nep-age New Economics Papers
on Economics of Ageing
Issue of 2018‒02‒05
thirty-one papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. The Funded Status of Local Pensions Inches Closer to States By Jean-Pierre Aubry; Caroline V. Crawford; Alicia H. Munnell
  2. Backtesting the Lee-Carter and the Cairns-Blake-Dowd Stochastic Mortality Models on Italian Death Rates By Carlo Maccheroni; Samuel Nocito
  3. Calculation of pension entitlements in the sample of integrated labour market biographies (SIAB) By Pfister, Mona; Lorenz, Svenja; Zwick, Thomas
  4. Paying for the Ageing Crisis : Who, How and When? By Westerhout, Ed
  5. Population Aging, Labor Market Frictions, and PAYG Pension By Takaaki Morimoto; Yuta Nakabo; Ken Tabata
  6. Impact du financement par fonds de pension sur la performance des entreprises du CAC 40. By Pierre Durand
  7. How to Pay for Social Security’s Missing Trust Fund? By Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
  8. Retreat from mandatory pension funds in countries of the Eastern and Central Europe in result of financial and fiscal crisis: Causes, effects and recommendations for fiscal rules By Bielawska, Kamila; Chłoń-Domińczak, Agnieszka; Stańko, Dariusz
  9. National Retirement Risk Index Shows Modest Improvement in 2016 By Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
  10. Socioeconomic determinants and health care utilization among elderly people living in Europe: Evidence from the Survey of Health, Ageing and Retirement. By David Cantarero-Prieto; Marta Pascual-Sáez; Javier Lera Torres
  11. Life expectancy and claiming behavior in a flexible pension system By Dennis Fredriksen; Christian N. Brinch; Ola L. Vestad
  12. Will Millennials Be Ready for Retirement? By Alicia H. Munnell; Wenliang Hou
  13. The Differential Effects of Population Aging on Provincial GDP per capita and the Role of Productivity Growth as a Possible offset By Frank T. Denton; Byron G. Spencer
  14. “Voting in the aftermath of a pension reform: the role of financial literacy” By Anna Lo Prete; Elsa Fornero
  15. Medical progress, demand for health care, and economic performance By Frankovic, Ivan; Kuhn, Michael; Wrzaczek, Stefan
  16. Labor reallocation and demographics By Joanna Tyrowicz; Lucas van der Velde
  17. Identifying Age Penalty in Women's Wages: New Method and Evidence from Germany 1984-2014 By Joanna Tyrowicz; Lucas van der Velde; Irene van Staveren
  18. Why Has U.S. Life Expectancy Fallen Below Other Countries? By Anqi Chen; Alicia H. Munnell; Geoffrey T. Sanzenbacher; Alice Zulkarnain
  19. Improving income protection for the elderly poor in Ecuador By Amores L., Cesar A.; Jara Tamayo, Holguer Xavier
  20. The Effect of Population Aging on Growth (in Korean) By Byung Kwun Ahn; Ki-Ho Kim; Seung Whan Ryuk
  21. Impact of Ageing on the Public Finance (in Korean) By Hosin Song; Joonyoung Hur
  22. Population Aging of Reunified Korea (in Korean) By Jiyoung Choi
  23. Demographic Change and Current Account (in Korean) By Kyungkeun Kim; Soyoung Kim
  24. The Outlook and Challenges of Population Aging and Labor Market (in Korean) By Chulhee Lee; Jieun Lee
  25. Demographic Policies against Aging in OECD countries (in Korean) By Jinill Kim; Kyounghoon Park
  26. Impact of population aging on the housing market (in Korean) By Kanghyun Oh; Sol Kim; Jaejun Yoon; Sangki Ahn; Donghwee Kwon
  27. Effects of Population Aging on International Investment (in Korean) By Jin Soo Lim; Young Rae Kim
  28. Impact of Population Aging on the Financial Sector (in Korean) By Kyoungsoo Yoon; Jae Hoon Cha; Sohee Park; Sun Young Kang
  29. Changes in the Korean Industry Structure due to It's Population Aging (in Korean) By Jong Ku Kang
  30. Demographic Change and Long Term Trend of Inflation: The Case of South Korea (in Korean) By Hwan Koo Kang
  31. Impacts of Aging on Households Assets and Liabilities (in Korean) By Se-Hyung Jo; Yong-Min Lee; Jeong-Hoon Kim

  1. By: Jean-Pierre Aubry; Caroline V. Crawford; Alicia H. Munnell
    Abstract: The last comprehensive review of locally adminstered plans in this series found that their funded status – as of 2011 – lagged behind that of state pension plans. Yet much has happened in the public pension landscape since. Plans administered at both the state and local levels have passed a spate of reforms to control rising pension costs and to limit liability growth. This brief uses the most recent data available – from 2015 and 2016 – to assess the current status of local plans. The discussion proceeds as follows. The first section briefly describes the universe of local plans and the sample of plans used in this study. The second section compares trends in the funded status for state and local plans. While local plans have historically trailed states, their funding gap is slowly closing. To better understand this pattern, the third and fourth sections examine two key determinants of the funded status: required contributions and investment returns. The final section concludes that although local plans have paid more of their actuarially required contributions than state plans, relatively poor returns limited their ability to close the gap in the past. More recently, however, local plans have experienced higher actual returns relative to state plans, in part, due to a smaller allocation to alternative investments. As a result, the gap in funded status between the two groups is shrinking.
