nep-age New Economics Papers
on Economics of Ageing
Issue of 2019‒04‒15
25 papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. What Financial Risks Do Retirees Face in Late Life? By Matthew S. Rutledge; Geoffrey T. Sanzenbacher
  2. Population Aging, Age Discrimination, and Age Discrimination Protections at the 50th Anniversary of the Age Discrimination in Employment Act By Button, Patrick
  3. Endogenous Demographic Change, Retirement and Social Security By Cipriani, Giam Pietro; Fioroni, Tamara
  4. NDC: The Generic Old-Age Pension Scheme By Góra, Marek; Palmer, Edward
  5. On the political feasibility of increasing the legal retirement age By Benjamin Bittschi; Berthold U. Wigger
  6. Demographics and the natural real interest rate: historical and projected paths for the euro area By Papetti, Andrea
  7. Workers' Employment Rates and Pension Reforms in France: the Role of Implicit Labor Taxation By Didier Blanchet; Antoine Bozio; Simon Rabaté; Muriel Roger
  8. Social Security Coverage around the World: The Case of China and Mexico By Francisco Perez-Arce; Maria Prados; Erik Meijer; Jinkook Lee
  9. Individual attitudes towards immigration in aging populations By Rana Comertpay; Andreas Irmen; Anastasia Litina
  10. Understanding Job Transitions and Retirement Expectations Using Stated Preferences for Job Characteristics By Nicole Maestas; Kathleen J. Mullen; David Powell; Till von Wachter; Jeffrey Wenger
  11. Retiring Earlier than Planned: What Matters Most? By Alicia H. Munnell; Matthew S. Rutledge; Geoffrey T. Sanzenbacher
  12. Investigating the Difference in Mortality Estimates between the Social Security Administration Trustees' Report and the Human Mortality Database By Magali Barbieri
  13. Voluntary Job Separations and Traditional versus Flexible Workplace Saving Plans: Evidence from Canada By Fang, Tony; Messacar, Derek
  14. Insurance with a deductible. A way out of the long term care insurance By KLIMAVICIUTE Justina,; PESTIEAU Pierre,
  15. Do Individuals Know When They Should Be Saving for a Spouse? By Geoffrey T. Sanzenbacher; Wenliang Hou
  16. Absolute momentum, sustainable withdrawal rates and glidepath investing in US retirement portfolios from 1925 By Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
  17. Make Yourselves Scarce: The Effect of Demographic Change on the Relative Wages and Employment Rates of Experienced Workers By Böhm, Michael Johannes; Siegel, Christian
  18. Private Benefits, Fiscal Costs, and Economic Resource Costs of the Private Defined Contribution Pension Systems in Turkey By Glenn P. Jenkins; Godwin O Olasehinde-Williams; Roya Amel
  19. Investment in children, social security, and intragenerational risk sharing By FAN Simon,; PANG Yu,; PESTIEAU Pierre,
  20. Missing poor in the U.S. By LEFEBVRE Mathieu,; PESTIEAU Pierre,; PONTHIERE Gregory,
  21. Requiring Auto-Enrollment: Lessons from UK Retirement Plans By Jonathan Cribb; Carl Emmerson
  22. Responding to Regulation: The Effects of Changes in Mandatory Retirement Laws on Firm-Provided Incentives By Frederiksen, Anders; Flaherty Manchester, Colleen
  23. Will Fewer Children Boost Demand for Formal Caregiving? By Gal Wettstein; Alice Zulkarnain
  24. Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing By Brown, Jeffrey R.; Kapteyn, Arie; Luttmer, Erzo F.P.; Mitchell, Olivia S.; Samek, Anya
  25. The Financial Repercussions of New Work-Limiting Health Conditions for Older Workers By Jody Schimmel; David C. Stapleton

  1. By: Matthew S. Rutledge; Geoffrey T. Sanzenbacher
    Abstract: Rising life expectancy means that many more Americans will reach very old ages. While longer lives are undeniably positive, they also mean that more people will face late-life financial risks for which they may be unprepared. These late-life risks include high out-of-pocket medical expenses; an increased possibility of financial mistakes due to declining cognitive abilities; and the specter of widowhood. The situation is generally expected to become more challenging, because future retirees will be more reliant on often-modest 401(k)/IRA lump sums rather than the automatic lifelong payment stream of a traditional pension plan. At the same time, a rising Full Retirement Age means monthly Social Security checks will provide less relative to pre-retirement income at any given claiming age. In short, future retirees will likely have less reliable income as they reach advanced ages. This brief reviews research by the U.S. Social Security Administration’s Retirement Research Consortium and others on the nature and extent of late-life financial risks. The brief is organized as follows. The first section explains how demographic and economic changes are leading to a larger population susceptible to these risks. The second section explores the nature of the three risks outlined above. The final section concludes that out-of-pocket medical expenses, financial mistakes, and widowhood tend to severely impact the finances of only a minority of older Americans today, but that those threats may be more widespread in the future.
