nep-age New Economics Papers
on Economics of Ageing
Issue of 2021‒03‒08
eighteen papers chosen by
Claudia Villosio
LABORatorio R. Revelli

  1. Intended Bequests and Housing Equity in Older Age By Gary V. Engelhardt; Michael D. Eriksen
  2. Joint Retirement of Couples: Evidence from Discontinuities in Denmark By Esteban García-Miralles; Jonathan M. Leganza
  3. Do State and Local Government Employees Save Outside of Their Defined Benefit Plans When They Need To? By Laura D. Quinby; Geoffrey T. Sanzenbacher
  4. Declining natural interest rate in the US: the pension system matters By Jacopo Bonchi; Giacomo Caracciolo
  5. The Consequences of Current Benefit Adjustments for Early and Delayed Claiming By Andrew G. Biggs; Anqi Chen; Alicia H. Munnell
  6. Working horizon and labour supply: the effect of raising the full retirement age on middle-aged individuals By Francesca Carta; Marta De Philippis
  7. The Effect of Early Claiming Benefit Reduction on Retirement Rates By Damir Cosic; C. Eugene Steuerle
  8. A Structural Econometric Approach to Analyzing the Impact of Teacher Pension Reform By Wei Kong; Shawn Ni
  9. Do People Work Longer When They Live Longer? By Damir Cosic; Aaron R. Williams; C. Eugene Stone
  10. Do Required Minimum Distribution 401(k) Rules Matter, and For Whom? Insights from a Lifecycle Model By Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
  11. Age-specific income trends in Europe: The role of employment, wages, and social transfers By Hammer, Bernhard; Spitzer, Sonja; Prskawetz, Alexia
  12. Internal vs. External Management for State and Local Pension Plans By Jean-Pierre Aubry; Kevin Wandrei
  13. How Much Taxes Will Retirees Owe on Their Retirement Income? By Anqi Chen; Alicia H. Munnell
  14. El proceso de envejecimiento en España By José Ignacio Conde-Ruiz; Clara I. González
  15. Reformando el sistema de pensiones en Perú: costo fiscal, nivel de pensiones, brecha de género y desigualdad By Javier Olivera
  16. ESG Investing and Public Pensions: An Update By Jean-Pierre Aubry; Anqi Chen; Patrick M. Hubbard; Alicia H. Munnell
  17. Location, location, location! Real effects from the mandated removal of pension expected return from operating income By Anantharaman, Divya; Chuk, Elizabeth; Kamath, Saipriya
  18. Financial Security at Older Ages By Barbara A. Butrica; Stipica Mudrazija

  1. By: Gary V. Engelhardt; Michael D. Eriksen
    Abstract: This paper examines how homeownership evolves in old age and around the time of death, using detailed data from the Health and Retirement Study (HRS) to assess the extent to which housing wealth held by older Americans might be used to complement Social Security in the provision of retirement income. Critical components of the analysis include the use of rich information on medical diagnoses, functional status, and bequest intentions in a competing-risks proportional hazard model of the likelihood of making a tenure transition out of homeownership, where death is the competing risk. The paper found that: ¥ The age profile of homeownership falls to under 10 percent among the oldest old, which in past studies has been a sufficient statistic for life-cycle behavior. ¥ For a baseline sample of homeowners, roughly half transition to renting before death; the other half die as homeowners. ¥ Health shock and bequest intentions play important roles in explaining why the elderly fail to spend housing wealth via tenure transitions. The policy implications of the findings are: ¥ Along with entitlements to Social Security and employer-provided pensions, housing is the most important asset in elderly portfolios, so that housing might supplement the retirement income of future retirees. ¥ The annual flow of housing bequests is about 4 percent of the aggregate housing value held by older Americans. ¥ About 80 percent of aggregate housing wealth of those 62 and older may be available to support consumption in retirement net of intended bequests.
