Olivia S.
    Abstract: We designed and fielded an experimental module in the 2014 HRS which seeks to measure older persons' willingness to voluntarily defer claiming of Social Security benefits. In addition we evaluate the stated willingness of older individuals to work longer, depending on the Social Security incentives offered to delay claiming their benefits. Our project extends previous work by analyzing the results from our HRS module and comparing findings from other data sources, which included very much smaller samples of older persons. We show that half of the respondents would delay claiming if no work requirement were in place under the status quo, and only slightly fewer, 46 percent, with a work requirement. We also asked respondents how large a lump sum they would need with or without a work requirement. In the former case, the average amount needed to induce delayed claiming was about $60,400, while when part-time work was required, the average was $66,700. This implies a low utility value of leisure foregone of only $6,300, or about 10 percent of older households' income.
    Date: 2016
  9. By: Simonovits Andras (Institute of Economics, Research Centre for Economic and Regional Studies, Hungarian Academy of Sciences, also Mathematical Institute of Budapest University of Technology)
    Abstract: We consider three transfer models with a representative individual who discounts the utility of the merit good with respect to the standard one's. In each model, a paternalistic government taxes the consumer and transfers him additional merit goods in return. The private purchase of the merit goods is cheaper than the transfer. Even if the optimal transfer system is welfare superior to the transfer-free system, a system with much lower transfer may be inferior, therefore this welfare gap should be jumped. Various pension modelers (e.g. Feldstein, 1985; van Groezen, Leers and Meijdam, 2003) overlooked this problem and drew wrong conclusions.
    Keywords: transfers, pensions, taxes, social welfare, paternalism
    JEL: D10 H55 J13 J14 J18 J26
    Date: 2017–03
  10. By: Gosse A.G. Alserda; J.A. Bikker; Fieke (S.G.) van der Lecq
    Abstract: Pension funds’ operating costs come at the cost of benefits, so it is crucial for pension funds to operate at the lowest cost possible. In practice, we observe substantial differences in costs per member for Dutch pension funds, both across and within size classes. This paper discusses scale inefficiency and X-inefficiency using various approaches and models, based on a unique supervisory data set, which distinguishes between administrative and investment costs. Our estimates show large economies of scale for pension fund administrations, but modest diseconomies of scale for investment activities. We also found that many pension funds have substantial X-inefficiencies for both administrative and investment activities. The two kinds of inefficiency differ across types of pension funds. Therefore, most pension funds should be able to improve their cost performance, and hence increase pension benefits
    Keywords: Efficiency, operating costs, cost elasticity, stochastic cost frontier analysis, optimal scale
    Date: 2017–02
  11. By: Farrell, James (FL Southern College); Shoag, Daniel (Harvard University)
    Abstract: State and local government pension funds in the United States collectively manage a very large and diverse pool of assets to meet the even large sum of accrued liabilities. Recent research has emphasized that widely-used accounting practices, like matching discount rates to expected asset returns, understate the market value of these liabilities. Less work has explored the risks inherent in existing diverse set asset allocations, and the accounting practices used by most state and local pensions do not capture or report this risk at all. To explore the effect of asset market risk, we build and simulate a dynamic model of pension funding using a realistic return generating process. We find that the range of potential outcomes is very large, meaning that state and local governments need to prepare for an extremely wide range of possible funding shocks in the next few decades. Moreover, this wide range of outcomes makes the ultimate impact of policy choices--such as changing the discount rate or failing to sufficiently contribute to the fund--nonlinear and difficult to anticipate. Together, these findings suggest the need for more attention and reporting of these risks and the attendant range of possible outcomes by public plans.
    Date: 2016–09
  12. By: Dirk Broeders; Kristy Jansen; Bas Werker
    Abstract: This paper empirically assesses the impact of liquidity and capital constraints on the allocation of defined benefit pension funds to illiquid assets. Liquidity constraints result from short-term pension payments and collateral requirements on derivatives. Capital constraints follow from the requirement to retain sufficient capital to absorb unexpected losses. Liability duration and hedging affect the allocation to illiquid assets through both these constraints. First, we find a hump-shaped impact of liability duration on the illiquid assets allocation. Up to 17.5 years, liability duration positively affects the illiquid asset allocation. However, beyond this point the effect is reversed as the capital constraint dominates the liquidity constraint. Second, we find no evidence that interest rate hedging affects the illiquid assets allocation. Third, we do find that currency risk hedging positively impacts the illiquid assets allocation.