  2. By: Carlo Maccheroni (Bocconi University); Samuel Nocito (University of Turin)
    Abstract: The work proposes a backtesting analysis in comparison between the Lee-Carter and the Cairns-Blake-Dowd mortality models, employing Italian data. The mortality data come from the Italian National Statistics Institute (ISTAT) database and span the period 1975-2014, over which we computed back-projections evaluating the performances of the models in comparisons with real data. We propose three different backtest approaches, evaluating the goodness of short-run forecast versus long-run ones. We find that both models were not able to capture the improving shock on the mortality observed for the male population on the analyzed period. Moreover, the results suggest that CBD forecast are reliable prevalently for ages above 75, and that LC forecast are basically more accurate for this data.
    Date: 2018–01
  3. By: Pfister, Mona; Lorenz, Svenja; Zwick, Thomas
    Abstract: "We describe a method to calculate individual pension entitlements (earning points, Entgeltpunkte) based on information available in conventional employment history data. Pension entitlements can be seen as an important driver of retirement decisions and of the labour market attachment of older people. Therefore, the calculation of pension entitlements using labour market history datasets improves the usability of these datasets for a broad range of topics around the decision to retire. In the first part of this report, we use a high-quality administrative biographical dataset with linked information on pension entitlements, covering a sample of almost all employees in Germany (Biographical Data of Selected Social Insurance Agencies in Germany, BASiD). Based on the BASiD, we explain which information is needed for the calculation of earning points and outline potential sources of error in this calculation. In a next step, we implement our method to calculate earning points in a larger administrative dataset with only conventional employment history information (Sample of Integrated Labour Market Biographies, SIAB). We describe our calculations and assess possible sources of error by mimicking the SIAB data structure in the BASiD. The average deviation for annual earning points is only around 1%, and the error for the sum of the earning points is around 7%. Most of these errors can be explained by large observation gaps in individual pension contributions during phases of reduced employment such as parental leave, marginal employment or unemployment. There might be additional small errors for the implementation of public compensation payments during these periods as a result of specific legal rules for certain socio-economic groups and minor rounding errors during all periods. Finally, we calculate the earning points using the SIAB and show descriptive statistics for annual and total pension entitlements for the entire sample and selected subgroups. We conclude that our approach to calculating pension entitlements using conventional employment history data opens various new and important research options at least for employees without large employment gaps." (Author's abstract, IAB-Doku) ((en))
    Keywords: Rentenanspruch, Datengewinnung, Methodenliteratur, Integrierte Arbeitsmarktbiografien, IAB-Biografiedaten
    Date: 2018–01–19
  4. By: Westerhout, Ed (Tilburg University, Center For Economic Research)
    Abstract: In many countries population ageing creates an implicit public debt. That is, if policies remain unchanged, the public debt will ultimately become unsustainable. This paper explores the optimal way to achieve debt sustainability. In particular, it asks when policy reforms should be made, how policies should be changed and which generations should make which contributions. As regards timing, we find that policy reform should anticipate future demographic change. As regards policy instruments, we find that optimal policy reform features changes in all available instruments. This implies less consumption of all types of goods; only pure public goods consumption may escape a reduction. The labour supply functions of the young and the old determine the allocation over policy instruments. In particular, the more elastic is the labour supply of the young, the smaller should be the increase in the tax rate on labour income; the more elastic is the labour supply of the old, the larger should be the reduction in transfers to the elderly. As regards generations, we find that the old share relatively little in the fiscal burden; future generations share more or less than the young, depending on future population size. In addition, we find that the change of the public debt is not a given, but a feature of optimal policies. In general,
    Keywords: population ageing; tax smoothing; public debt
    JEL: H21 H40 H60
    Date: 2018
  5. By: Takaaki Morimoto (Graduate School of Economics, Osaka University); Yuta Nakabo (Graduate School of Economics, Osaka University); Ken Tabata (School of Economics, Kwansei Gakuin University)
    Abstract: Employing a two-period OLG model with labor market frictions and PAYG pension, this paper examines the effects of population aging on the unemployment rate and the per capita output of the economy. We show that in economies in which the population growth rate is already low and the size of PAYG pension is relatively large, a further decline in the population growth rate reduces the unemployment rate and increases the per capita output of the economy in the short run, but it increases the unemployment rate and reduces the per capita output of the economy in the long run.
    Keywords: Population aging, Labor market frictions, Unemployment, PAYG pension
    JEL: D91 E24 H55 O41
    Date: 2018–01
  6. By: Pierre Durand
    Abstract: As pension saving managers, pension funds are able to finance long term investment, R&D and innovation while assuring their role as traditional institutional investors (activism, outsourcing of internal management bias...). As such pension funds can play a crucial role in the French investment dynamic which is mostly characterized by the use of credit. However, among the studies on the influence of institutional investors, few are those specifically interested in pension funds, and none focuses on the French case. This article aims to fill this gap in the literature by studying the impact of pension fund investments of CAC 40 firms' performance. Our results, over the period 2004-2016, highlight a negative influence of pension funds' participation. We explain those findings by the weakness of pension funds' participation and their foreign origin.
