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Working Papers

Students collaborating

Yue Hua and George Kudrna

Abstract: Progressive income contingent loans (ICLs) for college students, where repayment rates increase with income, may provide additional insurance against income risks after graduation. We study how the progressiveness of ICLs affects life-cycle behaviors and welfare. We document stylized facts on education in Australia, where recent reforms made ICLs more progressive. We found correlations between reforms and enrolment rates. We estimate income dynamics and found that progressive ICLs provide more insurance in the first repaying years. Lastly, we build a heterogenous-agent life-cycle model and find that progressive ICLs induce higher education attainment and welfare than non-contingent loans or linear ICLs.

KeywordsStudent loans, income-contingent repayment, income dynamics, heterogeneous-agent life-cycle model


Young family walking along the beach

Hélène Morsomme, Jennifer Alonso-García and Pierre Devolder

Abstract: Population ageing undermines traditional social security pension systems that combine pay-as-you-go (PAYG) and defined benefits (DB). Indeed, demographic risk, if guaranteed benefits remain unaltered, will be borne entirely by workers through increases in the contribution rate. To avoid a substantial increase of the contributions and in order to maintain simultaneously the financial sustainability and the social adequacy of the public pension system, risk sharing and automatic balancing mechanisms need to be put in place. We present a two-step convex family of risk-sharing mechanisms. The first shares the risk between contributors and retirees through adjustments in the contribution rate, used to calculate the global covered wage bill, and the benefit ratio that represents the relationship between average pensions and wages. The second step studies how the retirees’ risk should be shared between the different retirees’ generations through adjustments in the replacement rate and a sustainability factor that affects pension indexation during retirement. We perform a detailed study of the effect of social planner’s targets and solidarity weight between various generations in a deterministic and stochastic environment.

Keywords: risk-sharing, automatic balancing mechanisms, pension design, ageing



George Kudrna, John Piggott and Phitawat Poonpolkul

Abstract: This paper develops a general equilibrium overlapping generation model with heterogenous households to study pension reforms in emerging economies with large informal employment and rapid population ageing. Using Indonesia, a country in which 80% of the labour force works in the informal sector, and which confronts a 5-fold increase in the 65+ share of the population this century, as our exemplar economy, we assess, both separately and in combination, the impact of increasing the pension access age for formal labour and introducing a flat-rate social pension for informal labour. Households are differentiated by skill and employment type, and confront idiosyncratic labour income and survival shocks. The micro/household behaviours are calibrated with Indonesian Family Life Survey (IFLS) data, along with recent World Bank macro and fiscal data to target some macro moments. The benchmark model assumes tax and pension policy settings applicable solely to formal labour. We show that in a model incorporating population ageing, the combined reforms would significantly improve aggregate welfare for both groups: flexibility in late life work in the formal sector benefits those workers, while informal workers benefit from the social pension, set at 6.5% of per capita GDP. The incremental revenue requirement, taking account of both the reduced formal pension outlays and the cost of the social pension, is calculated to be about 1.5% of GDP.

Keywords: Population Ageing, Informal Labour, Retirement Policies, Social Security, Redistribution, Life Cycle, Stochastic General Equilibrium.



Do Won Kwak and Jong-Wha Lee

Abstract: An aging workforce has adversely impacted the economy in Korea, amid growing fiscal challenges associated with providing pension and healthcare for older people. The increasing elderly population has raised concerns about the diminishing quality of life among seniors. This study explores the impact of retirement and re-employment on the life satisfaction of older individuals, utilizing longitudinal data from 2008 to 2020. To address endogeneity concerns, we use statutory eligibility ages for retirement pension benefits and the expected monetary value of these benefits as instrumental variables for retirement and re-employment status. Our findings suggest that retirement leads to a significant reduction in overall life satisfaction among older individuals. Conversely, life satisfaction improves significantly when retired individuals are re-employed. This study examines the dynamic effects of retirement on life satisfaction by employing the event study framework and investigating the reversal of retirement through re-employment. The findings emphasize that the life satisfaction of older individuals can be enhanced through policies that enable them to extend their employment or pursue new opportunities after retirement.

Keywords: aging, retirement, re-employment, life satisfaction, longitudinal study, pension


Annamaria Olivieri

Annamaria Olivieri and Daniela Tabakova

Abstract: Special-rate life annuities offer customized annuity rates, based on the lifestyle or health status of the individual. Their main purpose is to encourage the annuity demand, which is still underdeveloped in many markets; as better annuity rates are quoted for individuals showing a higher mortality profile, the number of individuals attracted by life annuities could increase. Providers should then gain larger pool sizes; however, this is possibly matched by a greater heterogeneity of the pool, due to several risk classes defined by the annuity design. Heterogeneity emerges not only in terms of different life expectancies, but also in respect of the dispersion of the lifetime distribution; indeed, situations resulting in a lower life expectancy also show greater variability of the lifetime. As it is well-known, pooling effects are reinforced by the pool size, while they are weakened by its heterogeneity, with a possibly unclear impact on the overall longevity risk to which the provider is exposed.

