nep-age New Economics Papers
on Economics of Ageing
Issue of 2019‒04‒22
four papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Fair Pensions By Ilja Boelaars; Dirk Broeders
  2. Optimal time allocation in active retirement By Sanchez-Romero, Miguel; Fürnkranz-Prskawetz, Alexia
  3. How Cognitive Ability and Financial Literacy Shape the Demand for Financial Advice at Older Ages By Hugh Hoikwang Kim; Raimond Maurer; Olivia S. Mitchell
  4. Rational Inattention and Retirement Puzzles By Jamie Hentall MacCuish

  1. By: Ilja Boelaars; Dirk Broeders
    Abstract: This paper examines the allocation of market risk in a general class of collective pension arrangements: Collective Defined Contribution (CDC) schemes. In a CDC scheme participants collectively share funding risk through benefit level adjustments. There is a concern that, if not well designed, CDC schemes are unfair and will lead to an unintended redistribution of wealth between participants and, in particular, between generations. We define a pension scheme as fair if all participants receive an arbitrage-free return on the market risk they bear. The fact that the participants' claim on the CDC schemes' collective assets is expressed in terms of a stochastic future benefit, makes the arbitrage-free allocation of market risk non-trivial. It depends crucially on the specification of the discount rate process in combination with the benefit adjustment process. We show that fair CDC schemes may use a default-free market interest rate in combination with a specific horizon-dependent benefit adjustment process. Alternative discount rates are also permissible, but require additional correction terms in the benefit adjustment process.
    Keywords: Pension, Retirement; Asset Pricing; Fair value; Intergenerational risk-sharing; Funded pension systems
    JEL: H55 G13 G23 J26 J32
    Date: 2019–04
  2. By: Sanchez-Romero, Miguel; Fürnkranz-Prskawetz, Alexia
    Abstract: We set up a lifecycle model of a retired scholar who chooses optimally the time devoted to different activities including physical activity, continued work and social engagement. While time spent in physical activity increases life expectancy, continued scientific publications increases the knowledge stock. We show the optimal trade off between these activities in retirement and its sensitivity with respect to alternative settings of the preference parameters.
    Keywords: Time allocation,Active retirement,Longevity,Scientific production
    JEL: C60 D91 J22 J26 I12
    Date: 2019
  3. By: Hugh Hoikwang Kim; Raimond Maurer; Olivia S. Mitchell
    Abstract: We investigate how cognitive ability and financial literacy shape older Americans’ demand for financial advice using an experimental module in the 2016 Health and Retirement Study. We show that cognitive ability and financial literacy strongly improve the quality, but not the quantity, of financial advice sought. Most importantly, the financially literate and more cognitively able tend to seek financial help from professionals rather than family members, and they are less likely to accept so-called ‘free’ financial advice that may entail conflicts of interest. Nevertheless, those with higher cognitive function also tend to distrust financial advisors, leading them to eschew their services.
    JEL: D14 G11 J26
    Date: 2019–04
  4. By: Jamie Hentall MacCuish
    Abstract: I present evidence incorporating costly thought solves three puzzles in the retirement literature. The first puzzle is, given incentives, the extent of bunching of labour market exits at legislated state pension ages (SPA) seems incompatible with rational expectations. Adding to the evidence for this puzzle, I include an empirical analysis focusing on whether liquidity constraints can explain this bunching and find they cannot. The nature of this puzzle is clarified by exploring a life-cycle model with rational agents that matches aggregate profiles. This model succeeds in matching aggregates by overestimating the impact of the SPA on poorer individuals whilst underestimating its impact on wealthier people. The second puzzle is people are often mistaken about their own pension provisions. Concerning the second puzzle, I incorporate rational inattention to the SPA into the aforementioned life-cycle model, allowing for mistaken beliefs. To the best of my knowledge, this paper is the first not only to incorporate rational inattention into a life-cycle model but also to assess a rationally inattentive model against non-experimental individual choice data. This facilitates another important contribution: discipling the cost of attention with subjective belief data. Preliminary results indicate rational inattention improves the aggregate fit and better matches the response of participation to the SPA across the wealth distribution, hence offering a resolution to the first puzzle. The third puzzle is despite actuarially advantageous options to defer receipt of pension benefits, take up is extremely low. An extension of the model generates an explanation of this last puzzle: the actuarial calculations implying deferral is preferable ignore the utility cost of tracking your pension which can be avoided by claiming. These puzzles are researched in the context of the reform to the UK female SPA.
    Date: 2019–04

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