    Keywords: Pension funds, CAC 40, Tobin's Q, Panel, GMM
    JEL: C23 G23 G32 G34
    Date: 2018
  7. By: Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
    Abstract: Social Security’s Trust Fund is projected to run out in 2034. As policymakers consider restoring financial balance to the program, one topic that may be discussed is how to structure any tax increases. Understanding why Social Security requires a higher payroll tax than a funded retirement program for a given level of benefits is a crucial first step in informing this discussion. The current “pay-as-you-go” approach is the result of the policy decision made decades ago to pay benefits far in excess of contributions for early cohorts of workers. By paying benefits in excess of contributions to early cohorts, the nation essentially gave away the Trust Fund that would have accumulated and, importantly, gave away the interest on those contributions. Thus, the payroll tax must cover not only the required contribution but also the missing interest. This paper addresses alternative ways to pay for this Missing Trust Fund, including a comparison of the size of the required changes and their distributional implications.
    Date: 2017–12
  8. By: Bielawska, Kamila; Chłoń-Domińczak, Agnieszka; Stańko, Dariusz
    Abstract: The aim of this book is to assess in various dimensions the causes and effects of the reduction of mandatory pension funds in selected countries of Central-Eastern Europe and to propose changes to existing fiscal rules so that they could respond to the challenge of population ageing impact on public finances. We review the changes made in 2008-2011 in the multi-pillar pension systems CEE region: Hungary, Poland, Lithuania, Latvia, Estonia, Bulgaria, Slovakia and Romania. All of these countries in the course of late 1990s and early 2000s introduced multi-pillar pension systems that replaced traditional PAYG ones. All countries are also EU member states and are subject to the European policy with regards to the coordination of economic government including public finance situation. However, as analysis reveals they have different social and economic contexts, relevant from the pension systems’ perspective. We make a comprehensive assessment of consequences of limiting the role of funded pillar in societies’ pension security of selected countries of Central and Eastern Europe from macro perspective (public finance) and micro perspective (pension levels of individuals), also combining the two approaches. This helped to determine the costs and benefits of current developments in the short and long term for various stakeholders. The book comprises of seven chapters. The first chapter presents the design and changes in the multi-pillar pension systems in the CEE countries in the light of their public finance situation and broader socio-economic context. Chapter 2 analyses how the pension fund markets functioned due to the pension changes introduced recently by the governments. Chapter 3 makes an assessment of the short-term effects of reduction of pension funds sectors on the public finance situation and the public pension system in each of the analysed countries. Chapter 4 analyses the impact of changes in pension system on the level of pension wealth of individuals. Chapter 5 provides an assessment of the long-term impact of changes in funded systems for the stability of public finances and pension systems. Chapter 6 presents the recommendations on how to strike the balance between fiscal tensions and the need to maintain the role of pension funds in developing sustainable and adequate pensions in the future. The last chapter summarises the findings of the project with regards to the formulated hypotheses. The authors gratefully acknowledge the financing of this project by the National Science Centre, the decision number DEC-2012/05/B/HS4/04206.
    Keywords: pension reforms, reversals, funded pensions, pension funds, CEE countries, mandatory pension funds, stability of public finances, stability of pension systems, public finance, performance evaluation
    JEL: E6 E62 G23 H53 H55 I38 J1
    Date: 2017
  9. By: Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
    Abstract: The release of the Federal Reserve’s 2016 Survey of Consumer Finances (SCF) is a great opportunity to reassess Americans’ retirement preparedness as measured by the National Retirement Risk Index (NRRI). The NRRI shows the share of working-age households who are “at risk” of being unable to maintain their pre-retirement standard of living in retirement. This Index is constructed using the SCF, a triennial nationally representative survey of household finances. Since the last SCF was conducted in 2013, the U.S. economy enjoyed a period of low unemployment, rising wages, strong stock market growth, and rising house prices. These factors should have improved households’ preparedness for retirement. At the same time, longer-term trends – such as the gradual rise in Social Security’s Full Retirement Age and low interest rates – served as headwinds that made it more difficult to achieve retirement readiness. The question is what is the net impact of these disparate factors. The discussion proceeds as follows. The first section describes the nuts and bolts of the NRRI. The second section updates the NRRI using 2016 SCF data and shows that the share of households at risk dropped from 52 percent to 50 percent, largely due to rising home values. The third section presents results by age, income, and pension coverage. The fourth section takes a step back and assesses the overall reasonableness of the NRRI’s findings. The fifth section concludes that retirement readiness remains a major challenge for many of today’s workers; they need to save more and/or work longer to improve their prospects for a secure retirement.
    Date: 2018–01
  10. By: David Cantarero-Prieto; Marta Pascual-Sáez; Javier Lera Torres
    Abstract: This paper examines health care utilization among elderly people in sixteen European countries using the last wave of the Survey of Health, Ageing and Retirement in Europe (SHARE). Negative Binominal regression is conducted to study the main driving factors behind health care utilization (visits to the General Practitioners, GP; Hospital Stays, HS). The empirical results suggest that age, gender, education level, self-assessed health, health limitations and status and other socioeconomic variables are the main driving factors. We also show that socioeconomic variables do not play the same role in every country. From a policy economic approach, we propose important information to the current debates both in the health economics and social welfare literature. Our findings are relevant and have several implications for policy purposes to enhance efficiency, equity and quality of health care that it can be provided.