In this paper we investigate the longevity risk profile of an annuity pool consisting of several risk classes. We consider both the idiosyncratic and aggregate components of the risk, by modelling the random number of deaths and assuming a stochastic mortality dynamics. The heterogeneity of risk classes is represented alternatively in a deterministic and stochastic setting.

Our conclusions are in line with similar findings discussed in the literature, but obtained in a deterministic framework. Results suggest that the longevity risk profile of the provider is not significantly undermined by a greater pool heterogeneity, with a prevalence of the aggregate component whatever the pool composition.

Keywords: Underwritten annuities, Standard annuities, Enhanced annuities, Impaired annuities, Preferred risks, Substandard lives, Stochastic mortality, Longevity risk, Heterogeneity.

climate change CEPAR

Roshen Fernando and Caterina Lepore

Abstract: This paper evaluates the global economic consequences of physical climate risks under two Shared Socioeconomic Pathways (SSP 1-2.6 and SSP 2-4.5) using firm-level evidence. Firstly, we estimate the historical sectoral productivity changes from chronic climate risks (gradual changes in temperature and precipitation) and extreme climate risks (representative of heatwaves, coldwaves, droughts, and floods). Secondly, we produce forward-looking sectoral productivity changes for a global multisectoral sample of firms. For floods, these estimates account for the productivity changes from the damage to firms’ physical capital. Thirdly, we assess the macroeconomic impact of these shocks within the global, multisectoral, intertemporal general equilibrium model: G-Cubed. The results indicate that, in the absence of additional adaptation relative to that already achieved by 2020, all the economies would experience substantial losses under the two climate scenarios, and the losses would increase with global warming. The results can be useful for policymakers and practitioners interested in conducting climate risk analysis.

Keywords: Climate change, Climate risks, Extreme events, Macroeconomic modelling



Roshen Fernando

Abstract: Medical advancements in the twenty-first century significantly contribute to increased longevity and the current global demographic trends, including population aging. While rising antimicrobial resistance (AMR) threatens the sustainability of longevity prospects, the current demographic trends also contribute to worsening AMR. We investigate the role of four demographic indicators (population growth, population aging, population density, and urbanization) in the resistance growth of seven pathogens against twelve antimicrobials in 30 countries from 2000 to 2020. We observe heterogeneous responses of different antimicrobial drug-pathogen combinations to demographic trends. We observe that the demographic trends could affect resistance growth more than antimicrobial consumption growth in some antimicrobial- drug pathogen combinations. We emphasize the importance of a broader exploration of factors affecting AMR evolution from a one-health approach and enhanced AMR surveillance, among others, to produce effective policy responses to tame AMR.

Keywords: Antimicrobial resistance, Infectious diseases, Demographic Trends, Population Growth, Population Aging, Urbanization, Econometrics, Machine Learning

cepar award

Roshen Fernando

Abstract: Antimicrobial resistance (AMR) and climate change are interrelated complex challenges to humanity. We investigate the role of physical climate risks in the resistance growth of seven pathogens against twelve antimicrobials in 30 countries from 2000 to 2020. Our empirical assessment considers both chronic (gradual changes in temperature, precipitation, and relative humidity) and extreme climate risks (representing extreme precipitation events, droughts, heatwaves, coldwaves, and storms). We observe heterogeneous responses of different antimicrobial drug-pathogen combinations to physical climate risks. We observe that the physical climate risks could affect resistance growth more than antimicrobial consumption growth in some antimicrobial-drug pathogen combinations. We also illustrate stronger effects of extreme climate risks on resistance growth compared to chronic risks in some antimicrobial-drug pathogen combinations. We emphasize the importance of a broader exploration of factors affecting AMR evolution from a one-health approach and enhanced AMR surveillance, among others, to produce effective policy responses to tame AMR.

Keywords: Antimicrobial resistance, Infectious diseases, Climate Change, Econometrics, Machine Learning


health model

Kyu Park and Michael Sherris

Abstract: With increasing numbers of Australians in or entering retirement, the modelling of functional disability and health status is critical to the insuring and financing of retirement risks for both governments and individuals. The multi-state modelling of these risks underlie projections of the population by functional disability status, the estimation of healthy life expectancy, the sustainable financing of public aged care and innovations in private long-term care insurance. Developing a model for the Australian population is challenging because of the lack of longitudinal health and mortality data for older Australians. We use the cross-sectional data in the Survey of Disability, Ageing and Carers for years 1998, 2003, 2009, 2012, 2015 and 2018, providing prevalence of functional disability and illness across 20 years, to estimate a multi-state transitions model that best explain the observed changes of prevalence in Australia. We develop and estimate for the first time an Australian model for transitions between five states (healthy, disabled but not ill, ill but not disabled, disabled and ill, and dead) using age, sex and trend factors for those aged 60 or greater. Functional disability is defined by autonomy of activities of daily living. Illness is defined by chronic illness conditions including heart problems, diabetes, lung disease, and stroke. Model estimation is done numerically. Using the fitted model, we estimate yearly transition probabilities, life expectancy of retirees and projected population distributions by functional disability and health states. We also provide a comparison of the results with previous studies.

Keywords: functional disability, activities of daily living, multiple state model, cross-sectional data, life expectancy, long-term care insurance