    Date: 2019–01
  2. By: Button, Patrick (Tulane University)
    Abstract: This paper discusses population aging, increased participation of seniors in the labor force in the United States (and reasons for this), and how these trends are making the struggles of older workers in the labor market increasingly relevant. Evidence examining whether age discrimination is a barrier for seniors as they try to increase their work lives through the common practice of "bridge" jobs is also presented. After discussing the evidence that measures age discrimination, economics and legal research that seeks to determine to what extent the federal Age Discrimination in Employment Act and state-level age discrimination laws prevent age discrimination is discussed. In summary, current evidence indicates that age discrimination exists, but more so for older women. While evidence suggests that age discrimination laws may help, they cannot resolve the challenges imposed by population aging, especially for older women.
    Keywords: age discrimination, seniors, age discrimination in employment act, population aging, discrimination law, older women, sex-plus-age discrimination, intersectionality
    JEL: J71 J78 J14 K31 J16 J26
    Date: 2019–03
  3. By: Cipriani, Giam Pietro (University of Verona); Fioroni, Tamara (University of Verona)
    Abstract: In this paper, we analyse the effects of demographic change on a PAYG pension system, financed with a defined contribution scheme. In particular we examine the relationship between retirement, fertility and pensions in a three-period overlapping generations model. We focus on both the case of mandatory retirement and the case where the retirement age is freely chosen. In the case of mandatory retirement, increasing longevity has an unambiguously negative impact on fertility and pension payouts and a positive effect on the level of physical capital in the steady state. On the other hand, when agents choose the time of retirement, an increase in life expectancy positively affects physical capital only when the tax rate is sufficiently low and can have a positive impact on pension benefits because agents may find it optimal to retire later and to decrease fertility less. Finally, the effects of the social security tax on capital per worker are negative with mandatory retirement, however they could be positive in the optimal retirement case.
    Keywords: PAYG pensions, endogenous fertility, aging, retirement
    JEL: J13 H2 H8 H55
    Date: 2019–03
  4. By: Góra, Marek (Warsaw School of Economics); Palmer, Edward (Uppsala University)
    Abstract: This chapter defines a universal public pension scheme (UPPS) as a government-mandated lifecycle longevity insurance scheme that transfers individual consumption from the working years to the retirement phase of the lifecycle. It discusses the differences in four UPPS designs defined with regard to whether they are defined contribution (DC) or defined benefit (DB), and financial (F) or nonfinancial (N). Generally speaking, DC schemes are distinguished from DB schemes by their basic building block of individual accounts. This ensures the important design feature of transparency, the "enabler" of economic efficiency - through the effects on marginal decisions to choose formal work over informal work or leisure and to postpone retirement marginally toward the end of the working life. The chapter examines additional criteria (fairness, financial sustainability, affordability, and adequacy), plus some other design characteristics of interest in a comparative assessment. The conclusion is that the two UPPS-DC designs are superior to the two UPPS-DB designs. The difference in the relative rates of return of NDC versus FDC designs, together with uncertain demographic effects on future investment needs, speak in favor of a UPPS portfolio with both. UPPS-FDC involves additional risks and costs, but also provides positive effects through returns for individuals and the economy.
