Retirement planning in the light of changing demographics

With increasing longevity and decreasing fertility rates, governments and policy makers are increasingly engaged in the question of long term retirement planning. In many cases this has included emphasising the need for individuals to take more responsibility for their own retirement planning through tax incentives, compulsion and changes to the age at which state retirement benefits become available. In the case of Australia, as is considered here, long term retirement planning has been focused around the development of a compulsory defined contribution (DC) superannuation system. Here we investigate the interaction between population ageing and the sustainability of the superannuation system by modelling a general superannuation scheme to compare the adequacy of retirement funds under a number of alternative scenarios. The model incorporates stochastic longevity forecasts and provides insight into the sufficiency of compulsory retirement saving both now and future. We find that the current pension scheme is more robust to longevity improvements for mid-class individuals however significant gaps arise for low-income individuals as longevity improves. Without addressing these issues, government expenditure is expected to increase substantially.     

Ageing,government budgets,retirement, and growth

We analyze the short and long-run effects of demographic ageing – increased longevity and reduced fertility – on per-capita growth. The OLG model captures direct effects, working through adjustments in the savings rate, labor supply, and capital deepening, and indirect effects, working through changes of taxes, government spending components and the retirement age in politico-economic equilibrium. Growth is driven by capital accumulation and productivity increases fueled by public investment. The closed-form solutions of the model predict taxation and the retirement age in OECD economies to increase in response to demographic ageing and per-capita growth to accelerate. If the retirement age was held constant, the growth rate in politico-economic equilibrium would essentially remain unchanged, due to a surge of social-security transfers and crowding out of public investment.     

The impact of the correlation between health expenditure and survival probability on the demand for insurance

This paper studies the effects of health shocks on the demand for health insurance and annuities, along with precautionary saving in a dynamic life-cycle model. I argue that when the health shock can simultaneously increase health expenses and reduce longevity, rational agents would neither fully insure their uncertain health expenses nor fully annuitize their wealth because the correlation between health expenses and longevity provides a self-insurance channel for both uncertainties. That is, when the agent is hit by a health shock (which simultaneously increases health expenses and reduces longevity), she can use the resources originally saved for consumption in the reduced period of life to pay for the increased health expenses. Since the two uncertainties partially offset each other, the precautionary saving generated in the model should be smaller than in a standard model without the correlation between health expenses and longevity. In a quantitative life-cycle model calibrated using the Medical Expenditure Panel Survey dataset, I find that the health expenses are highly correlated with the survival probabilities, and this correlation significantly reduces the demand for actuarially fair health insurance, while its impact on the demand for annuities and precautionary saving is relatively small.     

Postponing retirement: the political effect of aging

Conventional economic wisdom suggests that because of the aging process, social security systems will have to be retrenched. In particular, retirement age will have to be largely increased. Yet, is this policy measure feasible in OECD countries? Since the answer belongs mainly to the realm of politics, I evaluate the political feasibility of postponing retirement under aging in France, Italy, the UK, and the US. Simulations for the year 2050 steady state demographic, economic and political scenario suggest that retirement age will be postponed in all countries, while the social security contribution rate will rise in all countries, but Italy. The political support for increasing the retirement age stems mainly from the negative income effect induced by aging, which reduces the profitability of the existing social security system, and thus the individuals' net social security wealth.     

Fiscal sustainability and demographics – Should we save or work more?

Approaching demographic shifts are raising concerns about fiscal sustainability in most OECD countries. A widespread view based on the tax-smoothing idea is that a prior consolidation of public finances is required to cope with the predicted trend deterioration in the primary budget balance. However, the smoothing argument cannot unconditionally be applied to the demographic problem. It is important to distinguish between increases in the dependency ratio driven by changes in fertility and longevity. For the former the smoothing argument may be appropriate, but not for the latter. In the case of longevity, a trade-off between consolidation and increasing retirement ages becomes relevant, and there are strong arguments why the latter should be pursued by e.g. linking statutory retirement ages to longevity. Both positive aspects in assessing the order of magnitude of sustainability problems and normative aspects of formulating policy strategies are addressed.     

The trajectory of wealth in retirement

In this paper, we develop a measure of household resources that converts total financial and non-financial assets, plus annuity-like assets (mainly, Social Security and defined-benefit pensions) into an expected annual amount of wealth per person in retirement. We use this measure, which we call “annualized comprehensive wealth,” to investigate spend-down behavior among a panel of older households in the Health and Retirement Study (HRS) from 1998 to 2006. Our analysis indicates that for most retired households, comprehensive wealth balances decline much more slowly than their remaining life expectancies, so that the predominate trend is for real annualized wealth to rise significantly with age over the course of retirement. Comparing the estimated age profiles for annualized wealth with profiles simulated from several different life-cycle models, we find that a model that takes into account uncertain longevity, random medical expenses, and intended bequests lines up best with the broad patterns of rising annualized wealth in the HRS.     

