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Working Papers

2021Dec
Image of Dr Myra Hamilton Associate Investigator

Manuela Naldini, Myra Hamilton and Elisabeth Adamson

Abstract: The social investment paradigm has received widespread attention as an approach to ‘prepare’ individuals, families, and societies to respond to new social risks they are likely to encounter throughout the life course, particularly those associated with post-industrialisation and globalisation. Early childhood education and care (ECEC) and policies that support women to participate in employment have been a central focus of the social investment paradigm. But while post-industrialisation and globalisation are closely linked to increases in migration, migrant families are largely absent from social investment policies. From a social investment perspective, access to ECEC and work/care reconciliation policy measures are crucial for migrant children and families. Yet there is a gap in the social investment literature when it comes to access to ECEC and work/care reconciliation policies by migrant families. Against this backdrop, this paper asks: To what extent are migrant families included or excluded from ECEC and work/care reconciliation policies in the two countries? Drawing on a comprehensive analysis of eligibility for and access to ECEC and work/care policies by migrant families in Australia and Italy, this paper critically examines the capacity of the social investment approach to respond to new life course risks associated with migration and mobility. This paper compares social investment policies for migrant families in two countries: Australia and Italy. These two countries have markedly different migration, employment, and care regimes, with both similarities and differences in the organisation of ECEC and policies to promote work/care reconciliation. It draws attention to the way in which the emergence of the social investment paradigm to address ‘new social risks’ does not take account of the importance of migration and mobility in the contemporary life course. Manuela Naldini, Myra Hamilton and Elisabeth Adamson

2021Dec

George Kudrna, John Piggott and Phitawat Poonpolkul

Abstract: This paper examines the economy-wide effects of government policies to extend public pensions in emerging Asia - particularly pertinent given the region’s large informal sector and rapid population ageing. We first document stylized facts about Indonesia’s labour force, drawing on the Indonesian Family Life Survey (IFLS). This household survey is then used to calibrate micro behaviours in a stochastic, overlapping-generations (OLG) model with formal and informal labour. The benchmark model is calibrated to the Indonesian economy (2000-2019), fitted to Indonesian demographic, household survey, macroeconomic and fiscal data. The model is applied to simulate pension policy extensions targeted to formal labour (contributory pension extensions to all formal workers with formal retirement age increased from 55 to 65), as well as to informal labour (introduction of non-contributory social pensions to informal 65+). First, abstracting from population ageing, we show that: (i) the first set of pension policy extensions (that have already been legislated and are being implemented in Indonesia) have positive effects on consumption, labour supply and welfare (of formal workers) (due largely to the formal retirement age extension); (ii) the introduction of social pensions targeted to informal workers at older age generates large welfare gains for currently living informal elderly; and (iii) the overall pension reform leads to higher welfare across the employment-skill distribution of households. We then extend the model to account for demographic transition, finding that the overall pension reform makes the contributory pension system more sustainable but the fiscal cost of non-contributory social pensions more than triples to 1.7% of GDP in the long run. As an alternative, we examine application of a means-tested social pension system within the overall pension reform. We show that this counterfactual reduces the fiscal cost (of social pensions) and further increases the welfare for both current and future generations.

Keywords: Informal Labour, Population Ageing, Social Security, Taxation, Re- distribution, Stochastic General Equilibrium.

2021Dec

George Kudrna, Trang Le and John Piggott

Abstract: We document the economic and social circumstances of older people in Indonesia, a low-income country with a population of 273 million, in the context of rapid demographic transition. We find that, in common with a number of other emerging economies in East and South East Asia, most older people in Indonesia are experiencing significant hardship, with nearly half either in poverty or vulnerable to poverty. Economic growth per se does not seem to lead to an improvement in the circumstances of these cohorts. Ongoing societal ageing suggests that this situation will become more critical in the next couple of decades. A major effort in developing effective and sustainable social protection structures to provide support to the future elderly in Indonesia is required. Constructing an informed macro-demographic profile of an emerging economy can be a daunting challenge, but is an essential pre-cursor to evidence based social policy development focused on older cohorts. This paper draws on demographic and household survey data in Indonesia to craft a profile of older cohorts in Indonesia, within a context of changing education and labour force participation. This work has been undertaken to provide context and data for a major research effort around the development of a detailed macroeconomic model to analyse and assess appropriate social protection applications. But it has generated insights into the circumstances of older cohorts, and associated changes through time, which have value in their own right.