    Date: 2021–01
  2. By: Esteban García-Miralles (CEBI, Department of Economics, University of Copenhagen); Jonathan M. Leganza (University of California, San Diego)
    Abstract: We study how social security influences joint retirement of couples. We exploit three decades of administrative data from Denmark to explore joint retirement in two complementary settings. In the first setting, we exploit the discontinuous increase in retirement observed when individuals become eligible for public pension benefits to identify the causal effects on their spouses. We find that spouses are more likely to retire right when their partners reach pension eligibility age, with a spillover effect across spouses of 7.5%. We further unpack this result by studying additional margins of adjustment such as benefit claiming and earnings, and by documenting meaningful response heterogeneity. We find age differences within couples to be a crucial determinant of joint retirement, which is primarily driven by older spouses who continue to work until their younger partners reach pension eligibility. Controlling for these age differences uncovers a gender gap where female spouses are more likely to adjust their behavior to retire jointly, and this gap remains after controlling for earnings shares within couples. In the second setting, we study to what extent couples adapt their behavior to retire jointly after a reform increases pension eligibility ages. We find spillover effects across spouses comparable to those from the first setting, in which eligibility ages were stable and known by couples well in advance. This suggests that spouses do not face adjustment costs limiting their capacity to retire together after the reform.
    Keywords: joint retirement, pension eligibility age, couples labor supply
    JEL: J14 J26 D10 H55
    Date: 2021–01–29
  3. By: Laura D. Quinby; Geoffrey T. Sanzenbacher
    Abstract: As state and local policymakers enact benefit cuts to reduce the cost of their pension systems, the life-cycle model suggests that workers will adjust by saving more on their own. But, whether workers actually respond to pension characteristics remains an open question. After all, income received far in the future may not be salient to young workers deciding how much of their earnings to consume in the present. To answer the question, this paper links the Survey of Income and Program Participation to the Public Plans Database and explores whether state and local workers consider the amount of their pension savings, the funded status of their plan, or their Social Security coverage when deciding whether to participate in a supplemental defined contribution (DC) plan. The paper found that: ¥ Employees whose pensions provide less income are more likely to participate in a supplemental DC plan, but the effect is small. ¥ Members of poorly funded pension plans are not more likely to participate in supplemental plans than members of well-funded plans. ¥ Employees without Social Security coverage are not compensating with greater participation in supplemental plans. The policy implications of the findings are: ¥ If state and local employers are forced to further curtail their pensions, employees are unlikely to replace that income with outside savings. ¥ In the event that poorly funded pension plans end up reducing retirement income for current employees, those employees are unlikely to have been saving more in anticipation. ¥ In short, states and localities Ð especially those whose workers are not covered by Social Security Ð should not count on outside savings to replace pension income.
    Date: 2020–11
  4. By: Jacopo Bonchi (LUISS); Giacomo Caracciolo (Bank of Italy)
    Abstract: The natural interest rate is the level of the real interest rate compatible with potential output and stable prices. We develop a life-cycle model and calibrate it to the US economy to quantify the role of the public pension scheme for the past and future evolution of the natural interest rate. Between 1970 and 2015, the pension reforms have overall mitigated the secular decline in the natural interest rate, raising it by around one percentage point and thus counteracting the downward pressure from adverse demographic and productivity patterns. As regards the future, we simulate the effects of the demographic trends, expected between 2015 and 2060, combined with alternative pension reforms and productivity growth scenarios. We rank the different policy options according to a welfare criterion and study the implications for the natural interest rate. A reduction in the replacement rate outperforms, in terms of welfare, an increase in the contribution rate in the “normal growth” scenario and vice versa in the “stagnant growth” case.