    Keywords: Aging; Discrete choice methods; Count Data Methods; Health; Health Care Utilization; SHARE; Europe.
    JEL: I10 I18
    Date: 2018–01
  11. By: Dennis Fredriksen (Statistics Norway); Christian N. Brinch; Ola L. Vestad
    Abstract: We study the relationship between early claiming of pensions and incentives in the highly flexible Norwegian public pension system, measuring incentives to claim based on an estimated model for expected longevity. Despite a strong correlation between incentives and claiming decisions, the additional costs to public budgets arising from this selection turn out to be modest. Based on analyses exploiting only variation in expected pensions generated by variation in parental longevities and only claiming of pensions not in conjunction with retirement, we conclude that part of the selection is active: Some individuals claim pensions early because they gain from doing so.
    Keywords: social security; pension benefits; retirement; annuity
    JEL: H55 J14 J26
    Date: 2017–05
  12. By: Alicia H. Munnell; Wenliang Hou
    Abstract: Many of today’s workers will have inadequate income when they reach retirement, but the prospects for Millennials seem more challenging than for the generations ahead of them. All workers face a world in which Social Security will provide less relative to pre-retirement earnings, 401(k) balances are generally meager, and – at any given time – half the private sector workforce does not have an employer-sponsored retirement plan. They will also face much longer periods of retirement due to rising life expectancy, high and rapidly rising health care costs, and historically low interest rates. In addition to these general headwinds, Millennials – those born during 1981-1999 – also have substantial student debt, began their careers in the tough job market following the Great Recession, and operate in a labor market where a declining share of jobs provide pension and health benefits. These factors have delayed major life milestones such as getting married and owning a home and have limited their ability to accumulate wealth. In short, Millennials are behind. This brief compares the status of Millennials across a number of socioeconomic dimensions to those of previous generations at the same age. The approach uses simple figures to summarize a complicated story. The discussion proceeds as follows. The first section defines Millennials and the earlier generations that are used as a basis for comparison. The second section presents the results for education and labor market outcomes for those ages 25-35 in each cohort using data from the Current Population Survey. The third section looks at how Millennials are postponing major life events, such as marriage. The fourth section presents debt and wealth information from the Survey of Consumer Finances. The fifth section concludes that – despite being more educated – Millennials’ challenging labor market experience and high student debt burden have left them less prepared for retirement than earlier cohorts.
    Date: 2018–01
  13. By: Frank T. Denton; Byron G. Spencer
    Abstract: A shift in population distribution toward older ages is underway in industrialised countries throughout the world and will continue well into the future. We provide a framework for isolating the pure effects of population aging on per capita GDP, employ the framework in calculations for the ten provinces of Canada, and derive the rates of productivity growth required to offset those effects. For comparison, as possible alternative offsets, we consider also some changes relating to the supply of labour.
    JEL: J1 J11 O4
    Date: 2018–01
  14. By: Anna Lo Prete (University of Turin); Elsa Fornero (University of Turin and CeRP-Collegio Carlo Alberto)
    Abstract: Economic reforms affecting people’s lives are generally quite unpopular and may imply an electoral cost. This can derive, among other things, from lack of understanding of the basic elements of reforms. Our paper shows that the electoral cost of a pension reform is significantly lower in countries where the level of financial literacy is higher. The evidence from data on legislative elections held between 1990 and 2010 in 21 advanced countries is robust when we control for macro-economic conditions, demographic factors, and characteristics of the political system. Interestingly, these findings are not robust when we use less specific indicators of human capital – such as general schooling – supporting the view that knowledge of basic economic and financial concepts has distinctive features that may help reduce the electoral cost of reforms having a relevant impact on the life cycle of individuals.
    Date: 2018–01
  15. By: Frankovic, Ivan; Kuhn, Michael; Wrzaczek, Stefan
    Abstract: We study medical progress within an economy of overlapping generations subject to endogenous mortality. Individuals demand health care with a view to lowering mortality over their life-cycle. We characterise the individual optimum and the general equilibrium of the economy and study the impact of improvements in the effectiveness of health care. We find that general equilibrium effects dampen strongly the increase in health care usage following medical innovation. Moreover, an increase in savings offsets the negative impact on GDP per capita of a decline in the support ratio.
    Keywords: life-cycle model,longevity,health care,medical innovation,overlapping generations,value of life
    JEL: D91 I11 I12 J11 J17 O31 O41
    Date: 2017
  16. By: Joanna Tyrowicz (Institute for Labour Law and Industrial Relations in the European Union IAAEU), Trier University); Lucas van der Velde (Group for Research in Applied Economics and Warsaw School of Economics)
    Abstract: We explore data from all transition economies over nearly two decades, providing insights on the mechanisms behind labor force reallocation. We show that worker ows between jobs in dierent industries are rare relative to the demographic ows of youth entry and elderly exit. The same applies to the ows between state-owned enterprises and private rms. In fact, evidence suggest that changes in the demand for labor were accommodated mostly through demographic ows, with a smaller role left for job transitions. We also show that the speed of changing the ownership structure in the economy has driven exits to retirement, in particular the early exits.