We report that:

  • Indonesia will undergo pronounced population ageing driven by a reduction in total fertility rate. For example, the aged dependency ratio (65+/15-64) is projected to increase from less than 10% (in 2020) to over 46% in 2100. This is also attributed to an increasing life expectancy, particularly at older ages. For those at age 65, life expectancy is projected to increase by almost 20 years in 2100 (which is almost double the expected lifespan in the middle of the 20th century). Indonesia’s total population has also quadrupled to 273 million (in 2020) since 1950 and is projected to increase to 320 million in 2100. However, the annual population growth rate will become negative, reaching -0.3% in 2100 due to population ageing.
  • Importantly, drawing on IFLS household survey data, this demographic transition is occurring in an economy where the large majority of the labour force operates in informal employment, not covered by a formal retirement income policy or, currently, a social pension.
  • At older ages, people continue to derive their income mainly from employment, along with private transfers from their adult children and these two income sources will be impacted by fewer adult children (to provide private transfers) and longer lifespans (affecting the labour supply of older people).
2021Oct

George Smyrnis, Hazel Bateman, Loretti Dobrescu, Ben R. Newell and Susan Thorp

Abstract: Can projections of retirement wealth and income motivate pension plan participants to save more? Results of field and online experiments show that participants who see both retirement balance and income projections increase voluntary savings. In the field study, conducted by a large Australian pension plan in 2013-14, participants of the treatment group received current balance, projected retirement balance and projected retirement income information, while participants of the control received only current balance information. Within one year of the treatment, the frequency, and average amount, of voluntary savings by treated plan participants rose significantly, as did the rate of participants interactions with the plan. In the related online experiment conducted in 2017, we tested the relative effect of information on (i) current balance; (ii) current balance and projected retirement balance; (iii) current balance and projected retirement income; and (iv) current balance, projected retirement balance and projected retirement income. Consistent with the field trial, the combination of retirement balance and income projections motivates a significantly higher retirement savings accumulation, after a sequence of ten savings decisions, than current balance information alone. Together our results strongly endorse recent changes to retirement plan benefit statement guidelines initiated by pension regulators globally.

Keywords: pensions, field experiment, benefit projections

2021Sep
Mature workers

Erik Hernaes, Zhiyang Jia, John Piggott and Trond Christian Vigtel

Abstract: Many consider that reducing the eligibility age for pension benefits will discourage labor supply by mature workers. This paper analyzes a recent Norwegian pension reform which effectively lowered the eligibility age of retirement from 67 to 62 for a group of workers. For the individuals we study, the expected present value of benefits was held constant by introducing flexible claiming and actuarially adjusting the periodic pension payment. This neutralized the income effect of decreasing the access age, while the abolition of any earnings test ensured constant present value of the pension, independent of the age when it is claimed. This provides us with a unique opportunity to study the isolated impact of increased flexibility. We employ a particular difference-in-difference approach, which allows us to study the effect on the distribution of labor supply behavior (represented by earnings) instead of just the mean. Older workers are found to stay longer in the labor market but with reduced intensity, implying a higher incidence of gradual exit. On average the reform leads to small and statistically insignificant increases in aggregate earnings over ages 62 to 66. The fiscal effect was negligible, due to actuarial adjustments of pensions and small changes in aggregate earnings. We do however find a reduced inflow to disability, which may add to any positive fiscal effect. Our findings thus suggest that increased pension flexibility could promote gradual exit from the labor market, allowing improved individual choice and positive welfare effects. It could also be an important component of a broader pension reform.

Keywords: Retirement, Pension, Flexibility

2021Sep
Warwick McKibbin

Florence Jaumotte, Weifeng Liu and Warwick J. McKibbin

Abstract: The paper examines climate mitigation strategies to reach net-zero emissions by mid-century, focusing on smoothing macroeconomic costs in the short- to medium-term—the horizon relevant for policymakers. It explores a comprehensive policy package, which complements carbon pricing with an initial green fiscal stimulus, consisting of green public investment and subsidies to renewables production. Model simulations show that thanks to the green public spending, the policy package boosts global output relative to the baseline for the first 15 years of the low-carbon transition. Subsequent transitional output costs resulting from further increases in carbon prices are moderate of the order of 1 percent of baseline global GDP by 2050. The findings suggest that upfront green fiscal packages could help smooth the transition to a low-carbon economy. In the current context of the Covid-19 economic crisis, they would help support the recovery from the crisis and put the global economy on a greener, more sustainable path.