    Keywords: natural interest rate, pensions, population ageing, secular stagnation, demography, social security
    JEL: E60 H55
    Date: 2021–02
  5. By: Andrew G. Biggs; Anqi Chen; Alicia H. Munnell
    Abstract: Workers have the option of claiming Social Security retirement benefits at any age between 62 and 70, with later claiming resulting in higher monthly benefits. These higher monthly benefits reflect an actuarial adjustment designed to keep lifetime benefits equal, for an individual with average life expectancy, regardless of when benefits are claimed. The actuarial adjustments, however, are decades old. Since then, interest rates have declined; life expectancy has increased; and longevity improvements have been much greater for high earners than low earners. This paper explores how changes in longevity and interest rates have affected the fairness of the actuarial adjustment over time and how the disparity in life expectancy affects the equity across the income distribution. It also looks at the impact of these developments on the costs of the program and the progressivity of benefits. The paper found that: ¥ The increases in life expectancy and the decline in interest rates argue for smaller reductions for early claiming and a smaller delayed retirement credit for later claiming. ¥ Specifically, the benefit at 62 should equal 77.5 percent, as opposed to 70.0 percent, of the full age-67 benefit, and the benefit at 70 should equal 119.9 percent, instead of 124.0 percent, of the full benefit. ¥ The outdated actuarial adjustments are a modest moneymaker for the program Ð about $1.9 billion in 2018, with most of the gains coming from those claiming at 62, who are typically lower earners. Surprisingly, the correlations between earnings and life expectancy and between earnings and claiming behavior have only modest implications for both the cost and progressivity of Social Security benefits. ¥ Finally, the cost and distributional effects of earnings-related life expectancy and claiming cannot be addressed through the actuarial adjustments for early and late claiming. They reflect the fact that high earners get their large benefits for a long time and low earners get their more modest benefits for a shorter time. The policy implications of the findings are: ¥ Increases in life expectancy and the decline in interest rates suggest smaller reductions for early claiming and a smaller delayed retirement credit for later claiming. ¥ Accounting for differential mortality would involve changing benefits, and is not a problem that can be solved by tinkering with the actuarial adjustments.
    Date: 2021–01
  6. By: Francesca Carta (Bank of Italy); Marta De Philippis (Bank of Italy)
    Abstract: This paper analyses the effects of raising the statutory full retirement age on the labour force participation of middle-aged individuals and their partners. Identification relies on a difference-in-differences setting that exploits the large heterogeneous increase in the age eligibility for retirement caused by an unexpected Italian pension reform. We detect a sizeable increase in the participation rate of middle-aged women that spills over into their husbands' labour supply, who choose to postpone their retirement decision.
    Keywords: family economics, labour supply, retirement
    JEL: J16 J22 J26
    Date: 2021–02
  7. By: Damir Cosic; C. Eugene Steuerle
    Abstract: This paper examines the effect of the increase in the Social Security Full Retirement Age (FRA) and the associated decrease in benefits for early claimants on retirement rates at ages 62 to 65. It uses information on age, sex, and labor force participation from the monthly Current Population Survey from 1976 to 2019. Critical components of the analysis include a difference-in-difference framework, comparison of three measures of retirement status, estimation of nonparametric and parametric models, and a test of the assumptions underlying the difference-in-difference approach. Although our model satisfied that test, the results do not guarantee that our specification is valid. The paper found that: ¥ The increase in the FRA decreased the retirement rate at age 62 by about 5 percentage points (or 30 percent) for men and by about 2 percentage points (or about 20 percent) for women. The retirement rate at age 63 to 65 was not affected. ¥ Estimates of the parametric model show that a 1 percent increase in the early claiming reduction decreases the retirement rate by between 0.7 and 0.9 percentage points for men and between 0.2 and 0.4 percentage points for women. The policy implications of the findings are: ¥ Our findings can inform evaluations of policy proposals to further increase the Social Security FRA. ¥ Our findings contribute to the understanding of the effects that the availability and generosity of pension benefits have on retirement decisions.
    Date: 2021–01
  8. By: Wei Kong (School of Business, Shanghai University of International Business and Economics); Shawn Ni (Department of Economics, University of Missouri-Columbia)
    Abstract: The growing fiscal cost of K-12 teacher pension plans and pension-induced labor market distortions have led to calls for teacher pension reforms. Dynamic structural econometric models are a useful way to analyze the fiscal and staffing consequences of current and alternative retirement plans. This paper lays out the benefits of the structural econometric modeling approach for analyzing changes to teacher pension plans, and estimates such a model for Missouri public school teachers. The results are then used to simulate effects of a pension reform on teacher retirement and employer pension costs.