    Keywords: non-financial defined contribution (NDC), income allocation, retirement, externalities, transparency, fairness, universal public pension scheme (UPPS)
    JEL: D6 D62 D81 E62 G22 G28 H23 H55 J14 J18
    Date: 2019–03
  5. By: Benjamin Bittschi; Berthold U. Wigger
    Abstract: Within a politico-economic model we first establish three hypotheses: (i) Retirees generally prefer a higher retirement age than workers, whereby just retired individuals prefer the highest retirement age, (ii) in equilibrium the level of the legal retirement age is increasing in longevity and (iii) decreasing in the public pension replacement rate. We then test these hypotheses empirically. Employing micro data for Germany we corroborate the first hypothesis with descriptive regressions and a fuzzy regression discontinuity (FRD) design. We show that just retired individuals are indeed most in favor of an increase in the legal retirement age. On the basis of cross country panel IV regressions we provide evidence for the second and third hypothesis. We demonstrate that a one percentage point increase in the share of the elderly increases the legal retirement age by 0.3 to 0.5 years, and that a 10 percentage point increase in the replacement rate reduces the legal retirement age by 0.5 to 3 years. We conclude that if policy contains the generosity of public pensions, increasing the legal retirement age becomes politically more feasible.
    Date: 2019
  6. By: Papetti, Andrea
    Abstract: This paper employs an aggregate representation of an overlapping generation (OLG) model quantifying a decrease of the natural real interest rate in the range of -1.7 and -0.4 percentage points in the euro area between 1990 and 2030 due to demographics alone. Two channels contribute to this downward impact: the increasing scarcity of effective labor input and the increasing willingness to save by individuals due to longer life expectancy. The decrease of the aggregate saving rate as individuals retire has an upward impact which is never strong enough. Mitigating factors are: higher substitutability between labor and capital, higher intertemporal elasticity of substitution in consumption, reforms aiming at increasing the relative productivity of older cohorts, the participation rate and the retirement age. The simulated path of the natural real interest rate is consistent with recent econometric estimates: an upward trend in the 70s and 80s and a prolonged decline afterward. JEL Classification: E17, E21, E43, E52, J11
    Keywords: aging, demographic transition, euro area, natural interest rate, secular stagnation
    Date: 2019–03
  7. By: Didier Blanchet; Antoine Bozio; Simon Rabaté; Muriel Roger
    Abstract: Over the last fifteen years, France has experienced a reversal of older workers’ labor force participation and employment rates. Changes in health, life expectancy or education levels over the period are trend variables and thus cannot explain this “U-shaped” time profile. Pension reforms and associated changes in monetary incentives to retire are a more plausible explanation. Their impact is measured by the implicit tax rate on working longer, which combines induced changes in the level of benefits and the fact of foregoing one year of these benefits. We also account for changes in the relative importance of alternative pathways to normal retirement. Pension reforms and access to these alternative pathways have moved in ways that can account for a significant part of the “U-shaped” pattern of older workers labor force participation.
    JEL: H55
    Date: 2019–04
  8. By: Francisco Perez-Arce (University of Southern California); Maria Prados (University of Southern California); Erik Meijer (University of Southern California); Jinkook Lee (University of Southern California)
    Abstract: We describe the current state and recent trends in the landscape of social security programs in China, Mexico, and India. A common thread across these countries is the introduction and recent expansion of old-age pension programs with noncontributory components. We use surveys from the HRS-family to analyze trends in the levels and correlates of social security coverage in Mexico and China. The most notable development is the increase in public pension coverage for the elderly population. In China, coverage rates for the population 70 and older grew from 33 percent in 2011 to 68 percent in 2015; and in Mexico from 32 percent to 55 percent in the 10 years following 2002. The new programs also caused significant changes on the determinants of coverage in ways that share similarities across countries. Variables such as educational attainment, urban status, and an employment history in the formal sector, were strong predictors of public pension receipt in the earlier survey-waves, but not in the most recent ones for China and Mexico. However, a strong relationship remains, and is unchanged across time, between those same characteristics and the average income pension amount. Likewise, there are no significant changes between them and receipt of benefits from other social programs. Based on these results, we conduct simulations that show, for example, that even rapid transformation of the labor market or education levels of the population would not radically change the proportion covered by pension programs but would largely increase average pension amounts.
    Date: 2018–09
  9. By: Rana Comertpay; Andreas Irmen; Anastasia Litina
    Abstract: This research empirically establishes the hypothesis that the process of population aging in a society as a whole affects the attitudes of its members towards immigration. Hence, an aging social environment exerts an effect on the attitudes of individuals towards immigration after accounting for their age and other individual characteristics. We test this hypothesis in a multilevel analysis of individuals living in 25 European OECD countries over the period 2002-2017. Our measure of “societal population aging” is the old-age dependency ratio. “Attitudes” are taken from immigration related questions in eight consecutive rounds of the European Social Survey. For these attitudes we find non-linear, U-shaped relationships. Hence, the effect of societal population aging on individual attitudes towards immigration is negative in young societies and positive in old ones.
