nep-age New Economics Papers
on Economics of Ageing
Issue of 2019‒10‒21
ten papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security By Bravo, Jorge Miguel; Ayuso, Mercedes; Holzmann, Robert
  2. Behind the success of dominated personal pension plans: sales force and financial literacy factors By Giuseppe Marotta
  3. Can your house keep you out of a nursing home? By Maaike Diepstraten; Rudy Douven; Bram Wouterse
  4. Bequest Motives and the Social Security Notch By Siha Lee; Kegon T. K. Tan
  5. Life Cycle Saving and Dissaving Revisited across Three-Tiered Income Groups: Starting Hypotheses, Refinement through Literature Review, and Ideas for Empirical Testing By Holzmann, Robert; Ayuso, Mercedes; Alaminos, Estefanía; Bravo, Jorge Miguel
  6. Japan's Public Sector Balance Sheet By Yugo Koshima
  7. Demographics and the Evolution of Trade Imbalances By Michael Sposi
  8. Are there fault lines in the Netherland's pension provision? By De Koning, Kees
  9. Housing Prices, Inter-generational Co-residence, and “Excess” Savings by the Young: Evidence using Chinese Data By R.; Junsen Zhang
  10. Social Capital Inequality and Subjective Wellbeing of Older Chinese By Appau, Samuelson; Awaworyi Churchill, Sefa; Smyth, Russell; Zhang, Quanda

  1. By: Bravo, Jorge Miguel (Universidade Nova de Lisboa); Ayuso, Mercedes (University of Barcelona); Holzmann, Robert (University of New South Wales)
    Abstract: The demographic change underway, declining adequacy levels from traditional pay-as-you-go old-age social security systems, structural reforms in pension schemes and the reduction in the traditional family support have increased the need for additional private savings to cover the old age income gap. In this paper we discuss the necessity, the role and the viability of home equity release schemes in supplementing public and private pensions in an integrated way. We use the latest European data from the Eurosystem Household Finance and Consumption Survey (HFCS) to analyse the household's wealth composition and accumulation process in the euro area. To quantify the size of the housing wealth and its potential to enhance existing and future retirement income, we compute the equity-to-value ratio (ETV) for all countries, estimate the time to loan payoff and compute the amount of home equity that is expected to be released over a 10-year period through regular monthly mortgage payments. We then catalogue and discuss the many alternative options for managing and accessing housing wealth over the life cycle, and highlight the main characteristics, risks, advantages and drawbacks of the two most important market products (home reversion plans and reverse mortgages). Finally, we discuss the main demand-side and supply-side obstacles and challenges to the development of equity release markets and extract some policy implications.
    Keywords: equity release schemes, housing wealth, reverse mortgage, homeownership, retirement income, pensions adequacy
    JEL: D1 G1 J1 R2 R3
    Date: 2019–09
  2. By: Giuseppe Marotta
    Abstract: The revealed preference for dominated insurance-based personal pension plans in Italy is a decade-long puzzle. I surmise that a motivation from the supply side is a sales force factor deriving from the geographical distribution of financial providers, including the countrywide network of the state controlled Post Office. I provide supporting evidence using three biennial waves of the Bank of Italy’s survey on household finances from 2010 to 2014. The time interval includes a public pension system reform sharply raising the statutory age retirement, legislated in December 2011 to defuse a sovereign debt crisis. I show that the salience effect on the awareness of the benefits of supplementing lower perspective public pensions with personal pension plans strengthened the explanatory power of financial strength indicators. Exploiting a module in the 2010 wave I estimate a surprising decrease in the probability of subscription to personal pension plans in 2014 associated to the indicator for the highest financial literacy level.
    Keywords: Pensions, Private pension systems, Retail financial products distribution, Italy
    JEL: D91 E21 G11 H55
    Date: 2019–10
  3. By: Maaike Diepstraten (CPB Netherlands Bureau for Economic Policy Analysis); Rudy Douven (CPB Netherlands Bureau for Economic Policy Analysis); Bram Wouterse (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We examine the impact of the accessibility of an older individual’s house on her use of nursing home care. We link administrative data on the accessibility of all houses in the Netherlands to data on long-term care use of all older persons from 2011-2014. We find that older people living in more accessible houses are less likely to use nursing home care. The effects increase with age and are largest for individuals aged 90 or older. The effects are stronger for people with physical limitations than for persons with cognitive problems. We also provide suggestive evidence that older people living in more accessible houses substitute nursing home care by home care.
