nep-age New Economics Papers
on Economics of Ageing
Issue of 2019‒01‒28
sixteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Sustainable and Equitable Pensions with Means Testing in Aging Economies Abstract: A means-tested pension system has a distinct feature that tailors the level of pension bene…ts according to individual economic status. In the context of population aging with widening gaps in life expectancies, this feature generates an automatic adjustment mechanism that ( ) mitigates the pressing …scal cost of an old-age public pension program (…scal stabilization device) and ( ) redistributes pension bene…ts to those in need with shorter life expectancies (redistributive device). To evaluate this automatic adjustment mechanism, we employ an overlapping generations model with population aging. Our results indicate that this novel mechanism plays an important role in containing the adverse e¤ects of population aging on the …scal costs and progressivity of a pension system. More pronounced aging scenarios further strengthen the role of this mechanism. A well-designed means test rule can create a su¢ciently strong automatic mechanism to keep public pensions sustainable and equitable. Importantly, it is feasible to devise a pension reform that better adapts a means-tested pension system to more pronounced demographic trends, but does not lower the welfare of current and future individuals of all ages and income. By George Kudrna; Chung Tran; Alan Woodland
  2. Demographics, Pension Systems and the Saving-Investment Balance By Hua Chai; Jun Il Kim
  3. Demographics, Old-Age Transfers and the Current Account By Mai Chi Dao; Callum Jones
  4. “Information and perceptions on pensions. The case of the 2011 Italian reform" By Elsa Fornero; Mariacristina Rossi; Cesira Urzì Brancati
  5. Retirement Choices by State and Local Public Sector Employees: The Role of Eligibility and Financial Incentives By Leslie E. Papke
  6. Health, Cognition and Work Capacity Beyond the Age of 50 By Vandenberghe, Vincent
  7. Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT By Maebayashi, Noritaka
  8. “The Italian Pension Gap: a Stochastic Optimal Control Approach" By Alessandro Milazzo; Elena Vigna
  9. “Another Look at Causes and Consequences of Pension Privatization Reform Reversals in Eastern Europe" By Nikola Altiparmakov
  10. Frontloaded Income Taxation of Old-Age Pensions: For Efficiency and Fairness in a World of International Labor Mobility By Bernd Genser; Robert Holzmann
  11. Do Pension Cuts for Current Employees Increase Separation? By Laura D. Quinby; Gal Wettstein
  12. “Information and Financial Literacy for a Socially Sustainable NDC Pension System" By Elsa Fornero; Noemi Oggero; Riccardo Puglisi
  13. Social Security Incentives in Belgium: An Analysis of Four Decades of Change By Anne-Lore Fraikin; Alain Jousten; Mathieu Lefebvre
  14. Modernizing Social Security: Minimum Benefits By Andrew D. Eschtruth; Alicia H. Munnell
  15. Age-Based Property Tax Exemptions By H. Spencer Banzhaf; Ryan Mickey; Carlianne E. Patrick
  16. The Incidence of Pension Contributions By Nicole Bosch; Maja Micevska Scharf; Casper van Ewijk; Sander Muns

  1. By: George Kudrna; Chung Tran; Alan Woodland
    JEL: H2 H55 J1 C68
    Date: 2018–12
  2. By: Hua Chai; Jun Il Kim
    Abstract: This paper studies the effect of demographic change on national saving, global interest rates, and international capital flows, focusing on the role of the public pension system. We develop a small open economy overlapping generations model to illustrate the channels through which demographic variables and pension system generosity interact to affect both private and public saving behavior. We then extend this framework to a two-country setting and simulate scenarios of demographic change and pension reform. We find that the generosity of the pension system plays an important role in determining the movement of the global interest rate and patterns of international capital flows.
    Keywords: Capital flows;Foreign exchange;Current account;Aging;Investment;Pensions;Private savings;Public sector savings;Demographic indicators;demographics, pension, saving
    Date: 2018–12–07
  3. By: Mai Chi Dao; Callum Jones
    Abstract: Building on the evolving literature on the topic, this paper reviews the relationship between demographics and long-run capital flows in both theory and in the data. For this purpose, we develop a two region overlapping generations model where countries differ in their population growth and mortality risk. Besides exploring the implications of demographics for saving and the current account over the long-run, we also study how these might be affected by differences in the coverage and sustainability of old-age transfer schemes. The model predicts that population structure and life expectancy (which affects the need to save to meet old age consumption) affect current account levels, and that while countries with more generous unfunded transfer schemes tend to have lower saving and more capital inflows over the long-run, this effect may be dampened by natural limits (on taxation) of these schemes. The key predictions of the model are generally supported by a rich panel dataset.