    Keywords: population aging, attitudes, immigration, culture
    JEL: J10 Z10
    Date: 2019
  10. By: Nicole Maestas (Harvard University and NBER); Kathleen J. Mullen (RAND); David Powell (RAND); Till von Wachter (University of California Los Angeles and NBER); Jeffrey Wenger (RAND)
    Abstract: As the population ages in the United States and other countries, encouraging older individuals to work would help counter increasing dependency ratios and improve national economic outcomes. Extending working lives is likely not simply a function of improving monetary incentives. Instead, job characteristics are also potentially important, yet understudied, determinants of whether individuals near retirement remain in the labor force. We use previously-collected data on job characteristics and preferences for job characteristics and work at older ages from the 2015 American Working Conditions Survey. We match the 2015 data with new data on job transitions collected three years after the initial survey. We use the matched data to study the relationship between preferences for job characteristics and actual job transitions. We then estimate heterogeneity in preferences for job characteristics as a function of age and plans for retirement. We test whether preferences differ for older workers ages 50 to 61 with different self-perceived probabilities of working in the future. Finally, we test whether preferences differ for retirement-aged individuals ages 62 and older who are working or not working.
    Date: 2019–02
  11. By: Alicia H. Munnell; Matthew S. Rutledge; Geoffrey T. Sanzenbacher
    Abstract: Many workers seem to have gotten the message that working longer may be necessary to boost their retirement security. The share of workers reporting that they expect to work past age 65 rose from 16 percent in 1991 to 48 percent in 2018. But such intentions often go awry; data from the Health and Retirement Study indicate that 37 percent of workers retire earlier than planned. This brief, based on a recent paper, reports on a “horse race” to identify which unexpected changes (or “shocks”) are most likely to interfere with retirement plans. The brief proceeds as follows. The first section defines and quantifies earlier-than-planned retirement. The second section describes four potential types of shocks: health, employment, family, and financial. The third section presents the results on which shocks matter the most, taking into account both their potency and prevalence. The final section concludes that health shocks are most important in driving workers to an earlier retirement, followed by job-related changes and family transitions. However, these factors only partly explain early retirements, which suggests that other factors that are harder to measure also play a role.
    Date: 2019–02
  12. By: Magali Barbieri (University of California-Berkeley)
    Abstract: This study’s goal was to determine whether differences in data or differences in methods explain the divergence between the mortality estimates at ages 65 and older of the Social Security Administration (SSA) and the Human Mortality Database (HMD). These differences, increasing since 1968, are an issue of significant value considering the importance of SSA estimates and projections to determine the long term solvency of the Social Security Trust Funds, as well as of other government programs such as Medicare and Medicaid. The two organizations use different data and different methods to construct their estimates. In particular, the HMD relies on national statistics from the vital registration system and the Census Bureau, while the SSA uses Medicare program enrollment data. Applying the SSA methods to the HMD data showed that differences in the data, rather than in the methods, explain the entire gap in life expectancy at age 65, with the HMD indicator 0.4 years higher for 2014 than the SSA. The study also determined that the gap resulted mostly from lower mortality rates at ages 65 to 84 years (rather than at 85 and older) up to about 2005 to 2006, but that the growing divergence since then is nearly entirely due to increasingly lower mortality at ages above 85. The pattern was found to be similar for men and for women, though the gap is slightly larger for the latter. Additional investigations, with more detailed data, will be necessary to assess whether data reliability or issues of representativeness explain the difference.
    Date: 2018–09
  13. By: Fang, Tony (Memorial University of Newfoundland); Messacar, Derek (Memorial University of Newfoundland)
    Abstract: This paper provides new insights into the longstanding empirical issue of whether the type of workplace saving plan (a "traditional" registered pension plan or RPP, a "flexible" group registered retirement savings plan or group RRSP, and a "hybrid" arrangement of the two) affects employee voluntary job separations. We use a Canadian employer–employee matched dataset that provides information on both job transitions and the types of workplace saving plans being held by employees and offered by employers. This dataset allows us to control for employee self-selection and firm fixed effects. The standard prediction from implicit contract theory suggests that traditional pensions reduce quit rates but flexible plans have little effect due to their portability. The results are partially consistent with this prediction. Implications of these findings for current public policy are discussed.