    Keywords: teacher retirement, pension reform, structural models
    JEL: H75 I21 J26 J45
    Date: 2021
  9. By: Damir Cosic; Aaron R. Williams; C. Eugene Stone
    Abstract: This paper examines the relationship between life expectancy and labor force participation at older ages. It uses information on life expectancy from the U.S. Small-Area Life Expectancy Estimates Project and information on labor force participation from the five-year American Community Survey. Critical components of the analysis include merging the Census-tract-level information from the two data sets and estimating a spatial model of the relationship between life expectancy and labor force participation for men and women ages 55 to 74 that exploits the geographic variation in labor force participation and life expectancy. The main limitation of the study is that our analysis may understate the relationship between life expectancy and labor force participation to the extent that people are unaware of the geographic variation in life expectancy and, consequently, how it might affect their retirement planning. The paper found that: ¥ A one-year increase in life expectancy increases labor force participation by about 1 percent for men ages 55 to 74. For women, labor force participation increases by 0.3 percent at ages 55 to 64 and decreases by about the same amount at ages 65 to 74. ¥ Our non-linear model shows that the effect of life expectancy on male labor force participation increases with age, ranging from 0.8 percent for 55-year-old men to 2.4 percent at age 74. For women, it varies from zero at age 55 to 0.7 at 64. At older ages, the effect for women does not vary with age. The policy implications are: ¥ Our findings may help inform the Social Security TrusteesÕ projections of future labor force participation. ¥ A spatial perspective may expand the understanding of the relationship between life expectancy and labor force participation.
    Date: 2020–12
  10. By: Vanya Horneff; Raimond Maurer; Olivia S. Mitchell
    Abstract: Tax-qualified vehicles helped U.S. private-sector workers accumulate $25Tr in retirement assets. An often-overlooked important institutional feature shaping decumulations from these retirement plans is the “Required Minimum Distribution” (RMD) regulation, requiring retirees to withdraw a minimum fraction from their retirement accounts or pay excise taxes on withdrawal shortfalls. Our calibrated lifecycle model measures the impact of RMD rules on financial behavior of heterogeneous households during their worklives and retirement. We show that proposed reforms to delay or eliminate the RMD rules should have little effects on consumption profiles but more impact on withdrawals and tax payments for households with bequest motives.
    JEL: D14 G11 G5 G51 H24
    Date: 2021–02
  11. By: Hammer, Bernhard; Spitzer, Sonja; Prskawetz, Alexia
    Abstract: This study analyses age-specific differences in income trends in nine European countries. Based on data from National Accounts and the European Union Statistics on Income and Living Conditions, we quantify age-specific changes in income between 2008 and 2017 and decompose these changes into employment, wages, and public transfer components. Results show that income of the younger age groups stagnated or declined in most countries since 2008, while income of the older population increased. The decomposition analysis indicates that the main drivers of the diverging trends are higher employment among the older population and a strong increase in public pensions, especially for women.
    Keywords: Generational Economy,Income,Intergenerational Equity
    Date: 2021
  12. By: Jean-Pierre Aubry; Kevin Wandrei
    Abstract: As the types of assets in which state and local pension plans invest has expanded, so have the number of external asset managers that plans use. However, due to concerns about fees and recent questions about the value of active management, some large public plans have begun to reevaluate the size of their external management teams. CalPERS, Wisconsin RS, and Nevada PERS are examples of large plans that have recently consolidated their external management team as part of an overall commitment to reduce investment fees, which cut into their after-fee returns. This brief documents the trends in the number of external asset managers used by public pension plans and examines the relationship between external management and fees. The aim is to assess how the recent commitment by some plans to rely on fewer external managers might impact investment performance going forward.
