nep-age New Economics Papers
on Economics of Ageing
Issue of 2018‒02‒12
fourteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Hyperbolic discounting can be good for your health By Strulik, Holger; Trimborn, Timo
  2. An Empirical Analysis of the Saving Behavior of Elderly Households in Japan By Charles Yuji Horioka; Yoko Niimi
  3. Population Aging and the Real Interest Rate in the Last and Next 50 Years -- A tale told by an Overlapping Generations Model -- By Nao Sudo; Yasutaka Takizuka
  4. Social Security: Progressive Benefits but Regressive Outcome? By Monisankar Bishnu; Nick L. Guo; Cagri S Kumru
  5. Economic Analysis of Social Security Survivors Insurance By Li, Yue
  6. Work-Life Balance and Labor Force Attachment at Older Ages By Marco Angrisani; Maria Casanova; Erik Meijer
  7. Marriage-related Policies in an Estimated Life-cycle Model of Households’ Labor Supply and Savings for Two Cohorts By Margherita Borella; Mariacristina De Nardi; Fang Yang
  8. Early-life correlates of later-life well-being: evidence from the Wisconsin Longitudinal Study By Clark, Andrew E.; Lee, Tom
  9. “Individual Heterogeneity and Pension Choices: How to Communicate an Effective Message? “ By Giovanni Gallo, Costanza Torricelli, Arthur van Soest; Costanza Torricelli; Arthur van Soest
  10. Parents with an Unemployed Adult Child: Labor Supply, Consumption, and Savings Effects By Kathryn Anne Edwards; Jeffrey B. Wenger
  11. Long-Term Effects of Leaving Military Service in a Weak Economy By Italo A. Gutierrez; Jennie W. Wenger
  12. Retired, at last? The short-term impact of retirement on health status in France By Thomas Barnay; Eric Defebvre
  13. The serendipity theorem for an endogenous open economy growth model By Ziesemer, Thomas
  14. Behavioral Aspects of Household Portfolio Choice: Effects of Loss Aversion on Life Insurance Uptake and Savings By In Do Hwang

  1. By: Strulik, Holger; Trimborn, Timo
    Abstract: It has been argued that hyperbolic discounting of future gains and losses leads to time-inconsistent behavior and thereby, in the context of health economics, not enough investment in health and too much indulgence of unhealthy consumption. Here, we challenge this view. We set up a life-cycle model of human aging and longevity in which individuals discount the future hyperbolically and make time-consistent decisions. This allows us to disentangle the role of discounting from the time consistency issue. We show that hyperbolically discounting individuals, under a reasonable normalization, invest more in their health than they would if they had a constant rate of time preference. Using a calibrated life-cycle model of human aging, we predict that the average U.S. American lives about 4 years longer with hyperbolic discounting than he would if he had applied a constant discount rate. The reason is that, under hyperbolic discounting, experiences in old age receive a relatively high weight in life time utility. In an extension we show that the introduction of health-dependent survival probability motivates an increasing discount rate for the elderly and, in the aggregate, a u-shaped pattern of the discount rate with respect to age.
    Keywords: discount rates,present bias,health behavior,aging,longevity
    JEL: D03 D11 D91 I10 I12
    Date: 2018
  2. By: Charles Yuji Horioka; Yoko Niimi
    Abstract: In this paper, we analyze the saving behavior of elderly households in Japan in order to shed light on the impact of population aging on the household saving rate. The data sources we use for this analysis are the “Family Income and Expenditure Survey,” conducted by the Statistics Bureau of the Ministry of Internal Affairs and Communications, and the “Survey on Households and Saving,” conducted by the Yu-cho Foundation. Our main findings are as follows: (1) In Japan, the saving rate of the working elderly is positive but lower than that of younger households. By contrast, the saving rate of the retired elderly is negative and high in absolute magnitude; (2) the wealth decumulation rate of the retired elderly has shown a moderate increase over time, and this is due primarily to reductions over time in social security benefits; and (3) the retired elderly are decumulating their wealth but not as rapidly as predicted by the simple life-cycle hypothesis, due primarily to the presence of precautionary saving and bequest motives.