    Keywords: implicit contract theory, flexible retirement saving plan, traditional pension, voluntary job separation, self-selection, fixed effects
    JEL: J26 J32 J63
    Date: 2019–03
  14. By: KLIMAVICIUTE Justina, (Vilnius University); PESTIEAU Pierre, (Université de Liège, CORE, UCLouvain and Toulouse School of Economics)
    Abstract: Long-term care (LTC) is one of the largest uninsured risks facing the elderly. In this paper, we first survey the standard causes of what has been dubbed the LTC insurance puzzle and then suggest that a possible way out of this puzzle is to make the reimbursement formula less threatening for those who fear a too long period of dependence. We adopt a reimbursement formula resting on Arrow’s theorem of the deductible, i.e. that it is optimal to focus insurance coverage on the states with largest expenditures. It implies full self-insurance coverage on the states with largest expenditures. It implies full self-insurance for the first years of dependency followed by full insurance thereafter. We show that this result remains at work with ex post moral hazard.
    Keywords: long-term care insurance, deductible, Arrow’s theorem, reimbursement rule
    JEL: G22 I13 J14
    Date: 2019–01–29
  15. By: Geoffrey T. Sanzenbacher; Wenliang Hou
    Abstract: Households save for retirement to help maintain their standard of living once they stop working. The amount of savings needed depends on how much a household earns. Since dual-earner households generally earn more than one-earner households, they need more savings. But only about half of private sector workers have a workplace retirement plan at any given time, and people rarely save outside of such plans. As a result, only one person in many dualearner couples is actually saving. In this situation, the spouse with a plan should save more to make up for the non-saving spouse. But 401(k) plans are individual savings vehicles, and contribution decisions are often driven by plan design features like default contribution rates and employer matches, not household earnings. The question is whether workers recognize the need to save for two. The discussion is organized as follows. The first section provides background on how individuals make saving decisions and whether they are likely to factor in their spouses’ situation. The second section describes the data and methodology used in the analysis. The third section provides results. The final section concludes that individuals do not seem to consider their spouses’ behavior when making saving decisions, which means households with two earners but only one saver end up saving relatively little for retirement. This finding highlights the importance of plan features like auto-escalation and suggests a role for educating spouses about saving for two. Alternatively, policymakers could ensure that all workers have access to a workplace plan.
    Date: 2019–03
  16. By: Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
    Abstract: A significant part of the development in pension provision in many countries is the emergence of ‘Target Date Funds’ or TDFs. In this paper we examine the proposition of de-risking through life and the guidance offered by TDFs in the decumulation phase following retirement. We investigate the withdrawal experience associated with Glidepath Investing in the US since 1925 for conventional bond-equity portfolios. We find one very powerful conclusion: that smoothing the returns on individual assets by simple absolute momentum or trend following techniques is a potent tool to enhance withdrawal rates, often by as much as 50% per annum! And, perhaps of even greater social relevance is that it removes the ‘left-tail’ of unfortunate withdrawal rate experiences, i.e. the bad luck of a poor sequence of returns early in decumulation. We show that diversifying assets over time by switching between an asset and cash in a systematic way is potentially more important for the retirement income experience than diversifying one’s portfolio across asset classes. We also show that Glidepath investing is only sensible within a few years of the target date. This finding provides succour to enthusiasts for target date investing in the face of the growing hostility in the literature.
    Keywords: Sequence Risk, Perfect Withdrawal Rate, Decumulation, Absolute Momentum, Trend Following
    JEL: G10 G11 G22
    Date: 2019–04
  17. By: Böhm, Michael Johannes (University of Bonn); Siegel, Christian (University of Kent)
    Abstract: We argue that rising supply of experience not only reduces experienced workers' relative wages but also their relative labor market participation. From a theoretical model we derive predictions which we quasi-experimentally investigate, using variation across U.S. local labor markets (LLMs) over the last decades and instrumenting experience supply by the LLMs' age structures a decade earlier. We find that aging substantially reduces experienced workers' relative wages and employment rates, and also their labor market participation rates. Our results imply that the effect of demographic change on labor markets might be more severe than previously recognized, as it reaches beyond wages.
