nep-age New Economics Papers
on Economics of Ageing
Issue of 2019‒01‒14
eighteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. What's gone wrong in the design of PAYG systems? By Riccardo Magnani
  2. Modernizing Social Security: Helping the Oldest Old By Alicia H. Munnell; Andrew D. Eschtruth
  3. Working Longer in China: Implicit Tax or Subsidy? By Xu, Jing; Wang, Xinmei
  4. Trends in Employment and Social Security Incentives in the Spanish Pension System: 1980-2016 By Pilar García-Gómez; Silvia Garcia-Mandicó; Sergi Jimenez-Martin; Judit Vall Castelló
  5. The Role of Public Pensions in Income Inequality among Elderly Households in China 1988–2013 By Li, Jinjing; Wang, Xinmei; Yuan, Chang; Xu, Jing
  6. How Have Workers Responded to Oregon’s Auto-IRA? By Anek Belbase; Geoffrey T. Sanzenbacher
  7. Do State Laws Protecting Older Workers from Discrimination Reduce Age Discrimination in Hiring? Evidence from a Field Experiment By David Neumark; Ian Burn; Patrick Button; Nanneh Chehras
  8. Stability in Overall Pension Plan Funding Masks a Growing Divide By Jean-Pierre Aubry; Caroline V. Crawford; Kevin Wandrei
  9. The Effect of College Education on Health and Mortality: Evidence from Canada By Guy Lacroix; François Laliberté-Auger; Pierre-Carl Michaud; Daniel Parent
  10. Trends in Retirement Security by Race/Ethnicity By Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
  11. Individual Life Horizon Influences Attitudes Toward Democracy By Lechler, Marie; Sunde, Uwe
  12. “Debt and Financial Vulnerability on the Verge of Retirement" By Annamaria Lusardi; Olivia S.; Noemi Oggero
  13. Immigration and Public Finances in OECD Countries By Hippolyte D'Albis; Ekrame Boubtane; Dramane Coulibaly
  14. How vulnerable is risk aversion to wealth, health and other risks? An empirical analysis for Europe By Christophe Courbage; Guillem Montoliu-Montes; Béatrice Rey
  15. “Retirement rigidities and the gap between effective and desired labour supply by older workers" By Serena Trucchi; Elsa Fornero; Mariacristina Rossi
  16. How Much Income Do Retirees Actually Have? By Anqi Chen; Alicia H. Munnell; Geoffrey T. Sanzenbacher
  17. The Disability Option: Labor Market Dynamics with Macroeconomic and Health Risks By Amanda Michaud; David Wiczer
  18. Financial advice for funding later life care: a scoping review of evidence from England By Heavey, Emily; Baxter, Kate; Birks, Yvonne

  1. By: Riccardo Magnani (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In order to face the population ageing problem, most countries with PAYG systems introduced pension reforms during the last twenty years. However, in many cases these reforms are considered as insufficient to guarantee the pension sustainability; in other cases, the pension sustainability is achieved through the introduction of drastic reforms and, thus, at the expense of a dramatic reduction in the well-being of current and future generations. The objective of this article is to show that the non-sustainability of PAYG systems and, consequently, the necessity to introduce drastic pension reforms, is explained by the fact that in countries with PAYG systems pensions have not been computed according to appropriate rules. In particular, we show that the sustainability of the pension system is guaranteed if (i) pension benefits are computed using actuarial principles, (ii) the implicit rate of return on contributions is the same for each retiree and equal to the average wage bill growth rate, and (iii) pension reserves are remunerated at a risk-free interest rate equal to the average wage bill growth rate. These conditions allow a PAYG system to face any demographic shock, such as an increase in life expectancy and a transitory increase in fertility rates (baby boom) followed by a transitory reduction in fertility rates (baby boost).
    Keywords: Pension economics,Pension finance,Population ageing
    Date: 2018–12–28
  2. By: Alicia H. Munnell; Andrew D. Eschtruth
    Abstract: People become more financially vulnerable the longer they live and the odds of living to advanced ages are growing as average life expectancy rises. In response, policy experts have proposed improving benefits for the “oldest old” (defined here as those ages 85 and over). The two main options are: 1) base the annual cost-of-living adjustment (COLA) on a price index that more accurately reflects the spending patterns of older Americans; or 2) introduce a targeted benefit adjustment at age 85. This brief on helping the oldest old is the fourth in a series on modernizing Social Security to account for changing social, economic, and demographic circumstances. The discussion proceeds as follows. The first section describes poverty patterns by age. The second section examines the two options for reducing poverty risk at advanced ages: using a Consumer Price Index for the elderly and adjusting benefits at 85. The third section assesses the reforms based on three criteria: targeting efficiency, administrative feasibility, and cost offsets. The final section concludes that raising benefits at 85 is the more cost-effective way to target the problem of poverty risk among the oldest old and that its modest cost could be offset by a very small reduction in the COLA.