    Date: 2018–01
  3. By: Nao Sudo (Bank of Japan); Yasutaka Takizuka (Bank of Japan)
    Abstract: Population aging, along with a secular decline in real interest rates, is an empirical regularity observed in developed countries over the last few decades. Under the premise that population aging will deepen further in coming years, some studies predict that real interest rates will continue to be depressed further to a level below zero. In the present paper, we address this issue and explore how changes in demographic structures have affected and will affect real interest rates, using an overlapping generations model calibrated to Japan's economy. We find that the demographic changes over the last 50 years reduced the real interest rate. About 270 out of the 640 basis points decline in real interest rates during this period was attributed to declining labor inputs and higher saving, which themselves stemmed from the lower fertility rate and increased life expectancy. As for the next 50 years, we find that demographic changes alone will not substantially increase or decrease the real interest rate from the current level. These changes reflect the fact that the size of demographic changes in years ahead will be minimal, but that downward pressure arising from the past demographic changes continue to bite in the years ahead. As Japan is not unique in terms of this broad picture of changes in demographic landscapes over the last 50 years and in the next 50 years, our results suggest that, sooner or later, a demography-induced decline in real interest rates may be contained in other developed countries as well.
    Keywords: Declining Real Interest Rates; Population Aging; Overlapping Generations Model
    JEL: E20 J11
    Date: 2018–01–31
  4. By: Monisankar Bishnu; Nick L. Guo; Cagri S Kumru
    Abstract: In this paper, we study under what conditions a Pay As You Go (PAYG) type social security program can have regressive outcomes even though the benefits of this program are designed to be progressive. Since a PAYG social security program collects payroll taxes whenever agents are working, and it pays retirement benefits as long as retirees are alive, each individual's well being depends on how long they contribute to and receive payments from this program as well as how much. Empirical evidence suggests that agents who have low income tend to start working earlier and have shorter longevity than those with middle or high income. Implications of the low income groups' shorter mortality are examined both analytically and quantitatively in this paper. We find the conditions under which a PAYG social security program may have a regressive outcome in a simple two period partial equilibrium model. Afterwards, we created a large scale quantitative OLG model calibrated to the US economy to compare aggregate and welfare implications of the US type PAYG, a no progressive PAYG, and a means tested pension program. Our results indicate that incorporating differential mortality into account change the welfare implications.
    JEL: E21 E43 G11
    Date: 2017–12
  5. By: Li, Yue
    Abstract: This paper develops a heterogeneous agents model to analyze the effects of Social Security survivors insurance. The model features a negative mortality-income gradient, asymmetric information of individual mortality rates, and a warm-glow bequest motive that varies by age and family structure. The model matches lifecycle changes in life insurance coverage, and generates advantageous selection in the insurance market. For male agents, reducing survivors benefits for dependent children generates welfare losses, while reducing survivors benefits for aged spouses produces welfare gains. The opposing welfare results are explained by differences in the timing of benefits and in the funding cost.
    Keywords: Social Security, bequest motive, life insurance, asymmetric information
    JEL: D1 D82 E21 G22 H55
    Date: 2017–10
  6. By: Marco Angrisani (University of Southern California); Maria Casanova (California State University-Fullerton); Erik Meijer (University of Southern California)
    Abstract: We use data from the Health and Retirement Study to examine the role of work-life balance (WLB) as a nonmonetary determinant of retirement transitions, conditional on job attributes such as hours of work, compensation and benefits. We show that low levels of WLB are significantly associated with subsequent reductions in labor supply for workers aged 51 to 79, and document heterogeneity by gender and employment status. Moreover, WLB mediates labor supply responses to spousal health shocks. Workers who report higher levels of work-to-life interference are significantly more likely to reduce their labor supply in the next two periods following a spouse’s health shock, and this effect is once more heterogeneous. The moderating effect of WLB is stronger for women than men. Among female workers, it is stronger for those employed part-time at baseline.
    Date: 2017–09
  7. By: Margherita Borella (University of Torino); Mariacristina De Nardi (University College London and Institute for Fiscal Studies); Fang Yang (Louisiana State University)
    Abstract: In the United States, both taxes and old age Social Security benefits explicitly depend on one's marital status. We study the effects of eliminating these marriage-related provisions on the labor supply and savings of two different cohorts. To do so, we estimate a rich life-cycle model of couples and singles using the method of simulated moments (MSM) on the 1945 and 1955 birth-year cohorts. Our model matches well the life-cycle profiles of labor market participation, hours, and savings for married and single people and generates plausible elasticities of labor supply. We find that these marriage-related provisions reduce the participation of married women over their life cycle, the participation of married men after age 55, and the savings of couples. These effects are large for both the 1945 and 1955 cohorts, even though to start with the latter had much higher labor market participation of married women.