    JEL: I11 I13 H51
    Date: 2019–04
  4. By: Siha Lee; Kegon T. K. Tan
    Abstract: Bequests may be a key driver of late life savings behavior and more broadly, a determinant of intergenerational inequality. However, distinguishing bequest motives from precautionary savings is challenging. Using data from the Health and Retirement Study, we exploit an unanticipated change in Social Security benefits, commonly called the Social Security Notch, as an instrument to identify the effect of benefits on bequests. We show that an increase in benefits leads to a sizable increase in bequest amounts. We combine our instrumental variable estimates with a model of late life savings behavior that accounts for mortality risk and unobserved expenditure shocks to identify bequest motives. The model is used to analyze two counterfactuals. The results demonstrates the importance of bequest motives as a driver of late life savings by comparing asset profiles with and without utility from bequests. We find that roughly one-third of accumulated assets and bequests are attributable to bequest motives among retirees. Our second counterfactual features a more progressive Social Security benefits schedule that reduces benefits for the richest retirees. We show that although wealth declines, consumption remains largely unchanged since wealth generated by bequest motives acts as a cushion against benefit reduction.
    Keywords: bequests, late life savings, assets, social security
    JEL: D30 D91 H55 J14
    Date: 2019–10
  5. By: Holzmann, Robert (University of New South Wales); Ayuso, Mercedes (University of Barcelona); Alaminos, Estefanía (University of Barcelona); Bravo, Jorge Miguel (Universidade Nova de Lisboa)
    Abstract: The lifecycle approach is the workhorse to model saving decisions of individuals. It conjectures individuals preferring a constant consumption stream across their lifecycle saving till retirement and dis-saving thereafter. The reality is often at odd with this assumption giving rise to our conjectured three-tier life-cycle model by income groups. The low-income tier does little saving and in consequence little dissaving; the high-income tier does save during active life and profits often from bequests, but no dissaving is taking place unless hit by a major shock; only the middle tier behaves broadly as predicted. The drivers for such a differentiated behavior are conjectured to be threefold: External settings such as a multitude of shocks; preferences deviations such a behavioral bias, and institutional settings and interventions, such as minimum income provisions. The paper outlines these corresponding hypotheses, presents some first conceptual and empirical support, and reviews the international literature on the conjectured drivers. The review of international literature does not shatter our conjecture of a broadly three-tiered and reframed applicability of the life cycle model but offers some first precisions and wrinkles. The paper proposes next conceptual and empirical steps, including enriching existing wealth distribution estimates at retirement with sound estimates of social insurance wealth (pension and health), focused hypothesis testing of the key drivers with household panel data, and formulating policy responses if the new hypotheses are not rejected.
    Keywords: shocks and saving/dissaving, wealth distribution, financial wealth, property, social security wealth
    JEL: D31 E21
    Date: 2019–09
  6. By: Yugo Koshima
    Abstract: This paper compiles and reviews the evolution of Japan’s Public Sector Balance Sheet (PSBS). In the past, large crossholdings of assets and liabilities within the public sector played a role in sustaining a high level of public debt and low interest rates. The Fiscal Investment and Loan Fund (FILF) channeled all postal deposits and pension savings to financing of public sector borrowing. After the FILF refrom in 2000, however, the Post Bank and pension funds shifted their assets to the portfolio investments and are seeking to maximize risk-adjusted returns. This has changed the implications of crossholdings for public debt management. In the future, population aging is expected to add more pressures on the PSBS, which already saw a considerable decrease of net worth over the last three decades.
    Date: 2019–10–04
  7. By: Michael Sposi (Southern Methodist University)
    Abstract: The age distribution evolves asymmetrically across countries, inuflencing relative saving rates and labor supply. Using a dynamic, multicountry trade model I quantify how demographic changes affected trade imbalances across 28 countries since 1970. Counterfactually holding demographics constant reduces net exports in emerging economies that experienced rising working age shares, and boosts them in advanced economies that experienced flatter, or declining, working age shares. This helps alleviate the allocation puzzle. On average, a one percentage point increase in a country's working age share, relative to the world, increased its ratio of net exports to GDP by one-third of a percentage point.
    Keywords: Demographics, Trade imbalances, Dynamics, Labor supply.