    Date: 2018–10
  3. By: Xu, Jing; Wang, Xinmei
    Abstract: Using the conventional concept of implicit tax, we investigate pension incentives to retire for private sector employees in China. The social security pension consists of pay-as-you-go defined benefit (DB) and defined contribution (DC) systems. Based on Chinese official parameters and the revised OECD models, our studies conclude that the DB system discourages people from working more, but the DC system offers considerably greater incentives at the expense of financial sustainability. If the annuity factors in the DC scheme were linked to the probability of retirees’ mortality, then both constant incentives to work longer and financial sustainability could be achieved.
    Keywords: implicit tax, incentives, pension wealth, social security pension, working longer
    JEL: C53 C54 H55
    Date: 2018–12
  4. By: Pilar García-Gómez; Silvia Garcia-Mandicó; Sergi Jimenez-Martin; Judit Vall Castelló
    Abstract: In this paper, we analyze the association between financial incentives and retirement decisions using aggregate data for over four decades in Spain. We calculate an implicit tax rate on remaining in employment for an additional year and examine its correlation with employment rates for older workers. The results suggest that financial incentives play a role in explaining the retirement patterns of both employed and unemployed workers.
    JEL: H55 J26
    Date: 2018–12
  5. By: Li, Jinjing; Wang, Xinmei; Yuan, Chang; Xu, Jing
    Abstract: Using data from the Chinese Household Income Project surveys for 1988, 1995, 2002 and 2013, we investigate the role of public pensions in income inequality among households with elderly members across two decades of pension policy reforms. We examine the distribution and role of public pensions at a national level. We analyse the evolution of the contribution of public pensions to national income inequality across a much more extended time period than earlier studies, which have generally focused on regional changes over short periods. Our findings suggest that public pensions have become the most important source of income for households with elderly members on average in China, but the distribution of pension income is highly unequal, with a Gini coefficient of 0.74 in 2013. Public pension income has been the largest source of income inequality for elderly households since 2002 and contributed to more than half of total income inequality in the most recent year of the survey. This finding is robust against variations in the income inequality measures used. Additionally, our analysis suggests unequal distribution of pension benefits is the primary driver of pensioners’ income inequality. Among several hypothetical policy changes, ensuring a minimum pension benefit for all existing pensioners seems to be the most fiscally effective option in reducing income inequality, with a 0.8% reduction in the Gini coefficient for a 1% increase in public pension expenditure.
    Keywords: income inequality, public pension, Gini decomposition
    JEL: H55 C53 C54
    Date: 2018–12
  6. By: Anek Belbase; Geoffrey T. Sanzenbacher
    Abstract: Only about half of private sector workers are covered by employer-sponsored retirement savings plans at any given time, and few workers save without one. The net result is that roughly a third of retired households end up solely reliant on Social Security benefits, which were never intended to be their only source of income. In the absence of federal action to close the coverage gap, some states have passed legislation to implement auto-IRAs, which require employers who do not offer a retirement plan to automatically enroll their workers in an IRA-based saving program sponsored by the state. The primary goal of auto-IRAs is to improve retirement security among uncovered workers, who would automatically start to build assets through the program. In practice, the extent to which workers benefit will depend on how they respond – workers who do not opt out, save at a meaningful rate, and avoid raiding their nest egg before retirement for non-essential expenses will improve their odds. But those who opt out of the program, or participate but do not use the program to improve their overall financial situation, will not be better prepared for retirement. Therefore, to assess the overall impact of an auto-IRA, one would need comprehensive financial data for a household, including debt, income, and saving over a long period of time. But an early look can still be useful, so this brief examines the experience of Oregon to date, which recently became the first state to implement an auto-IRA program (called OregonSaves). The goal is to answer a limited question: how do workers who gain access to an auto-IRA initially interact with the program? The discussion proceeds as follows. The first section provides background on OregonSaves’ goals, design, and implementation. The second section describes the data used in the analysis. The third section discusses the initial results emerging from the early data. The final section concludes that the majority of eligible workers do participate and tend to stick with the default deferral rate. As more data become available, both on new participants and on current participants’ longer-term behavior, researchers should be able to assess the impact of OregonSaves on the overall financial status of participating households.