    Keywords: hirings, separations, transition, worker ows, unemployment, retirement
    JEL: P2 P5 D2 J6
    Date: 2018–02
  17. By: Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw; Institut für Arbeitsrecht und Arbeitsbeziehungen in der Europäischen Union (IAAEU); Institute of Labor Economics (IZA)); Lucas van der Velde (Group for Research in Applied Economics (GRAPE); Warsaw School Economics); Irene van Staveren (Institute of Social Studies (ISS))
    Abstract: Given theoretical premises, gender wage gap adjusted for individual characteristics is likely to vary over age. We adapt DiNardo, Fortin and Lemieux (1996) semi-parametric technique to disentangle year, cohort and age effects in adjusted gender wage gaps. We rely on a long panel of data from the German Socio-Economic Panel covering the 1984-2015 period. Our results indicate that the gender wage gap increases over the lifetime, for some birth cohorts also in the post-reproductive age.
    Keywords: gender wage gap, age, cohort, decomposition, non-parametric estimates, Germany
    JEL: J31 J71
    Date: 2017
  18. By: Anqi Chen; Alicia H. Munnell; Geoffrey T. Sanzenbacher; Alice Zulkarnain
    Abstract: Life expectancy at age 65 in the United States and other high-income countries has increased dra­matically over the last 50 years. But progress in the United States on this key health indicator has been slower than its peers during this period, and the U.S. ranking has dropped from near the top of the group to the bottom. How long people live has significant implications not only for their well-being but also for the finances of the Social Security program. Thus, understanding the reasons for the relatively slow pace of improvement is necessary to provide some basis for future projections. This brief compares U.S. life expectancy, separately for men and women, to nine other countries in the Organization for Economic Cooperation and Devel­opment (OECD). It focuses on two factors that may have contributed to the U.S.’s relatively poor perfor­mance: smoking and obesity. This brief is the second of two on mortality; the first explored trends within the United States. The discussion proceeds as follows. The first section looks at trends in life expectancy at age 65 across countries and finds that the major source of the U.S. shortfall rests with women. The second sec­tion explores whether the shortfall could be explained by the unique aspects of the U.S. health care system and concludes that these differences probably have had little impact. The third section reports cause-of-death statistics that suggest diseases associated with smoking and obesity are the major sources of the U.S. shortfall. The fourth section compares U.S. smoking and obesity patterns to those of other countries. The fifth section isolates the impact of smoking and obe­sity on life expectancy using regression analysis. The results show that, if U.S. patterns had matched those of its peer countries, U.S. life expectancy would have exceeded the average until very recently. The final section concludes that the relative performance of U.S. life expectancy in the future depends on control­ling obesity.
    Date: 2017–12
  19. By: Amores L., Cesar A.; Jara Tamayo, Holguer Xavier
    Abstract: A series of social benefits targeting vulnerable groups, such as the elderly population, has been implemented in Ecuador over the last few decades. Elderly adults living in vulnerable conditions and not affiliated with social security are entitled to noncontributory pension assistance under the Human Development Transfer program. However, over one quarter of old-age beneficiaries still live in poverty and the recent fall in oil prices has put increasing pressure on government expenditures to deliver such schemes. This paper aims to assess the current needs of old-age adults based on expenditure data, and makes use of microsimulation techniques to evaluate the effect of covering those needs through an increase in pension assistance. Our results show that increasing pension assistance to match the level of the poverty line in Ecuador would reduce elderly poverty by 40% and would take 18% of old-age beneficiaries out of poverty. We analyze the effect of additional hypothetical reforms and discuss the importance of using microsimulation techniques, in particular to assess the effect of budget neutral reforms in a macroeconomic environment with low oil prices.
    Date: 2018–01–22
  20. By: Byung Kwun Ahn (Economic Research Institute, The Bank of Korea); Ki-Ho Kim (Economic Research Institute, The Bank of Korea); Seung Whan Ryuk (Economic Research Institute, The Bank of Korea)
    Abstract: Population aging has a profound influence on the overall economic variables, such as inflation, current account and public finance, as well as economic growth. However, more specifically, how and to what extent population aging affects economy is considerably influenced by economic system, agents' behaviour, and policy maker's policies. Thus, the effect of population aging will be decided by our response to this challenge. This paper estimates the effect of population aging on economic growth based on a simple growth accounting model, reflecting the demographic projection released by the National Statistics Office. The result shows that the economic growth rate of Korea is estimated to gradually decline from 3.9% (2000 to 2015) to 1.9% (2016 to 2025) to 0.4% (2026 to 2035) on annual average. However, if Korea implements comprehensive measures (e.g. extending retirement age, encouraging women’s economic participation, along with improving productivity and fertility rates) responding to population aging, the economic growth rate is predicted to maintain between 2.5~3.0% in 10 years and around 1.5% in 20 years on annual average. Since the effect of population aging on economy may be dramatically changed according to policy responses, comprehensive measures should be set up at the national level to reduce the population aging speed and to alleviate negative effects, followed by more detailed action plans in each sector.
    Keywords: Population aging, Growth Accounting Model, Dynamic CGE
    JEL: E30 E58 J11
    Date: 2017–07–07
  21. By: Hosin Song (Department of Economics, Ewha Woman's University); Joonyoung Hur (Division of Economics, Hankuk University of Foreign Studies)
    Abstract: In this study, we analyze the impact of ageing on the public finance of Korea economy. Both government revenue and government expenditure are considered to take into account the effect of ageing. Specifically, Park (2012) and Hur and Lee (2017) are used to analyze the impact of ageing on the government revenue. It is found that Korea economy has some fiscal space in revenue side. For the analysis of the expenditure side, the probability choice model using aggregate data is used. As to the expenditure, it is empirically found that ageing has significant effect on the government expenditure through the ageing related expenditure such as social protection and health. The impact is expected to continue as long as ageing persists.