多因素影响下的最优年金化时间决策

长寿风险是退休计划中易被低估的风险因素,这类风险因人类寿命的不断延长而快速增大。养老年金具有规避长寿风险和提高消费者效用的双重价值,在养老保障中具有重要的作用。本文系统考虑退休计划中消费者的寿命风险和遗赠需求,讨论年金投资中的最优年金化时间决策,通过构建单周期的最优年金化时间选择模型,分析了消费者在整个退休计划中如何进行年金投资这一多期决策问题。本文最后展示了不同参数设置下的计算结果,以说明消费者的遗赠需求强度与风险厌恶特征、年金管理费率、年金收益与风险水平等因素对最优年金化时间的影响。     

How important is the stock market wealth effect on consumption in India?

We examine how shocks emanating from changes in the stock wealth affect the consumption demand in India using a Bayesian VAR framework. The effect of the stock market wealth shock on consumption demand in India is relatively small in magnitude. The estimates suggest that a 10% increase in the real stock wealth raises the consumption demand by 0.3%, which seems to be consistent with some empirical estimates for the emerging market economies given a relatively low share of stock wealth in the household asset portfolio and its asymmetric distribution. The stock market wealth effect being short run in nature does not have a large and persistent effect on consumption demand since consumers may not perceive the changes in the stock wealth to cause a permanent shift in their wealth.     

DEFINED CONTRIBUTION PLANS, DEFINED BENEFIT PLANS, AND THE ACCUMULATION OF RETIREMENT WEALTH

The private pension structure in the United States, once dominated by defined benefit (DB) plans, is currently divided between defined contribution (DC) and DB plans. Wealth accumulation in DC plans depends on a participant's contribution behavior and on financial market returns, while accumulation in DB plans is sensitive to a participant's labor market experience and to plan parameters. This paper simulates the distribution of retirement wealth under representative DB and DC plans. It uses data from the Health and Retirement Study (HRS) to explore how asset returns, earnings histories, and retirement plan characteristics contribute to the variation in retirement wealth outcomes. We simulate DC plan accumulation by randomly assigning individuals a share of wages that they and their employer contribute to the plan. We consider several possible asset allocation strategies, with asset returns drawn from the historical return distribution. Our DB plan simulations draw earnings histories from the HRS, and randomly assign each individual a pension plan drawn from a sample of large private and public defined benefit plans. The simulations yield distributions of both DC and DB wealth at retirement. Average retirement wealth accruals under current DC plans exceed average accruals under private sector DB plans, although DC plans are also more likely to generate very low retirement wealth outcomes. The comparison of current DC plans with more generous public sector DB plans is less definitive, because public sector DB plans are more generous on average than their private sector DB counterparts.     

The effects of longevity and distortions on education and retirement

This article studies the impact of longevity and taxation on life-cycle decisions and long run income. Individuals allocate optimally their total lifetime between education, working and retirement. They also decide at each moment how much to save or consume out of their income, and, after entering the labor market, how to divide their time between labor and leisure. The model incorporates experience–earnings profiles and return to education function that follows evidence from the labor literature. In this setup increases in longevity raises the investment in education—time in school—and retirement. The model is calibrated to the US and is able to reproduce observed schooling trends of the last century. It also reproduces the increase in retirement, as the evidence shows. Simulations show that a country equal to the US but with 20% smaller longevity will be 25% poorer, mostly because of the impact of life expectancy on human capital formation and retirement. In this economy labor taxes have a strong impact on the per capita income, as it decreases labor effort, time at school and retirement age, in addition to the general equilibrium impact over physical capital.     

人口红利转变、老龄化与提高退休年龄

中国人口生育水平的下降和平均预期寿命的延长,导致原来的人口红利出现了转变的趋势,也造成了老龄化负担的加剧。在这种情况下,实行提高退休年龄的政策具备了某种可能性,因为人口红利的逐渐消失和劳动力供求的逆转可能成为提高退休年龄的推力,而养老金制度的老龄化危机则成为提高退休年龄的拉力。在现实条件下,考虑这一政策对城镇就业的冲击以及劳动力异质性的影响,应该实施渐进缓慢、逐步提高退休年龄的政策。     

The taxation of life annuities under adverse selection

This paper studies how annuities should be taxed in a Mirrlees-type model in the presence of adverse selection and a positive link between income and longevity. The government is able to address the adverse selection problem by implementing a progressive marginal tax rate on annuities. This amounts to subsidizing small annuities (purchased by low incomes) and taxing large annuities (purchased by high incomes). Numerical simulations suggest that the taxation is significant and becomes more pronounced as annuitants get older.     