    Date: 2020–11
  13. By: Anqi Chen; Alicia H. Munnell
    Abstract: To evaluate their retirement resources, households approaching retirement will examine their Social Security statements, defined benefit pensions, defined contribution balances, and other financial assets. However, many households may forget that not all of these resources belong to them; they will need to pay some portion to federal and state government in taxes. It is unclear, however, just how large the tax burden is for the typical retired household and for households with different income levels. This project aims to shed light on the tax burdens that retirees face by estimating lifetime taxes for a group of recently retired households. The project uses data from the Health and Retirement Study (HRS) linked to administrative earnings to determine Social Security benefits and administrative records on state of residence to estimate state tax liabilities. Income is then projected over the expected retirement of each household. Federal and state taxes, are estimated with TAXSIM, for each household on its reported and projected income. The paper found that: ¥ These estimates show that households in the aggregate will have to pay about 6 percent of their income in federal and state income taxes. ¥ But this liability rests primarily with the top quintile of the income distribution. ¥ For the lowest four quintiles, taxes are negligible Ð ranging from 0 percent to 1.9 percent. ¥ In contrast, the average liability is 11.3 percent for the top quintile, 16.4 percent for the top 5 percent, and 22.7 percent for the top 1 percent. The policy implications of the findings are: ¥ Taxes are meaningful for the top quintile, who are mostly married couples with average combined Social Security benefits of $50,900, 401(k)/IRA balances of $325,400 and financial wealth of $441,400. ¥ If these retirement and financial assets were fully annuitized, the amount a household would receive is equivalent to about $3,000 a month, and these households face tax liabilities of about 11 percent. ¥ Thus, for many households reliant on 401(k)/IRA or financial assets for security in retirement, taxes are an important consideration.
    Date: 2020–11
  14. By: José Ignacio Conde-Ruiz; Clara I. González
    Abstract: En este artículo se realiza en primer lugar un repaso de la dinámica demográfica en las últimas décadas en España para pasar a analizar el proceso de envejecimiento que tendrá lugar hasta el año 2050 según las principales proyecciones demográficas. Este análisis es relevante dadas las implicaciones que el proceso de envejecimiento tendrá en diferentes áreas y cuyo reto habrá que hacer frente sin esperar al futuro.
    Date: 2021–02
  15. By: Javier Olivera (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: El objetivo del presente trabajo es estudiar los posibles efectos de distintos escenarios de reforma del sistema de pensiones peruano en la deuda pública, valor de las pensiones, brecha de género y desigualdad de pensiones. Se analizan 3 modelos de reforma: i) capitalización individual puro, ii) sistema mixto basado en complementos de pensión (top up) y iii) sistema mixto con cuentas nocionales. Los resultados indican que el modelo de capitalización individual puro es mucho más costoso que el resto de alternativas y además no genera las pensiones más altas ni es el que reduce más las brechas de género ni la desigualdad de pensiones. Es tan caro ese escenario de reforma (57.1% del PBI) que es fiscalmente poco responsable. En cambio, el modelo mixto de cuentas nocionales es superior pues implica un considerablemente menor costo fiscal (9.5% del PBI) y mejores resultados en la brecha de género y el valor de las pensiones. En todos los casos se considera una pensión universal de monto pequeño, pensión mínima y pensiones garantizadas según umbrales de números de aportes. JEL Classification-JE: H55, H63, I30, G23
    Keywords: Pensions, Public debt, Inequality, Gender gap, Peru
    Date: 2020
  16. By: Jean-Pierre Aubry; Anqi Chen; Patrick M. Hubbard; Alicia H. Munnell
    Abstract: Public pension funds have engaged in social investing since the early 1970s, when several states passed laws to screen out ÒsinÓ stocks, such as tobacco, alcohol, and gambling. The practice was broadened in the early 1980s in the wake of a major campaign to encourage pension funds and others to divest from companies doing business in South Africa. States have also aimed to achieve domestic goals, such as promoting union workers, economic development, and homeownership. In the mid-2000s, the focus shifted to Òterror-freeÓ investing in response to the Darfur genocide and to weapons proliferation in Iran. And, after mass shootings in Aurora, CO and Newtown, CT, some public funds shed their holdings in gun manufacturers. In the last few years, state legislation has renewed the call to divest from Iran and has increasingly targeted fossil fuels to combat climate change. Interestingly, a ÒnewÓ form of investing Ð called ESG (environmental, social, and governance) Ð has gained traction among public plans themselves Ð as opposed to being imposed by state legislatures. A key tenet of ESG investing is that certain non-financial factors Ð such as a firmÕs environmental impact, its relationship with communities where it operates, and its management culture Ð are also relevant to longterm value. Proponents believe that, by integrating these ESG factors into existing methods of financial analysis, investors can both earn higher returns and promote socially beneficial practices and outcomes. This brief explores whether this new form of investing can fulfill its claims.