    Keywords: Demographic shift, Tax revenue, Government spending, DSGE models, Probability choice models
    JEL: J11 H20 H50 E62
    Date: 2017–08–11
  22. By: Jiyoung Choi (North Korean Economy Team in Economic Research Institute, The Bank of Korea)
    Abstract: This study introduces various scenarios of changes in fertility rates and life expectancy of North Korea after Korean reunification, and compares the development of population aging by scenario based on demographic projections calculated by the cohort component method. These scenarios are set up in consideration of the demographic changes in Germany, observed after its Reunification: the fertility rate of East Germany dropped by half right after unification; and its life expectancy converged to the level of West Germany. Therefore, the fertility shock and the convergence of life expectancy are reflected in the scenarios of North Korean population after unification. Besides, this study assumes a scenario where the fertility rate of the North could increase due to an improvement in child-care environment and public health, considering the distinct features of the inter-Korean unification. The main finding of this study is as follows. The population integration of the two Koreas may alleviate the burden of population aging of South Korea. This positive impact, however, may be gradually reduced if the North's fertility rate sharply drops and life expectancy converges to the level of the South. Yet, the level of population aging may be continuously reduced in case the fertility rate of the North raises even though its life expectancy converges to the level of the South.
    Keywords: Population aging, Korean reunification, German reunification, Cohort component method, Fertility shock
    JEL: J1 O53 P41 P52
    Date: 2017–07–21
  23. By: Kyungkeun Kim (Economic Research Institute, The Bank of Korea); Soyoung Kim (Department of Economics, Seoul National University)
    Abstract: This paper investigates the impact of demographic changes on the current account by using the data for over 180 countries. We find a negative linear relationship between the youth dependency ratio and the current account. We also find a negative relationship between the elderly dependency ratio but the negative relationship weakens as the elderly dependency ratio increases. This non-linear effects of the elderly dependency ratio on the current account differentiates our findings from existing literatures. Population aging may affect economic agents' behavior, economic structure, and economic policies, which may explain the non-linear effect. In Korea, the projected elderly dependency ratio is expected to increase sharply as aging population continues to rise. It is uncertain whether this spike in the old-dependency ratio would negatively affect the current account balance since the effect may change as population aging proceeds.
    Keywords: Demographic change, Young-age dependency ratio, Old-age dependency ratio, Current account, Non-linearity
    JEL: F3 G11 G15
    Date: 2017–07–21
  24. By: Chulhee Lee (Department of Economics, Seoul National University); Jieun Lee (Economic Research Institution, The Bank of Korea)
    Abstract: The size of the labor force will diminish with on-going population aging. However, the magnitude of the anticipated decline remains unclear and differs according to the choice of labor input measure. If the current patterns of gender- and age-specific labor supply would remain unchanged, it is projected that the number of employed population and the total hours of work will decrease to 88% and 83% of the current levels, respectively. The actual decline in labor inputs will heavily depend on long-term changes of labor supply, especially employment of the elderly and women as well as unemployment of younger people. Given that long-term trend of labor demand is highly unpredictable, it is difficult to determine whether a large-scale decline in the work force (if actually emerged) will cause significant labor shortages. Furthermore, the extent of labor shortage will widely differ across industries and across worker types because of sectoral disparities in labor-demand changes. Over the next 10~15 years, the overall size of labor inputs in Korea will not diminish. However, the exit of the baby boom generation from the work force can produce serious labor shortages in sectors with high and increasing fractions of aging workers. In particular, population aging will hit hard the industries in which the entry of young workers is insufficient to meet rapidly growing labor demand.
    Keywords: Population aging, Labor market
    JEL: J20 J21 J23 J24
    Date: 2017–08–11
  25. By: Jinill Kim (Department of Economics, Korea University); Kyounghoon Park (Economic Research Institution, The Bank of Korea)
    Abstract: In most advanced economies, population aging has been happening due to low fertility and long life expectancy, which has increased the burden of supporting the elderly and lowered the share of working-age population. Many countries have embarked on demographic policies against a decrease in potential growth due to low fertility and fast aging, an increase in cost of social security, and inter-generational conflicts between the young and the old. This paper researches on various policies by OECD countries focusing on work-family balance, pension reform, employment policies, and immigration policies; we also provide some lessons for Korea by comparing its demographic policies with other OECD countries. Demographic policies against aging have succeeded only when they are combined in an effective manner with work-family balance, pension reform, employment policies, and immigration policies. Especially, it is necessary to lower the wage differential between genders and to change the sociocultural understanding of childbirth and childbearing. As for pension reform, it is recommended to adjust the qualifying age of the national pension and to cooperate with private pension providers in order to enhance the sustainability of the pension system. At the same time, the system should be able to help the elderly secure income after retirement to prevent elderly poverty; to this end, the blind spot of the pension system needs to be resolved, such as low income earners and temporary workers. With respect to employment policies, it is necessary to adopt a division of labor between the elderly and the youth, along with age specific policies. More specifically, employment services tailored for the elderly may support job searching and help them to continue previous careers; in the youth front, active labor market policies will increase youth employment, such as combining education with job training. Finally, it is about time to decide on Korea’s position on immigration policies—in terms of both employment policies and demographic policies with more inclusive stance for foreign workers.