    Date: 2017–10
  8. By: Clark, Andrew E.; Lee, Tom
    Abstract: We here use data from the Wisconsin Longitudinal Study (WLS) to provide one of the first analyses of the distal (early-life) and proximal (later-life) correlates of older-life subjective well-being. Unusually, we have two distinct measures of the latter: happiness and eudaimonia. Even after controlling for proximal covariates, outcomes at age 18 (IQ score, parental income and parental education) remain good predictors of well-being over 50 years later. In terms of the proximal covariates, mental health and social participation are the strongest predictors of both measures of well-being in older age. However, there are notable differences in the other correlates of happiness and eudaimonia. As such, well-being policy will depend to an extent on which measure is preferred
    Keywords: life-course; well-being; eudaimonia; health; happiness
    JEL: I31 I38
    Date: 2017–11–01
  9. By: Giovanni Gallo, Costanza Torricelli, Arthur van Soest (University of Modena and Reggio Emilia); Costanza Torricelli (University of Modena and Reggio Emilia); Arthur van Soest (Tilburg University)
    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.
    Date: 2018–01
  10. By: Kathryn Anne Edwards (RAND Corporation); Jeffrey B. Wenger (RAND Corporation)
    Abstract: The risk of labor market, health, and asset-value shocks comprise profound retirement savings challenges for older workers. Parents, however, may experience added risk if their children experience adverse labor market shocks. Prior research has shown that parents support their children financially through an unemployment spell. In this paper, we also provide evidence of financial support from parents and investigate if this financial support is accompanied by adjustments to parental labor supply, program participation, consumption, or savings behavior. With longitudinal data on parents and children from the Panel Study of Income Dynamics, we use within-parent variation in behavior to identify the effect of a child’s labor market shock on parental outcomes. We find results vary by the parent’s age: Parents younger than 62 years old increase labor supply and decrease savings rates, all parents reduce assets and usual food consumption.
    Date: 2017–09
  11. By: Italo A. Gutierrez (RAND Corporation); Jennie W. Wenger (RAND Corporation)
    Abstract: Previous research finds negative effects in the short and medium term for those who initially entered the labor force during weak labor markets. Discerning the effects of initial market conditions is difficult as young workers may attempt to time their entry by, for example, spending additional time in school during weak markets. In this paper, we take advantage of a novel form of exogenous variation that affected a large group of older workers to study longer-term effects of entering labor markets during bad economic times. Using the Health and Retirement Study, we focus on veterans from the draft era and examine the effects of leaving military service during periods of high unemployment on earnings, wealth, and retirement. These men had little choice about the timing of entry into the labor force; they generally were drafted or volunteered based on world events, and they left the military at the end of fixed contracts after short terms of service. Our results indicate that draft-era veterans who entered the labor force during a weaker economy had lower levels of earnings, and the effects lasted for more than a decade. We also find that while veterans who enter weak labor markets eventually catch up with other veterans in terms of earnings, the accumulated negative effects on wealth and financial preparedness for retirement are large; we find some evidence that veterans compensate by extending their working lives.
    Date: 2017–09
  12. By: Thomas Barnay; Eric Defebvre
    Date: 2018
  13. By: Ziesemer, Thomas (UNU-MERIT, and SBE, Maastricht University)
    Abstract: A Samuelsonian serendipity theorem for an endogenous growth model is derived. The formula for optimal population growth rate deviates from those of the model with exogenous population growth rates in a third best endogenous growth model of the Lucas type with imperfect international capital movements and human capital externalities. Calibration shows that the effect of variation of the exogenous population growth rates on other variables and the deviation of population growth rates from its optimal value are small. The reason is that labour supply, interest rates and technical change are endogenous. There is not much of an incentive for population growth policy unless Frisch parameters change with ageing.
    Keywords: Open economy, endogenous growth, human capital, serendipity theorem, ageing
    JEL: F43 J11 J22 J24 O11 O15 O41
    Date: 2018–01–09
  14. By: In Do Hwang (Economic Research Institute, The Bank of Korea)
    Abstract: This paper investigates how loss-aversion affects individuals' decisions on savings and insurance purchase. Specifically, this paper empirically tests if prospect theory's loss aversion decreases insurance demand and increases savings demand. Prospect theory predicts that boundedly rational consumers may view pure protection insurance, such as term-life insurance, as a risky investment because the insured may lose premiums if a bad event does not occur within the pre-specified term. Hence, those who are fairly sensitive to the potential loss choose not to buy term-life insurance. Instead, they may choose a more safe option to prepare for uncertain future events by increasing precautionary saving. This paper tests such prediction using individual-level data from the Health and Retirement Study (HRS) and finds empirical evidence consistent with the prediction: loss-averse individuals are less likely to own term-life insurance and more likely to own whole-life insurance, which serves as a partial savings instrument. These individuals also hold a higher level of wealth than others, suggesting that they tend to save more (presumably for precautionary motives), all other things being equal.
    Keywords: Loss aversion, Term life insurance, Whole life insurance, Precautionary saving, Prospect theory
    JEL: D03 D14 G22
    Date: 2017–02–27

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