    Keywords: Illiquid assets; asset liability management; asset allocation; liquidity constraints; capital constraints; pension funds; regulation
    JEL: G11 G23
    Date: 2017–04
  13. By: Giovanni Gallo; Costanza Torricelli; Arthur van Soest
    Abstract: We use the Elaboration Likelihood Model (ELM) to explain how communication influences pension choices in a heterogeneous population. We exploit the 2007 Italian reform that allowed transferring future severance pay contributions into a pension fund and was accompanied by an information campaign with a clear message. According to ELM, individuals follow either a “central route” or a “peripheral route” depending on their motivation and ability to process, and eventually change or retain their initial attitude. Based on data from the Bank of Italy Survey on Household Income and Wealth, we find that not only financial literacy plays a relevant role in the employees’ elaboration process, but also the individual’s comprehension of the specific choice object, the personal relevance of the decision, cognitive skills, and contextual elements (e.g. unions, employer pressure). These considerations have policy implications for the effectiveness of information messages in the pension domain.
    Keywords: pension choices, Elaboration Likelihood Model, cognitive skills, contextual elements,financial literacy
    JEL: A12 C25 D03 D14
    Date: 2017–04
  14. By: John A. Bishop (East Carolina University, U.S.A.); Jonathan Lee (East Carolina University, U.S.A.); Lester A. Zeager (East Carolina University, U.S.A.)
    Abstract: Questions about the adequacy of the official poverty measure led to the development of the Supplemental Poverty Measure, designed to be released concurrently with the official poverty measure. We raise two concerns with the Supplemental Poverty Measure: a discontinuity in the economies of scale implied by the equivalence scale and the adjustment for local prices using only housing costs. We propose corrections for both issues that can be applied by anyone using the public use files of the Current Population Survey. The changes we propose would have the greatest effect on poverty rates for the elderly and would reduce the difference in poverty rates by metro status.
    Keywords: supplemental poverty measure, equivalence scales, spatial price index.
    JEL: I32
    Date: 2017–03
  15. By: Garth Heutel; Nolan H. Miller; David Molitor
    Abstract: We study heterogeneity in the relationship between temperature and mortality across U.S. climate regions and its implications for climate adaptation. Using exogenous variation in temperature and data on all elderly Medicare beneficiaries from 1992 – 2011, we show that the mortality effect of hot days is much larger in cool ZIP codes than in warm ones and that the opposite is true for cold days. We attribute this heterogeneity to historical climate adaptation. As one adaptive mechanism, air conditioning penetration explains nearly all of the regional heterogeneity in heat-driven morality but not cold-driven mortality. Combining these results with projected changes in local temperature distributions by the end of the century, we show that failure to incorporate climate heterogeneity in temperature effects can lead to mortality predictions that are wrong in sign for both cool and warm climates. Allowing regions to adapt to future climate according to the degree of climate adaptation currently observed across climates yields mortality impacts of climate change that are much lower than those estimated without allowing for adaptation, and possibly even negative.
    JEL: I18 J14 Q54
    Date: 2017–03
  16. By: Flavia Dantas; L. Randall Wray
    Abstract: Aging demographics, "social shifts," and other supply-side and institutional factors have commonly been blamed for the fall in the US labor force participation rate. However, depressed labor force participation for prime-age workers is likely due to a combination of insufficient aggregate demand, weak job creation, and stagnant wages--all of which have been persistent problems over the past three or four decades. Although insufficient aggregate demand is the main problem, general "Keynesian" pump priming is not the answer. Stimulus needs to take the form of targeted job creation to tighten labor markets for less-skilled workers.
    Date: 2017–02
  17. By: Christian Dreger
    Abstract: Euro area countries and Japan are confronted with similar challenges. Potential output is on a falling trend in the euro area, and the decrease started well before the financial crisis. In Japan, low output growth is a striking feature since many years, despite the unconventional monetary policy stance and massive fiscal stimulus programs provided by the government. According to a growth accounting exercise based on a Cobb-Douglas production function, the development in both economies can be traced to a weak evolution of TFP. Weak capital deepening is detected especially in the euro area. Driven by high uncertainty with regard to the business cycle, the willingness of firms to undertake investment is only modest and constitutes the achilles heel for a smooth recovery. Both economies are not well prepared to manage the demographic challenges caused by an elderly population. Given that debt-to-GDP ratios are already at record heights, the scope for further demand driven policies is rather limited, especially in Japan. Instead, structural reforms are on the agenda to promote long run growth and a smooth development of the global economy.
    Keywords: Long run growth, government debt, aging population
    JEL: O40 E60 J11
    Date: 2017
  18. By: Iacono, Roberto
    Abstract: The aim of this research is to provide novel evidence regarding the functioning of the Nordic model of economic development and the robustness of its institutions. At first, the paper defines a conceptual analytical framework identifying the key features of the model for the Nordic economies (Denmark, Finland, Norway, and Sweden), by synthesizing relevant background literature. Secondly, this framework is used to interpret a set of shocks, reforms and ongoing trends: the effect of resource revenues on the labor market and income inequality in Norway compared to the other Nordic countries; the design of a novel minimum income scheme in Finland and its effects on preferences for social insurance; and the implications of population ageing and increased automation for indicators of sustainability for the Nordic welfare states.
    Keywords: Nordic model,Income inequality,Welfare states,Ageing,Automation
    JEL: H53 I38 J31 P47 P51
    Date: 2017

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