    Date: 2020–10
  17. By: Anantharaman, Divya; Chuk, Elizabeth; Kamath, Saipriya
    Abstract: The accounting for defined-benefit (DB) pension expense in U.S. GAAP involves offsetting pension costs against an expected (rather than actual) return on pension assets. Pensions commentators argue that this expensing model tilts pension portfolios towards riskier assets – as sponsoring firms can benefit from assuming higher expected rates of return on riskier assets (which reduce pension expense and boost reported income), without bearing the cost of higher volatility in reported income. We examine a recent regulatory change in U.S. GAAP, which mandates the relocation of the expected return on pension assets from “above the line” of to “below the line” of operating income. Consistent with this change reducing the financial reporting incentives for risk-taking, we predict and find that a sample of U.S. firms subject to this mandate reduces risk-taking in pension assets following the change, relative to a control sample of Canadian firms not subject to the change. In cross-sectional tests, we find that the reduction in risk-taking is more pronounced in (1) firms where the financial reporting incentives for risk-taking were stronger in the pre-period, and in (2) firms where the regulatory change particularly reduced those benefits. Our findings imply that managers are willing to undertake real actions (i.e., invest in riskier assets) to report favorable operating income, and that these incentives are incremental to the incentives to report favorable net income. They also provide evidence that financial reporting incentives serve as a driver of pension asset allocation decisions.
    Keywords: accounting regulation; standard-setting; defined benefit pension; operating income; Accounting Standards Update No. 2017-07
    JEL: M40 M41
    Date: 2021–02–19
  18. By: Barbara A. Butrica; Stipica Mudrazija
    Abstract: This paper uses financial data from a major credit bureau for a nationally representative 2 percent random sample from more than 250 million consumer records to examine the financial health and indebtedness of older adults. The data cover the years 2010 through 2019 and follow the same consumers over time. Consumer records include numerous sources of debt and information on their total credit available, total balances, amounts past due, debt in collections, and bankruptcies and foreclosures. They also include a nationally recognized credit score that is becoming increasingly utilized by creditors. We supplement these data with the zip-code level information from the American Community Survey on neighborhood characteristics, including racial and ethnic composition, median household income, homeownership, median housing prices, housing cost burdens, and unemployment rates. The paper found that: ¥ Consumers ages 50 and older are decreasingly indebted since the Great Recession. ¥ This trend masks the increase in indebtedness among adults ages 70 and older due primarily to mortgages. Not only are they more indebted, but our findings suggest that their financial health Ð reflected by their credit scores and capacity to borrow Ð has worsened over time. ¥ Where older people live matters for their use of debt. Older adults from socioeconomically disadvantaged areas carry debt well into their retirement years, whereas those who live in wealthier zip codes appear to deleverage as they age. ¥ More than other sources of debt, credit card debt is the most highly correlated with spells of poor credit Ð increasing both the likelihood of experiencing a spell and reducing the likelihood of exiting a spell. This has negative implications for consumers ages 70 and older since credit cards are their largest source of non-mortgage debt.
    Date: 2020–12

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