    Date: 2018–12
  7. By: David Neumark; Ian Burn; Patrick Button; Nanneh Chehras
    Abstract: We provide evidence from a field experiment in all 50 states on age discrimination in hiring for retail sales jobs. We relate measured age discrimination – the difference in callback rates between old and young applicants – to state variation in anti-discrimination laws protecting older workers. Anti-discrimination laws could boost hiring, although they could have the unintended consequence of deterring hiring if their main effect is to increase termination costs. We find some evidence that there is less discrimination against older men and women in states where age discrimination law allows larger damages, and some evidence that there is lower discrimination against older women in states where disability discrimination law allows larger damages. But this evidence is not robust to all of the estimations we consider. However, we reach a robust conclusion that stronger or broader laws protecting older workers from discrimination do not have the unintended consequence of deterring their hiring.
    JEL: J23 J26 J7 J78 K31
    Date: 2018–12
  8. By: Jean-Pierre Aubry; Caroline V. Crawford; Kevin Wandrei
    Abstract: In fiscal year 2017, the aggregate funded ratio for state and local pension plans under traditional government accounting rules was 72 percent, largely unchanged from the past several years. However, this stability belies growing disparities in individual plan funding. While plans with extremely low funded ratios garner most of the public spotlight, a sizable share of plans are well-funded and financially stable. As such, much can be learned from analyzing trends for specific groups of plans that underlie the aggregate story. The discussion proceeds as follows. The first section provides an update of the aggregate funded level for 2017 based on the most recent reports from the 180 plans in the Public Plans Database. The second section divides the sample of plans into thirds based on their 2017 funded ratio, and traces the history of funding for each group. The data show that the average funded ratios for each third were relatively similar in 2001, but have diverged since. The third section investigates potential reasons for this divergence by reviewing each group’s benefit levels, funding discipline, and investment returns from 2001-2017. The fourth section projects future funded levels in aggregate. The final section concludes that the top third of plans should remain on track if they maintain their current course while the bottom third will likely need to make major changes. One concern that all plans share is the possibility of a market downturn, which could set back funding for several years.
    Date: 2018–10
  9. By: Guy Lacroix; François Laliberté-Auger; Pierre-Carl Michaud; Daniel Parent
    Abstract: We investigate the returns to college attendance in Canada in terms of health and mortality reduction. To do so, we first use a dynamic health microsimulation model to document how interventions which incentivize college attendance among high school graduates may impact their health trajectory, health care consumption and life expectancy. We find large returns both in terms of longevity (4.2 years additional years at age 50), reduction in the prevalence of various health conditions (10-15 percentage points reduction in diabetes and 5 percentage points for stroke) and health care consumption (28.4% reduction in lifetime hospital stays, 19.8 for specialists). We find that education impacts mortality mostly by delaying the incidence of health conditions as well as providing a survival advantage conditional on having diseases. Second, we provide quasi-experimental evidence on the impact of college attendance on long-term health outcomes by exploiting the Canadian Veteran’s Rehabilitation Act, a program targeted towards returning WW-II veterans and which incentivized college attendance. The impact on mortality are found to be larger than those estimated from the health microsimulation model (hazard ratio of 0.216 compared to 0.6 in the simulation model) which suggest substantial returns to college education in terms of healthy life extension which we estimate around one million canadian dollars.
    Keywords: mortality,education,microsimulation,quasi-experimental,instrumental variables,veterans,
    JEL: I14
    Date: 2018–12–24
  10. By: Alicia H. Munnell; Wenliang Hou; Geoffrey T. Sanzenbacher
    Abstract: Retirement security has declined in the wake of the global financial crisis and ensuing recession. Despite an extended period of recovery, half of households ages 30-59 are at risk of inadequate retirement income compared to 44 percent in 2007. The questions addressed in this brief are how the percentage at risk varies by race/ethnicity in 2016 and how the impact of the crisis and the recovery led to the 2016 pattern. This brief uses the National Retirement Risk Index(NRRI) to assess the retirement security of today’s working-age households. The NRRI is calculated by comparing households’ projected replacement rates – retirement income as a percentage of pre-retirement income – with target replacement rates that would allow them to maintain their standard of living. These calculations are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households. As of 2016, the NRRI showed that, even if households worked to age 65 and annuitized all their financial assets (including the receipts from reverse mortgages on their homes), half of households were at risk of falling short in retirement. The discussion proceeds as follows. The first section describes the nuts and bolts of the NRRI. The second section presents background data on wealth and earnings, showing that white households now hold roughly six times as much wealth and earn almost twice as much as minority households. The third section reports the NRRI for white, black, and Hispanic households for 2007-2016. In 2016, whites had the lowest share at risk, followed by blacks and then Hispanics. The pattern over time is somewhat surprising, with the situation of blacks holding relatively steady and that of Hispanics deteriorating sharply. To explain this pattern, the fourth section explores the underlying wealth and earnings data. The data suggest that the deterioration for Hispanics reflects their buying housing in the wrong places at the wrong time and that the steadiness for blacks is a function of falling earnings at the bottom of the income distribution and Social Security’s progressive benefit formula. The final section concludes that while considerable inequality exists in retirement preparedness, it is significantly less than exists in the distribution of wealth and earnings before retirement. The reason, though, is that minorities have a lower standard of living to maintain than whites.