    Keywords: Pensions;Demographic indicators;Current account balances;Current account surpluses;Capital flows;Aging;Demographics, Current Account Flows, External Imbalances, General
    Date: 2018–12–07
  4. By: Elsa Fornero (University of Turin and CeRP-Collegio Carlo Alberto); Mariacristina Rossi; Cesira Urzì Brancati (Joint Research Centre, European Commission, SevilleAuthor-Workplace-Name: University of Turin and CeRP-Collegio Carlo Alberto)
    Abstract: This article summarises some results from an ad hoc survey investigating the awareness and understanding of the 2011 Pension reform in Italy among would be retirees aged 55 and over. Despite being so close to retirement age, a third of the respondents did not think their income in retirement would be enough to meet consumption needs. Pension information was deemed as sufficient and easy to find only by one in five respondents. Even though nearly all respondents were interested in receiving generic pension information, only a tiny proportion was eager to seek professional advice to assess how balanced their portfolio were.
    Date: 2018–01
  5. By: Leslie E. Papke
    Abstract: I analyze the effects of state public pension parameters on the retirement of public employees. Using a panel data set of public sector workers from 12 waves of the Health and Retirement Study, I model the probability of retirement as a function of pension wealth at early and normal retirement eligibility and Social Security coverage in the public sector job. I find that becoming eligible for early retirement, or receiving an early-out offer, significantly increases the probability of retiring. I do not find any effect of retirement wealth levels; instead the findings are consistent with the literature on default options in defined contribution plans. These findings suggest that state legislative action to affect retirement decisions and reduce future pension costs may be most effective operating through plan eligibility rules and early-out incentives.
    JEL: H72 H75 J26 J45 J82
    Date: 2019–01
  6. By: Vandenberghe, Vincent
    Abstract: The rising cost of old-age dependency in Europe and elsewhere invariably leads to reforms aimed at raising the effective age or retirement. But do older individuals have the health/cognitive capacity to work longer? Following Cutler et al. (2012), this paper asks how much older individuals could work if they worked as much as their younger (50-54) counterparts in similar health/with equal cognitive performance. Contrary to existing papers, this one uses international, European, comparable panel evidence available in the Survey of Health, Ageing and Retirement in Europe (SHARE). It considers both physical health and cognition; and health consists of subjective and objective measures. Also, it examines the extensive and intensive margins of work (employment and hours): existing papers only consider the former. Results are essentially fivefold. First, declines in health significantly affect employment. Second, the impact on hours is statistical significant but of much smaller magnitude. People suffering from ill health rarely adjust hours; they rather stop working altogether. Third, cognition is not fundamentally affected by ageing, and it adds little to our capacity to predict how work capacity evolves with age. Fourth, identification issues exist and must be addressed. They comprise unobserved heterogeneity across respondents, justification bias or proxying/measurement errors regarding health. Finally, declining health/cognition explain at most 31% of the actual labour supply reduction between 50 and 70. This confirms the existence of a, currently largely underused, work capacity among older individuals.
    Keywords: Ageing,Health,Cognition,Labour Supply,Work Capacity
    JEL: J22 I10 J26
    Date: 2019
  7. By: Maebayashi, Noritaka
    Abstract: This study investigates (i) how unfunded public pensions financed by VAT, as discussed in Japan, affect economic growth, and (ii) whether payroll tax or VAT is the more growth-friendly tax structure for the finance of public pensions. We examine these issues in overlapping generations (OLG) models with parental altruism and find the following results. A public pension system financed by VAT itself may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT have turned out to be more growth-friendly than those financed by payroll tax when bequests are operative.