    JEL: F11 F21 J11
    Date: 2019–10
  8. By: De Koning, Kees
    Abstract: According to the latest data from the OECD, from all OECD countries Denmark came out on top with an accumulated pension savings representing 199.0% of the Danish GDP. The Netherlands came second with an accumulated pension fund savings of 171% of GDP. Size matters, especially the changes in size that have taken place over time. For instance in 2007, the Assets Under Management (AUM) of all Dutch pension funds represented just 108.8% of the 2007 Dutch GDP level. Since then, Dutch pension fund assets have grown much faster than GDP levels. Size also matters for the Dutch government debt levels. In 1995 it reached its highest level of the last 24 years at 73.1% of GDP; the level stood at 56.8% in 2009 and by 2018 the level was 52.4%. Over time, Dutch Finance Ministers have managed to reduce the borrowing levels; in other words taxes were used to repay outstanding government debt levels relative to GDP levels. The 52.4% of GDP represents €406 billion in Dutch government debt for 2018. Compare this to the total savings in Dutch pension funds in 2019 of € 1428 billion and it is clear that all pension funds together could potentially only invest 28.4% of their portfolio in Dutch government bonds. Of course, this is unrealistic given that some private domestic and foreign investors might wish to buy some Dutch government bonds as well. The ECB has been a buyer of bank bonds since 2015. Its Quantitative Easing program of €2.6 trillion is spread over all Eurozone countries on basis of each country’s relative share in the Eurozone GDP. With the Dutch share of 4.8% of the Eurozone GDP, such purchases amounted to €125 billion. This leaves Dutch pension funds with a much-reduced opportunity to buy Dutch bank risks. The flaws in the Dutch pension system are linked with the government’s assessment of the adequacy of providing for future pension payouts. The law states that such assessment should be made on basis of the Ultimate Forward Rate, which in 2015 was reduced to 3.3%. Three factors are currently in play: negative interest rates on government bonds; diminished Dutch bank risks on offer due to ECB’s quantitative easing and thirdly the expected slow down in economic growth, which is already manifesting itself in the sharp drop of share prices on the European stock markets.
    Keywords: Dutch pensions; Pension agreement; Threat of cuts in pension payments; ECB QE,
    JEL: E21 E24 E4 E44 E6 E62
    Date: 2019–10–03
  9. By: R.; Junsen Zhang
    Abstract: In many countries of the world the co-residence of young adults aged 25-34 with their parents is not uncommon and in some countries the savings rates of these age groups exceed those of the middle-aged contrary to the standard model of life-cycle savings. In this paper we examine the role of housing prices in affecting the living arrangements of adult family members and their individual savings rates by age. Using unique data from China that enable the re-construction of whole families and identify individual savings regardless of who within the family co-resides in the same household, and exploiting the Chinese government rules determining the supply of land for residential housing, we find that increases in housing prices significantly increase inter-generational co-residence and elevate the savings rates of the young relative to the middle-aged, conditional on income, in part due to the subsidies to the young from sharing housing with parents. Based on our estimates of the effects of housing prices on co-residence and the effects of co-residence on individual savings, we find that the savings rates of the young in China would be 21% lower if housing prices were at the same ratio to disposable incomes as that observed in the United States.
    Keywords: savings, family, housing price, co-residence
    JEL: D91 D19 R31
    Date: 2019–10
  10. By: Appau, Samuelson; Awaworyi Churchill, Sefa; Smyth, Russell; Zhang, Quanda
    Abstract: Using longitudinal data from the China Family Panel Studies (CFPS), this study provides insights on comparative wellbeing outcomes for older people who are institutionally segregated into clusters that produce uneven social capital. We present the first study that examines how institutionalized social capital inequality, measured by the social capital gap generated by hukou (household registration) status in China, affects the wellbeing of older people. Our results show that high levels of social capital inequality are associated with lower subjective wellbeing, measured by life satisfaction. This general conclusion is robust to a number of sensitivity checks including alternative ways of measuring subjective wellbeing and inequality. We also find that the negative relationship between social capital inequality and subjective wellbeing is strongest for people with a non-urban hukou living in urban areas. Our findings highlight the need for policies aimed at narrowing the social capital gap and the dismantling of institutional structures that hinder upward social capital mobility.
    Keywords: social capital, social networks, trust, social capital inequality, hukou, China
    JEL: I31 J14 O18
    Date: 2019–10–08

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