    Date: 2018–11
  11. By: Lechler, Marie (LMU Munich); Sunde, Uwe (LMU Munich)
    Abstract: Support for democracy in the population is considered critical for the emergence and stability of democracy. Macro-determinants and retrospective experiences have been shown to affect the support for democracy at the individual level. We investigate whether and how the individual life horizon, in terms of the prospective length of life and age, affect individual attitudes toward democracy. Combining information from period life tables with individual survey response data spanning more than 260,000 observations from 93 countries over the period 1994-2014, we find evidence that the expected remaining years of life influence the attitudes toward a democratic political regime. The statistical identification decomposes the influence of age from the influence of the expected proximity to death. The evidence shows that support for democracy increases with age, but declines with expected proximity to death, implying that increasing longevity might help fostering the support for democracy. Increasing age while keeping the remaining years of life fixed as well as increasing remaining years of life for a given age group both contribute to the support for democracy.
    Keywords: attitudes toward democracy; life expectancy; aging;
    Date: 2019–01–08
  12. By: Annamaria Lusardi (George Washington University School of Business); Olivia S. (The Wharton School of the University of Pennsylvania); Noemi Oggero (Collegio Carlo Alberto)
    Abstract: We analyze older individuals’ debt and financial vulnerability using data from the Health and Retirement Study (HRS) and the National Financial Capability Study (NFCS). Specifically, in the HRS we examine three different cohorts (individuals age 56–61) in 1992, 2004, and 2010 to evaluate cross-cohort changes in debt over time. We also use two waves of the NFCS (2012 and 2015) to gain additional insights into debt management and older individuals’ capacity to shield themselves against shocks. We show that recent cohorts have taken on more debt and face more financial insecurity, mostly due to having purchased more expensive homes with smaller down payments.
    Date: 2017–09
  13. By: Hippolyte D'Albis (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Ekrame Boubtane (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Dramane Coulibaly (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper shows that the macroeconomic and fiscal consequences of international migration are positive for OECD countries, and suggests that international migration produces a demographic dividend by increasing the share of the work- force within the population. The estimation of a structural vector autoregressive model on a panel of 19 OECD countries over the period 1980-2015 reveals that a migration shock increases GDP per capita through a positive effect on both the ratio of working-age to total population and the employment rate. International migration also improves the fiscal balance by reducing the per capita transfers paid by the government and per capita old-age public spending. To rationalize these findings, an original theoretical framework is developed. This framework highlights the roles of both the demographic structure and intergenerational public transfers and shows that migration is beneficial to host economies characterized by aging populations and large public sectors.
    Keywords: Immigration,public finances,overlapping-generation model,panel VAR
    Date: 2018–12–14
  14. By: Christophe Courbage (Geneva School of Business Administration - University of Applied Sciences Western Switzerland); Guillem Montoliu-Montes (UNIL - Université de Lausanne); Béatrice Rey (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper empirically assesses how financial risk aversion reacts to a change in individuals' wealth and health and to the presence of both financial and health risks using the Survey of Health, Ageing, and Retirement in Europe (SHARE). Individuals in our sample exhibit financial risk aversion decreasing both in wealth and health. Financial risk aversion is also found to increase in the presence of a background financial risk and a background health risk. Interestingly, risk aversion is shown to be convex in wealth but linear in health. Such findings complement the literature on risk aversion behaviours and can help to better understand various economic decisions in a risky environment.