    Keywords: Public pensions financed by VAT, Altruism, Education, Bequests, Growth
    JEL: D64 H20 H55 I20 O40
    Date: 2018–12–26
  8. By: Alessandro Milazzo (Imperial College, London); Elena Vigna (University of Turin and CERP-Collegio Carlo Alberto)
    Abstract: We study the gap between the state pension provided by the Italian pension system pre-Dini reform and post-Dini reform. The goal is to fill the gap between the old and the new pension by joining a defi ned contribution pension scheme and adopting an optimal investment strategy that is target-based. We fi nd that it is possible to cover, at least partially, this gap with the additional income of the pension scheme, especially in the presence of late retirement and in the presence of stagnant career. Workers with dynamic career and workers who retire early are those who are most penalised by the reform. Results are intuitive and in line with previous studies on the subject.
    Date: 2018–05
  9. By: Nikola Altiparmakov (Fiscal Council, Serbia)
    Abstract: In order for ‘carve-out’ pension privatization to improve long-term sustainability the transition should not be predominantly debt-financed, and private pension funds should deliver (net) rates of return tangibly higher than GDP growth. We show that none of the reforming countries in Eastern Europe was successful in fulfilling these two preconditions, even before the emergence of the global financial crisis. While existing literature mostly describes a recent wave of reform reversals as politically driven short-sighted policies that deteriorate long-term sustainability, we argue the contrary: that pension privatization structural deficiencies and disappointing performance allow reversals to improve the short-term stance without necessarily undermining long-term pension sustainability. We conclude that unless political consensus exists to support the multi-decade fiscal austerity required to finance pension privatization, reform adjustments and reversals can be a rational alternative to maintaining economically suboptimal or politically unstable pension systems in some Eastern European countries.
    Date: 2018–06
  10. By: Bernd Genser; Robert Holzmann
    Abstract: Strong evidence shows that the existing pattern of cross-border pension taxation in OECD countries and beyond is extremely diverse and inconsistent, generating a double fairness dilemma for individuals and countries alike. This paper argues that this dilemma cannot be solved within the current network of double-taxation treaties. Instead, it proposes a new approach for the taxation of old-age pensions in a world of high and increasing cross-border mobility of workers and pensioners. The paper demonstrates that a coordinated move to frontloaded pension taxation and exclusive source taxation would pave the way for an international pension tax order that eliminates the double fairness dilemma. An additional innovative element of frontloaded pension taxation is presented: the decoupling of individual tax assessment and tax payment, which may help curb political opposition against frontloaded pension taxation and smooth transitional effects after its introduction.
    Keywords: pension taxation, international taxation, international migration, double taxation convention
    JEL: H24 H55 H87 F22
    Date: 2018
  11. By: Laura D. Quinby; Gal Wettstein
    Abstract: This study examines whether pension cuts affecting current public employees encourage mid-career teachers and civil servants to separate from their employers. The analysis takes advantage of a 2005 reform to the Employees’ Retirement System of Rhode Island (ERSRI) that dramatically reduced the generosity of benefits for current workers. Importantly, the cuts applied only to ERSRI members who had not vested by June 30, 2005. Vested ERSRI members and municipal government employees in Rhode Island were unaffected. This sharp difference in benefit generosity permits a triple-differences research design in which non-vested ERSRI members are compared, before and after the reform, to vested members and to all members of the Municipal Employees’ Retirement System of Rhode Island. The results show that the pension cut caused a 2.4-percentage-point increase in the rate of separation, implying an elasticity of labor supply with respect to pension benefits of around 0.25. Rhode Island teachers were significantly less responsive to the benefit cut than other occupations, in line with an existing literature on teacher labor supply, suggesting that the results from that literature may not generalize to the broader workforce.
    Date: 2019–01
  12. By: Elsa Fornero (University of Turin and CeRP-Collegio Carlo Alberto); Noemi Oggero (University of Turin and CeRP-Collegio Carlo Alberto); Riccardo Puglisi (University of Pavia)
    Abstract: The accumulation of pension wealth is a long and complex endeavour, with various ‘moments’ in which the individual has to make decisions, even in public systems with a strong compulsory component. Awareness is essential to increase welfare, as citizens are more likely to make sensible choices and avoid regrettable mistakes. Awareness requires both information and the ability to use it wisely; in turn, this requires a minimum economic-financial knowledge, typically called financial literacy. Workers must have some knowledge (conjecture), as precise as possible, of where they stand on their accumulated (prospective) pension wealth and retirement options. This knowledge is less important in the traditional world of DB pension promises, because of their ‘guaranteed’ nature (although the political risk—a risk that people are more likely to ignore, by appealing to the notion of ‘acquired rights’—was never explicitly taken into account and thus covered). Knowledge is instead essential in (N)DC schemes because of their more complicated structure, combined with a higher level of individual responsibility and corresponding risk. In this chapter, we investigate the importance of both information and financial literacy, as they are complementary in achieving a socially sustainable NDC pension system.