    Keywords: Aging, work-family balance, public pension policy, employment policy, immigration policy.
    JEL: J10 J18 J26 J61 H55
    Date: 2017–07–17
  26. By: Kanghyun Oh (Financial Stability Dept. The Bank of Korea); Sol Kim (Financial Stability Dept. The Bank of Korea); Jaejun Yoon (Financial Stability Dept. The Bank of Korea); Sangki Ahn (Financial Stability Dept. The Bank of Korea); Donghwee Kwon (Financial Stability Dept. The Bank of Korea)
    Abstract: Population aging due to low fertility and prolonged life expectancy is expected to bring a large structural change in the housing market in the mid to long-term in terms of i) occupation type and residential areas, ii) housing type and iii) purpose of possession, and others. In particular, the rate of population aging in Korea is faster than that in other major countries, and it is highly likely that the effects of populations aging on the housing market will appear to be compressive as baby boomers become 65 or above after 2020. First of all, in the case of housing occupation type and residential area, it is necessary for some elderly households to preserve their income by disposing houses under insufficient provision of future living expenses. This phenomenon is expected to slow down the growth of housing demand, on top of young households decreasing demand for housing and shrinking residential areas. In addition, as the number of elderly household with 1~2 people increases and the need for liquidation of housing assets after retirement grows, demand for small- to mid-sized houses and apartments is likely to increase. Meanwhile, It is highly likely that the leasing market will continue to change due to an increase in incentives to pursue stable cash flows through monthly rental for multi-house owners and young households' steady demand for leases. In order to prevent structural changes in house market, due to population aging, from causing supply-demand imbalance of the housing market, it is necessary to stabilize the supply and demand of mid- and long-term housing. At the same time, supplying customized housing for the aged, expanding public rental housing for people with housing disadvantages such as young, low income, and impoverished elderly and promoting inventory management measures such as utilization of vacant houses should be implemented. Especially, if the housing disposal of baby boomers is concentrated in the short term, it can act as a pressure to lower house price. To this end, measures should be taken to mitigate the pressure on the sale of housing for the elderly, such as the activation of housing pensions and the support for retirement home lease conversion.
    Keywords: Population aging, housing market, APC model
    JEL: J10 R21 R30 C53
    Date: 2017–07–27
  27. By: Jin Soo Lim (International Finance Research Team, International Department, The Bank of Korea); Young Rae Kim (International Finance Research Team, International Department, The Bank of Korea)
    Abstract: This paper conducts an empirical estimation of the effects of population aging on international investment, in consideration of the fact, especially in an environment of deeply integrated global financial markets, that differences in degrees of aging across countries can amplify capital movements. Through this estimation, this paper examines whether the life-cycle hypothesis of Modigliani also applies to the external sector, and the international investment assets accumulated are used to cover consumption when a mismatch between income and consumption occurs due to population aging. We analyze the impacts of demographic variables―the old-age dependency ratio and the pace of aging―on foreign investment (foreign direct investment (FDI) and foreign portfolio investment (FPI)), using annual data for 54 countries between 2001 and 2015. We find as a result that the life-cycle hypothesis holds for the external sector as well. First, our study shows that population aging leads to a significant decrease in international investment. A reduction in international investment assets means a decline in future sources for supply of foreign currency. This suggests that if international investment assets decrease dramatically, it could lead to concerns about possible insolvency and cause the creditworthiness of a country to fall, resulting in pressures for outflows of capital from it. Meanwhile, looking at the effects depending upon the nature of investment, we find that the negative impact on FDI due to aging is more significant than that on FPI. While foreign investment increases significantly with a bigger working age population, it declines significantly as aging proceeds more rapidly. The level of significance of the pace of aging is also much higher than that of the old-age dependency ratio. Given these effects of population aging on international investment, there is a possibility that progress in population aging could undermine stability in the external sector. In this regard, Korea, one of the rapidly aging societies, should make preparations to minimize the negative effects of aging on its external sector. Viable strategies in this regard are improving the primary income balance through promoting foreign investment, and introducing policies to increase the birthrate. Meanwhile, additional studies are required to analyze in greater detail the effects of aging from various perspectives, such as that of behavioral changes in international investment depending upon maturity and upon investor type, and that of the external debt dynamics. We hope that this paper might pave the way for such future research.
