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Working Papers

Cepar - Retirement Decisions

Robert Holzmann and John Piggott

Abstract: The quest for better-designed pension schemes and effective pension system reforms has preoccupied policy makers and academic research- ers for the last several decades. The debate has swept across the globe, at times generating strong theoretical and policy arguments and creating reform leaders and followers. The notions of systemic and parametric pension reform that emerged with the debate suggest the depth of pro- posed reforms and the willingness to explore new ones.

Keywords: Pension schemes, pension, policy, taxation, reform 

Aged care support

Marijan Jukic

Aged care residents, residential care developers and government policy-makers need accurate information on likelihood of main events in residential care (i.e. residents’ functional decline and death). Since 20 March 2008 Australian government subsidies for residential care have been based on detailed assessments of individual care needs, and this generated 1.5 million assessment records by 30 June 2015. Four levels are assessed for three types of need - aids to daily living, behavioural needs, and complex health care. Logistic regression models are used to derive mortality and transition probabilities from these data. Backwards derivation was used to estimate mean life expectancies from these models, and microsimulation used to model distributions around means. As there has been continuing drift in assessed care needs, the mortality and transition assumptions estimates are based on the most recent year of experience. A microsimulation model of aged care residents, with all residents at 30 June 2015 as the initial population, has been constructed.

Content elderly couple enjoying life

Bei Lu, John Piggott, and Bingwen Zheng

This chapter discusses the potential expansion of the role of the notional defined contribution (NDC) paradigm in the ongoing reforms of retirement provision in China. China has remarkably high nominal retirement coverage of its population, but issues of sustainability, equity, and governance are challenging and real. Further, while many broad policy guidelines are set by the central government, jurisdictions at provincial, city, and sometimes even district level have major control over implementation, covering administration, benefit rates, and other important retirement policy features.

Aged care support

Mi H., Fan XD., Lu B., Cai LM and Piggott J.

China, in common with many other countries in Asia, will confront rapidly increasing demand for formal Long-term Care (LTC) over coming decades. This paper uses a unique regional monthly database on utilization of comprehensive care in Qingdao, China, to estimate transition probabilities and compute duration of care, using Markov chain simulations. Duration of care estimates are then combined with price per unit of care to calculate the total cost of care for the disabled elderly. Results show that the transition probabilities from institutional care to home care are ten times higher than those in the opposite direction; the average support duration in the plan is about 53 months, including both home and institutional care, when admitted at the age of 60, and 44 months if admitted at the age of 85, with costs ranging from RMB 40-120,000 per recipient. The cost analysis suggests that this provision model is an affordable comprehensive care model for elderly Chinese.


Elena Capatina, Michael Keane, Shiko Maruyama

This paper studies the effects of health on earnings dynamics and on consumption inequality over the life-cycle. We build and calibrate a life-cycle model with idiosyncratic health, earnings and survival risk where individuals make labor supply and asset accumulation decisions, adding two novel features. First, we model health as a complex multi-dimensional concept. We differentiate between functional health and underlying health risk, temporary vs. persistent health shocks, and predictable vs. unpredictable shocks. Second, we study the interactions between health and human capital accumulation (learning-by-doing). These features are important in allowing the model to capture the degree to which, and the pathways through which, health impacts earnings and consumption patterns. They are also very important in estimating the value of health insurance and social insurance. A key finding is that health shocks account for roughly half of the growth in offer wage inequality over the life cycle. Eliminating health shocks leads to a 5.5% decline in the variance of the present value of earnings across all individuals.

Keywords: Health, Income Risk, Precautionary Saving, Health Insurance, Welfare

Dr Xiangling Liu

Xiangling Liu

This paper studies the theoretical relationship between house prices and income by using the user cost equilibrium condition. Empirically, the long-run and short-run dynamics of this relationship are studied by using data for 144 Local government areas (LGA) over 25 years from 1991 to 2015 in the state of New South Wales, Australia. The income elasticity of house prices for the state is estimated to be 1.07 by multi-factor panel data models and the cointegration analysis. The income elasticities across locations demonstrate a spatial pattern, higher in Sydney and the Sydney surrounds and diminishing as going to inland regional and rural areas. The Granger Causality of the co-integrated relationship has been studied sequentially and proves the unidirectional causality from income to house prices. Finally, the state-wide common factors are found to show widespread signicance in contrast to the Sydney-wide common factors which only impact signicantly the areas that surround Sydney within a certain spatial range.
Colleagues discussing ageing research

Zvi Eckstein, Michael Keane and Osnat Lifshitz

Comparing the 1935 and 1975 U.S. birth cohorts, wages of married women grew twice as fast as for married men, and the wage gap between married and single women turned from negative to positive. The employment rate of married women also increased sharply, while that of other groups remained quite stable. To better understand these diverse patterns we develop a lifecycle model incorporating individual and household decisions about education, employment, marriage/divorce and fertility. The model provides an excellent fit to wage and employment patterns, along with changes in education, marriage/divorce rates, and fertility. We assume fixed preferences, but allow for four exogenously changing factors: (i) mother’s education, health and taxes/transfers; (ii) marriage market opportunities and divorce costs; (iii) the wage structure and job offers; (iv) contraception technology. We quantify how each factor contributed to changes across cohorts. We find that factor (iii) was the most important force driving the increase in relative wages of married women, but that all four factors are important for explaining the many socio-economic changes that occurred in the past 50 years. Finally, we use the model to simulate a shift from joint to individual taxation. In a revenue neutral simulation, we predict this would increase employment of married women by 9% and the marriage rate by 8.1%.

Pensioners enjoying retirement

Ermanno Pitacco

Heterogeneity of a population in respect of mortality is due to differences among the individuals, which are caused by various risk factors. Some risk factors are observable while others are unobservable. The set of observable risk factors clearly depends on the type of population addressed. The impact of observable risk factors on individual mortality, in particular when they also constitute “rating factors” in the calculation of premiums and other actuarial values, is usually expressed approximately, according to some pragmatic approach. For example, additive or multiplicative adjustments to the average age-specific mortality are frequently adopted. Heterogeneity due to unobservable risk factors can conversely be quantified by adopting the concept of individual “frailty”. However, individual frailty can be interpreted and consequently modeled in several ways, according to the causes which are considered as originating the frailty itself: congenital characteristics, environmental features, lifestyle aspects, etc. It follows that the individual frailty can, in particular, be assumed either constant or variable throughout the lifetime.

Keywords: Heterogeneity, Frailty, Risk factors, Force of mortality, Mortality laws, Parametric models, Special-rate annuities.

Hazel Bateman

Julie Agnew, Hazel Bateman, Christine Eckert, Fedor Iskhakov, Jordan Louviere, and Susan Thorp

We quantify the widespread and significant economic impact of first impressions and confirmation bias in the financial advice market. We use a theoretical learning model and new experimental data to measure how these biases can evolve over time and change clients’ willingness to pay advisers. Our model demonstrates that clients’ confirmation bias will reinforce the effect of first impressions. Our results also lend support, in a new financial context, to theoretical models of learning under limited memory where people use unclear signals to confirm and reinforce their current beliefs. We find that almost two thirds of the participants in our experiment make choices that are consistent with a limited memory updating process: they interpret unclear advice to be good advice when it comes from the adviser they prefer. Our results show that models that account for behavioral factors such as confirmation bias may be needed to explain some financial decisions.