    Keywords: demographic change, employment of experienced workers, return to experience
    JEL: J11 J21 J31
    Date: 2019–03
  18. By: Glenn P. Jenkins (Department of Economics, Queen's University, Kingston, Canada and Eastern Mediterranean University, North Cyprus); Godwin O Olasehinde-Williams (Department of Economics, Eastern Mediterranean University, North Cyprus); Roya Amel (Department of Banking and Finance, Eastern Mediterranean University, North Cyprus)
    Abstract: This study addresses economic issues associated with the private defined benefit pension system in Turkey. The institutional arrangements in Turkey for administering the government securities held in such pensions are compared with two private defined contribution pension schemes in Canada. In Canada, pension participants can hold the insured securities of banks instead of government securities. In turn banks charge no management fees on pension accounts that hold such securities. In the Turkish private pension system, more than 20% of the total value of the pension investments in government bonds are lost through administration costs. In addition, there is a net fiscal cost to the Treasury of Turkey. Although the net return received by pension holders is approximately the same as in the Turkish system, taxes are fully collected in Canada on either the proceeds of the pensions or on the taxable income used to finance the private pension assets.
    Keywords: Private pensions, Turkey, pension administration costs, economic resource cost, Canada
    JEL: H20 J26 J32
    Date: 2019–02
  19. By: FAN Simon, (Lingnan University, Hong Kong); PANG Yu, (Macau University of Science and Technology); PESTIEAU Pierre, (Université de Liège, CORE, UCLouvain and Toulouse School of Economics)
    Abstract: We analyze the role of pay-as-you-go social security in intragenerational risk sharing in an overlapping-generations model with individual heterogeneity. Parents invest in their children’s education in exchange for old-age support financed by a fraction of their children’s future earnings. Due to random factors such as luck in the job market, children may have different earning capacities even if they receive the same education. Without social security, a parent receives a transfert payment from her own child, so the received amount is uncertain as it depends on the child’s earnings. The social security scheme of pooling transfer contributions from all children and then returning them equally to each parent insures parents against the riks of educational investments. Our models shows that social security stimulates educational spending, increases labor earnings, and improves social welfare (as measured by ex ante individual utility). However, it worsens ex post intragenerational income equality (as measured by the Gini coefficient for lifetime income).
    Keywords: old-age insurance, social security, public education, income inequality
    JEL: D81 H20 H55 I24
    Date: 2019–01–29
  20. By: LEFEBVRE Mathieu, (BETA, Université de Strasbourg); PESTIEAU Pierre, (Université de Liège, CORE, UCLouvain and Paris School of Economics); PONTHIERE Gregory, (Université Paris 12, Paris School of Economics and Institut Universitaire de France)
    Abstract: Given that poor individuals face worse survival conditions than non-poor individuals, one can expect that a steeper income/mortality gradient leads, through stronger income-based selection, to a lower poverty rate at the old age (i.e. the “missing poor” hypothesis). This paper uses U.S. state-level data on poverty at age 65+ and life expectancy by income levels to provide an empirical test of the missing poor hypothesis. Using air pollution as an instrument for mortality differentials, we show that instrument changes in mortality differentials have a negative and statistically significant effect on old-age proverty: A 1 % increase in the mortality differential implies a 9 % decrease in the 65+ headcount poverty rate. Using those regression results, we compute hypothetical old-age poverty rates while neutralizing the impact of the income/mortality gradient, and show that correcting for heterogeneity in income-based selection effects modifies the comparison of old-age poverty prevalence across states.