    Keywords: Population aging, International investment
    JEL: F21 J11
    Date: 2017–07–27
  28. By: Kyoungsoo Yoon (Financial Stability Department, The Bank of Korea); Jae Hoon Cha (Financial Stability Department, The Bank of Korea); Sohee Park (Financial Stability Department, The Bank of Korea); Sun Young Kang (Financial Stability Department, The Bank of Korea)
    Abstract: This paper investigates the main channels through which population aging affects the financial sector. Based on the results, we conjecture possible changes in the structure of the financial sector due to the aging. Empirical evidence from international panel data shows that population aging is associated with a higher growth rate of household net assets and does not suppress household debt growth. In addition, the insurance, pension and asset management industries are expected to increase their shares in the financial sector. Furthermore, population aging causes lower longer-term interest rates which leads to a flatter yield curve, while it affects stock prices positively because of higher asset demand by households. To complement the international panel data analysis, we also implement a simulation of household balance sheets based on Korea-specific data, 'The Survey of Household Finance and Living Conditions.' The main findings are as follows. First, the financial industry is expected to keep growing until the late 2020s thanks to increasing household financial assets, which would also contribute to higher long-term financial asset demand. Second, aging-induced low economic growth and low interest rates together with flattened yield curves will likely lead to lower profitability for financial institutions. Third, under low interest rates, households would increase their stock or fund investments to seek higher yields. Fourth, if elderly-headed households keep their asset allocations biased towards real assets, population aging could increase the concentration of household assets into real assets. These findings imply that the supply of long-term bonds needs to be increased to meet increased demand from the financial institutions where households accumulate their assets. Furthermore, financial institutions should diversify their income sources and strengthen their risk management to cope with lower profitability. Finally, authorities need to help households to reduce liquidity and price risk related to real estate by making reverse mortgages more accessible.
    Keywords: Population aging, Household saving, Household assets and liabilities, Interest rates Stock prices, Financial sector
    JEL: D14 E2 E4 G11 G2 J1
    Date: 2017–08–18
  29. By: Jong Ku Kang (The Bank of Korea)
    Abstract: This paper analyzes the effects of the population aging on the future industry structure in Korea, using the coefficients of estimation with the OECD country panel data and the forecast of Korean population by Statistics Korea. The result reveals that the Korean industry structure, both in terms of value added production and employment, is greatly influenced by the future change in it's population, such as population aging and declining working age population and total population. First, the Korean population structure change is expected to bring about a decrease in the share of the manufacturing sector, centering on the low skilled manufacturing sector, while an increase in the service sector, especially in the business activity sector and the health and social work sector. Second, due to the change in the population structure, the productivity of the manufacturing sector, relative to that of the whole industry, tends to fall, while that of the service sector rises. Third, the ratio of export to value added production in most manufacturing sectors rises along with the change in the population structure.
    Keywords: Population Aging, Industry Structure, Employment, Productivity
    JEL: D24 J21 J24
    Date: 2017–08–03
  30. By: Hwan Koo Kang (Economic Research Institute, The Bank of Korea)
    Abstract: Since the global financial crisis, long term trend of global inflation remains low in spite of the fact that major developed countries implemented long-lasting intensively accommodating policies. One possible explanation is that demographic change such as population aging has affected the long term trend of inflation. Japanese 'lost decades' could be a persuasive evidence of the effect of demographic change on long term inflation. Recent literature on this topic provides much evidence that population aging could affect growth and inflation rate through the various and complicated channels such as labor supply, savings rate, real wage, labor productivity, asset prices and fiscal burdens. However, a unified conclusion is not reached from the theoretical and empirical literature since the direction and extent of the effects are different from country to country depending on the stage and type of the demographic change. This study presents some simulation results based on a dynamic general equilibrium monetary model in which demographic changes are captured by the change of working population ratio. The simulation results show that in case of South Korea where the working population ratio is starting to decline from this year, the effect of population aging on long term trend of inflation is being realized since mid 2020's as a weak but long-lasting downside pressure. These results tell us that the effects of demographic changes on long term inflation should be considered when making a long term inflation target. They also gives an implication that those effects could not be counter-acted by the short term demand management policy. As a result, it would be better to focus on the policies for structural reform to minimize the negative consequences of the demographic change.
    Keywords: Demographic change, Long term trend of inflation, Inflation target, Cash-in-advance constraint
    JEL: E30 E58 J11
    Date: 2017–04–05
  31. By: Se-Hyung Jo (Market Intelligence Unit, Financial Markets Department, The Bank of Korea); Yong-Min Lee (Financial Markets Affairs Team, Financial Markets Department, The Bank of Korea); Jeong-Hoon Kim (Market Intelligence Unit, Financial Markets Department, The Bank of Korea)
    Abstract: This paper looks into the impacts of the progress of aging on the financial markets from the perspective of changes in households' asset and liability portfolios. To identify these impacts empirically, this paper sets up a hypothesis and conducts an analysis through a macroeconomic panel model using economic indicators from OECD member countries, and through a microeconomic panel model using Korean labor and income panel data. The results of empirical analysis show that, as the level of population aging increases, the household savings ratio and the share of households' investment in risky assets decline. The financial debt-to-financial assets ratio is found to fall as the level of aging rises, but this fall was statistically insignificant. In the microeconomic panel model, considering the cohort effect, the baby-boomer generation that experienced a period of high economic growth is found to have been able to build up more real and financial assets than the generations before them. In addition, the elderly are found to maintain their financial assets to some extent, rather than reducing them, owing mainly to the precautionary savings and bequest motives, while their real assets show modest downward movements. However, it is estimated that high-income elderly people, belonging to the fifth income quintile group, will reduce their real assets to repay their debts, hold financial assets for retirement savings, and so on. This paper is significant in that it verifies not only the impacts of aging on households' asset and liability structures but also the impacts of factors such as the retirement of baby-boomers in Korea through microeconomic panel data. This is expected to have implications for us in coming up with policy solutions related to aging.
    Keywords: Population aging, household assets, household liabilities, financial markets, panel analysis
    JEL: E60 G10
    Date: 2017–08–03

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