    Date: 2018–05
  13. By: Anne-Lore Fraikin; Alain Jousten; Mathieu Lefebvre
    Abstract: The paper traces labor market reforms over the last four decades. It provides estimates of retirement incentives for a selected set of typical worker profiles across time and socioeconomic groups and links these series to the labor market performance in Belgium. The results show that the numerous retirement and social security program reforms have had a marked impact on incentives at the micro level. At the aggregate level, results are less clear-cut given the extreme diversity of programs and features in the Belgian institutional context.
    JEL: H55 J26
    Date: 2018–12
  14. By: Andrew D. Eschtruth; Alicia H. Munnell
    Abstract: Social Security offers a minimum benefit to retired workers with very low career earnings. However, the current level of this benefit is not enough, by itself, to prevent poverty even for full-career workers, and it is withering away due to a design flaw. As a result, many policy experts support redesigning the minimum benefit. Virtually all experts agree that full-career workers should get a benefit that keeps them out of poverty. Some also support broadening eligibility for the minimum benefit by reducing the earnings level needed to build up qualifying credits. Others would take the opposite tack, narrowing eligibility by raising the number of years needed for a full or partial benefit. This brief is the final one in a series on modernizing Social Security to account for changing social, economic, and demographic circumstances. The discussion proceeds as follows. The first section provides the basics on Social Security benefits for low earners. The second section introduces the key design elements of the current minimum benefit. The third section reviews several reform proposals. The fourth section assesses the reforms based on three criteria: targeting efficiency, administrative feasibility, and cost offsets. The final section concludes that an enhanced minimum benefit has wide appeal and could substantially reduce poverty risk, with the breadth of the impact dependent on how eligibility is determined.
    Date: 2019–01
  15. By: H. Spencer Banzhaf; Ryan Mickey; Carlianne E. Patrick
    Abstract: Many local jurisdictions offer property tax exemptions or similar concessions to older citizens. Such exemptions represent substantial intergenerational transfers and may have important implications for local public finances. The consequences of age-based property tax exemptions depend upon the extent to which they influence households' location decisions, housing tenure decisions, and housing consumption. We provide the first evidence on (long-term) changes in household composition and housing consumption attributable to local, age-based property tax exemptions. We construct a unique database of local property tax exemptions in Georgia covering 100 years of county, school district, and selected city property tax laws. We use these data to estimate the effect of age-based property tax exemptions on the number of older home-owners from 1970-2010 attributable to the exemption. Using a "quadruple-difference" estimation strategy, we find a significant increase in older homeowners attributable to the combined effect of age-based property tax exemptions on location decisions and housing tenure. We also find evidence that age-based property tax exemptions increase housing consumption among older households. Finally, we estimate a sorting model to estimate the equilibrium effects of different tax policies.
    JEL: H7 R2
    Date: 2019–01
  16. By: Nicole Bosch (CPB Netherlands Bureau for Economic Policy Analysis); Maja Micevska Scharf (CPB Netherlands Bureau for Economic Policy Analysis); Casper van Ewijk (CPB Netherlands Bureau for Economic Policy Analysis); Sander Muns (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This paper investigates the incidence of pension contributions using a unique longitudinal administrative dataset covering individual employees at different pension funds in the Netherlands for the period 2006-2012. With a panel-based difference-indifference approach, we estimate the response of wages, labor cost and hours worked to both marginal and average contribution rates, which provides us insight into the mechanisms underlying incidence. In contrast to the standard demand and supply model of labor we fi nd that average contribution rates matter more for incidence than marginal rates. Moreover, we fi nd that a substantial part of the burden (some 70%) is borne by employers. This is in line with the statutory contribution rates (on average 70-30 for employers and employees) but could also be explained by other factors such as non-salience or bargaining. Together our findings indicate that incidence is best explained by a bargaining model of wages, at least in the short and medium term considered in our analysis.
    JEL: D91 G11 G23
    Date: 2019–01

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