    Keywords: risk aversion,(cross-) DARA,(cross-) risk vulnerability,background risk,health risk
    Date: 2018
  15. By: Serena Trucchi (University College London and CeRP-Collegio Carlo Alberto); Elsa Fornero (University of Turin and CeRP-Collegio Carlo Alberto); Mariacristina Rossi (University of Turin and CeRP-Collegio Carlo Alberto)
    Abstract: Our paper analyses the observed and desired labour supply of older workers and (recent) retirees in a country (Italy) with limited opportunities for flexible work schedules. For this purpose, we use a unique dataset drawn from the Bank of Italy’s Survey on Household Income and Wealth (SHIW) providing information on both desired and actual working hours. Our empirical analysis documents the gap between older individuals’ desired and observed labour supply at both the extensive and the intensive margins and traces it back to gender, education and family composition.
    Date: 2018–10
  16. By: Anqi Chen; Alicia H. Munnell; Geoffrey T. Sanzenbacher
    Abstract: How much income retirees actually have seems like a straightforward question. Researchers often rely on nationally representative surveys to measure the financial resources available to households and inform evaluations of the employer retirement system and the Social Security program. But recent research has undermined confidence in survey data by focusing attention on the understatement of retirement income in one specific dataset – the Current Population Survey (CPS) – and thereby has called into question prior studies showing many households are not well-prepared for retirement. The question is whether other datasets frequently used by researchers also underestimate retirement income and, if so, by how much and where in the income distribution? This brief, based on a recent paper, compares administrative data from the Internal Revenue Service (IRS) and the Social Security Administration (SSA) to measures of retirement income reported in the CPS and four other commonly used datasets: 1) the Survey of Consumer Finances (SCF); 2) the Health and Retirement Study (HRS); 3) the Panel Survey of Income Dynamics (PSID); and 4) the Survey of Income and Program Participation (SIPP).1 The discussion proceeds as follows. The first section describes, for each dataset, the survey design and definition of retirement income. The second section compares retirement income from each dataset with aggregate administrative data, while the third section compares each dataset with administrative data across the income distribution. The fourth section presents the results in the context of the percentage of households at risk of facing a retirement shortfall. The final section concludes that while recent research suggests that older households may have a lot more income than is captured in survey data, those results are unique to the CPS. Other survey data provide income estimates that are much more consistent with administrative data and still suggest that about half of households face a retirement shortfall.
    Date: 2018–11
  17. By: Amanda Michaud; David Wiczer
    Abstract: We evaluate the contribution of changing macroeconomic conditions and demographics to the increase in Social Security Disability Insurance (SSDI) over recent decades. Within our quantitative framework, multiple sectors differentially expose workers to health and economic risks, both of which affect individuals' decisions to apply for SSDI. Over the transition, falling wages at the bottom of the distribution increased awards by 27% in the 1980s and 90s and aging demographics rose in importance thereafter. The model also implies two-thirds of the decline in working-age male employment from 1985 to 2013, three-fourths of which eventually goes on SSDI.
    Date: 2018
  18. By: Heavey, Emily; Baxter, Kate; Birks, Yvonne
    Abstract: Context: Ageing populations across the world make the provision of long-term care a global challenge. A growing number of people in England are faced with paying for later life social care costs, but do little to plan for these costs in advance. Recent legislation in the form of the Care Act 2014 gave local authorities new responsibilities to provide information on how people can access independent financial advice on matters relating to care needs. Objectives: This scoping review aimed to identify existing evidence about people’s engagement with financial advice in relation to paying for later life care in England. Methods: Electronic and manual searching identified seventeen papers reporting empirical evidence on the topic, published between 2002 and 2017. Findings: We found evidence of low numbers accessing regulated financial advice. Barriers included limited consumer awareness, preferences for other sources of advice such as friends an d family, and poor signposting and referrals by local authorities. Most papers indicated that financial advice would be useful in helping people to plan for care costs. Robust research evidence on this topic is limited, with particular gaps in evidence about stakeholders’ experiences of the barriers to, and usefulness of, financial advice about paying for long-term care in later life. Limitations: The paper does not include a formal quality assessment of the included research papers. Our interpretation of study findings was hindered by lack of methodological transparency in some papers and lack of studies focusing specifically on the topic of financial planning for long-term care. Implications: An improved evidence base could assist financial advisers specialising in this area and local authorities that are now obliged to signpost people to such advice. With better evidence they would be better placed to explain to members of the public the financial and non-financial implications of obtaining financial advice about care costs. It might also enable those organisations to overcome barriers and facilitate access to appropriate advice.
    Keywords: self-funders; financial advice; later life care; paying for care; older people; scoping review; Care Act 2014
    JEL: E6
    Date: 2019–01

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