    Keywords: poverty, measurement, income/mortality gradient, selection biases, comparability
    JEL: I32
    Date: 2019–01–29
  21. By: Jonathan Cribb; Carl Emmerson
    Abstract: Policymakers around the world are concerned that workers are not saving enough for retirement. One reason is that, in some countries, many workers do not have an employer-based retirement plan. For example, at any given time, around half of private sector employees in the United States do not have a plan and, as recently as 2012, the coverage rate in the United Kingdom had fallen to just one in three. Since relatively few people save for retirement outside of employer plans, those without a plan are at greater risk of being unable to maintain their pre-retirement standard of living in retirement. To address this coverage gap, one option gaining traction is requiring some or all employers to enroll their workers in a plan automatically, with the worker allowed to opt out. California, Connecticut, Illinois, Maryland, and Oregon have all enacted such policies while Germany, Ireland, and Poland are actively considering them. So far, however, the United Kingdom is the only country to have completed the nationwide rollout of a policy that requires all private sector employers to auto-enroll their workers in a retirement plan. The UK experience provides a unique opportunity to evaluate the effectiveness of such a wide-scale policy on plan participation and saving. This brief summarizes the results of two recent studies on the UK reform. The discussion proceeds as follows. The first section provides background on the UK reform. The second section assesses the effects of auto-enrollment on participation at medium and large employers and, separately, at small employers. The third section compares UK participation to US participation. The fourth section looks at how auto-enrollment affects UK contribution rates. The fifth section considers how “re-enrolling” workers affects retirement plan participation. The final section concludes that the UK reform has substantially increased participation rates – to about 90 percent at medium and large employers and 70 percent at small employers. And, although most of the increase is among employees making minimum default contributions, the share of employees contributing at higher rates has also risen significantly as a result of the policy.
    Date: 2019–03
  22. By: Frederiksen, Anders (Aarhus University); Flaherty Manchester, Colleen (University of Minnesota)
    Abstract: The Age Discrimination in Employment Act of 1978 expanded employee age protections to age 70, making the widespread practice by U.S. firms of mandating retirement at age 65 illegal. Building on the work of Lazear (1979), we propose that the law change not only weakened the long-term employment contract, but also contributed to the rise in pay-for-performance incentives. We model the firm's choice between offering long-term incentive contracts with low monitoring requirements and pay-for-performance (PFP) contracts with high monitoring requirements, showing how the law change increased the relative attractiveness of PFP contracts. We test the model's predictions using data from the Baker-Gibbs-Holmstrom firm, evaluating the effect of the law change on the slope of the age-pay profile, turnover rates, and the sensitivity of pay to performance. Further, we find direct evidence of strategic response to the law change by the firm, including the introduction of bonus payments, change in performance management system, and increase in the proportion of top managers. The setting also provides an opportunity to empirically investigate how firms navigate career incentives for employees.
    Keywords: incentive pay, pay for performance, long-term incentive contracts, promotions, slot constraints, career incentives
    JEL: M51 M52
    Date: 2019–03
  23. By: Gal Wettstein; Alice Zulkarnain
    Abstract: Today, 25 percent of all caregivers of elderly are adult children. However, while the parents of the Baby Boom generation had three children per household on average, the Boomers themselves only have two. This project uses the Health and Retirement Study to assess how the number of children a person has affects the demand for formal long-term care, i.e. Long-term services and supports (LTSS), using ordinary linear regression, a Cox proportional hazard model, and an instrumental variable approach. Results suggest that the lower fertility of the Baby Boom generation is likely to lead to greater demand for LTSS in the coming decades. For example, the instrumental variable estimates indicate that having one fewer child increases the probability of having spent a night in a nursing home in the last two years from 10.7 percent to 12.4 percent among those with two or more Activities of Daily Living limitations.
    Date: 2019–03
  24. By: Brown, Jeffrey R. (University of Illinois); Kapteyn, Arie (University of Southern California); Luttmer, Erzo F.P. (Dartmouth College); Mitchell, Olivia S. (University of Pennsylvania); Samek, Anya (University of Southern California)
    Abstract: This paper examines two behavioral factors that diminish people's ability to value a life-time income stream or annuity, drawing on a survey of about 4,000 adults in a U.S. nationally representative sample. By experimentally varying the degree of complexity, we provide the first causal evidence that increasing the complexity of the annuity choice reduces respondents' ability to value the annuity, measured by the difference between the sell and buy values people assign to the annuity. We also find that people's ability to value an annuity increases when we experimentally induce them to think jointly about the annuitization decision as well as how quickly or slowly to spend down assets in retirement. Accordingly, we conclude that narrow choice bracketing is an impediment to annuitization, yet this impediment can be mitigated with a relatively straightforward intervention.
    Keywords: pension, annuity, retirement income, Social Security, cognition, behavioral
    JEL: D14 D91 G11 H55
    Date: 2019–03
  25. By: Jody Schimmel; David C. Stapleton
    Abstract: Using a nonexperimental analysis, this article examined earnings and income for older workers who later experience the onset of a medical condition that limits their ability to work.
    Keywords: Disability , propensity score matching , Older Workers , Work-Limiting Health Conditions
    JEL: I J

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