Annuity Values in Defined Contribution Retirement Systems: Australia and Singapore Compared

Annuities promise to play an increasingly important role in countries with national defined contribution retirement systems. In this article we examine life annuities in two countries, Singapore and Australia, each of which has a national mandatory pension program. Exploiting data on annuity pricing and purchase behaviour, we compare the money's worth of life annuity products across these two nations. Our results indicate that, after controlling on administrative loadings, there are important differences in measured adverse selection. Part of the explanation may be due to the different structures of the two countries’retirement systems.     

Increasing life expectancy and optimal retirement in general equilibrium

We analytically assess the effects of changes in longevity on the interest rate, the consumption-savings behavior, and the optimal retirement decision within a dynamic general equilibrium setting. We derive a simple sufficient condition for which the optimal retirement age always increases with life expectancy. Numerical assessment reveals that for realistic parameter values that reflect the situation in industrialized countries, the optimal retirement age indeed increases with life expectancy and the sufficient condition tends to be fulfilled. Together with the fact that the actual retirement age did not increase in industrialized countries over the last decades, while there have been large improvements in longevity, this leads us to conclude that strong monetary and institutional incentives for early retirement exist and these counteract the effects of increasing life expectancy. Our policy conclusion is that the retirement age should be partially linked to life expectancy and that incentives for early retirement should be removed.     

From duty to right: The role of public education in the transition to aging societies

This paper argues that the introduction of compulsory schooling in early industrialization promoted the growth process that eventually led to a vicious cycle of population aging and negative pressure on education policy. In the early phases of industrialization, public education was undesirable for the young poor who relied on child labor. Compulsory schooling therefore discouraged childbirth, while the accompanying industrialization stimulated their demand for education. The subsequent rise in the share of the old population, however, limited government resources for education, placing heavier financial burdens on the young. This induced further fertility decline and population aging, and the resulting cycle may have delayed the growth of advanced economies in the last few decades.     

Mandatory retirement and older worker employment

Abstract.  In this paper we take advantage of differences in the legal status of mandatory retirement in Canada across jurisdictions and over time to assess its impact on the share of older people working. The results suggest that making mandatory retirement illegal would have little effect on the size of the older workforce, and therefore such a policy alone would do little to alleviate problems associated with an aging population and the consequent decline in the share of the population employed. JEL Classification: J26, J88     

Bequest Motives and the Annuity Puzzle

Few retirees annuitize any wealth, a fact that has so far defied explanation within the standard framework of forward-looking, expected utility-maximizing agents. Bequest motives seem a natural explanation. Yet the prevailing view is that people with plausible bequest motives should annuitize part of their wealth, and thus that bequest motives cannot explain why most people do not annuitize any wealth. I show, however, that people with plausible bequest motives are likely to be better off not annuitizing any wealth at available rates. The evidence suggests that bequest motives play a central role in limiting the demand for annuities.     

Aging,growth and the allocation of public expenditures on health and education

In this paper, I develop an overlapping generations endogenous growth model in which both public education and health are sources of growth by affecting the accumulation rate of the human capital stock and the savings rate over life expectancy. I first find that dynamic complementarities of public expenditures lead to minimum threshold levels of public education and health expenditures that ensure sustainable growth. I then show how governments can use the allocation of public expenditures as an alternative policy instrument to maximize growth without increasing the tax rate or the retirement age, as usually happens in aging economies.     

人口老龄化、社会保障与人力资本投资

本文以我国养老保险的"统账结合"模式为例,探讨了社会保障制度对人口老龄化和人力资本投资的影响。根据本文的推导和验证,增加"统账结合"模式中个人账户的比例,将会对居民的人力资本投资产生一定的激励作用,并延缓其退出劳动力市场的时间,从而缓解人口老龄化对经济和社会发展带来的压力。另外,本文还在"统账结合"模型下,分析了人力资本投资与退休的关系,结果发现,增加人力资本投资,可以延长居民的劳动参与时间。由此,我国的社会保障制度应该在以下两个方面进行改革:适当增加"统账结合"模式中个人承担的比例;加快农村的社会保障体系建设,促进覆盖全国的社会保障体系的形成。     

Uncertain Medical Expenses and Precautionary Saving Near the End of the Life Cycle

This paper introduces a dynamic, structural model of household consumption decisions in which elderly families consider the effects of uncertain future medical expenses when deciding current levels of consumption. The model with uncertain medical expenses implies a potentially important role for precautionary saving incentives to explain slow rates of dissaving among elderly Americans during retirement. Rather than just simulating the stochastic dynamic model, preference parameters are estimated using panel data on health, wealth and expenditures for retired families. The health uncertainty model predicts consumption levels closer to observed expenditures than a life cycle model with uncertain longevity. However, elderly families typically dissave their financial assets more slowly than even the baseline health uncertainty model predicts is optimal.