Keywords: Climate Change, Net-Zero Emissions, Green Infrastructure, Macroeconomics, DSGE, CGE, G-Cubed

2021Sep

Weifeng Liu

Abstract: While population has been aging globally, regions and countries are significantly asymmetric in the timing and speed of the demographic transitions, especially between developed and developing regions. This paper explores the impacts of asymmetric demographic change on international capital flows with two contributions. First, the paper introduces demographic structure and pension systems into a theoretical overlapping generation model of a small open economy, and derives an analytical solution which links a large set of factors to the current account. This framework enables tractable analysis of the effects of various demographic shocks on external balances, and also of the interaction between demographic shocks and producvity growth and pension systems. Second, the paper provides a comprehensive literature review of both modeling and empirical studies. There are several qualitative implications. First, the patterns of capital flows depend on the nature of demographic shocks (permanent or transitory; fertility or mortality) and also on the stage of demographic shocks. Second, less generous pension systems tend to increase national saving and drive capital outflows. Third, financial frictions such as borrowing constraints of young people tend to increase national saving and drive capital outflows. Fourth, production and trade specialization in labor-intensive sectors tends to decrease investment and drive capital outflows in the face of fertility growth. Fifth, the magnitude of the demographic effects depends on the extent of cross-border mobility of capital, labor and goods. There are also several quantitative implications. First, demographics alone can explain a significant fraction of historical current account dynamics among advanced economies, especially low-frequency movements. Second, institutional and financial frictions need to be incorporated to reconcile the demographic effects with historical capital flows from emerging to advanced economies. Third, production structure and trade specialization also play an important role in demographics-driven capital outflows from emerging economies. On the other hand, empirical studies strongly support that the demographic change since the second half of last century has statistically significant effects on the current account balance. The current account tends to decrease in the dependency ratio, and increase in the working-age population share. This paper also points out the potential research direction.

Keywords: Global demographic change; fertility and mortality; international capital flows; current account balances; overlapping generation model; pension systems; factor mobility; financial frictions; structural change

 

2021Aug
Mike Sherris CEPAR

Francesco Ungolo, Michael Sherris, and Yuxin Zhou

Abstract: Affine mortality models, developed in continuous time, are well suited to longevity applications including pricing and risk management. Advantages of this modelling approach include closed-form derivations of cohort survival curves, with these survival curves consistent with the dynamics of mortality rates. We compare a number of multi-factor continuous time affine models applied to age-cohort mortality data in a multi-country comparison of five countries with differing lengths of time series mortality data. We develop improved estimation methods for these models and provide R code. Parameters are estimated using maximum likelihood with the univariate Kalman Filter, which accounts for the Poisson variation in the measurement equation. We show how this estimation method is faster and more robust compared to the traditional formulation which heavily uses large matrix multiplication and inversion. We also discuss and address numerical issues with the estimation process. We provide graphical and numerical goodness-of-fit checks, and assess model robustness. We then project cohort survival curves and assess the out-of-sample performance of the analysed models. Although the CIR mortality model fits historical data well, particularly at older ages. Other affine mortality models provide better out-of-sample performance, although less so old ages. We show that the affine mortality models analysed are robust with respect to the set of age-cohort data used for parameter estimation.

Keywords: Longevity Risk, Kalman Filter, State-space models

 

2021Aug
Data analysis

Francesco Ungolo, Michael Sherris, and Yuxin Zhou

Abstract: This tutorial provides guidance in the use of the R files within the Github repository affine mortality containing the code used to fit, examine and compare continuous time affine mortality models. The final implementation will be available as the R package AffineMortality. Throughout this tutorial we provide a discussion of how the code works in order to effectively estimate and project the models, and describe the functions available therein. Some illustration of the code for the analysis of the US dataset is provided.

Keywords: Longevity Risk, Kalman Filter, State-space models