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Working Papers


L.I. Dobrescu, A. Shanker, H. Bateman, B.R. Newell, and S. Thorp

Abstract: How do people save over their lifetime? Using a dynamic lifecycle model of saving and portfolio choice featuring risky labor income, housing, and safe and risky financial assets inside and outside pension plans with comprehensive choice architecture, we examine the behavior of members of an industry-wide retirement fund to assess how standard saving motives, pension defaults, investment returns, preferences and frictions interact to drive lifetime savings across major asset classes. Our results show considerable heterogeneity in what motivates people how to save. First, we find that financial and housing assets are largely driven by consumption smoothing motives. While these motives also affect plan choices, their role in pension accumulation is more limited due to default switching costs. Removing such costs, on the other hand, encourages pension savings at the expense of financial wealth but not of housing. In fact, we find higher pension assets to drive up housing wealth throughout the lifecycle, as people - anticipating a wealthier retirement and to avoid potentially larger adjustment costs later in life - lock in higher housing investments early on. Second, being luxury goods, bequest motives lead to higher DC take-up and riskier portfolios, but only to a modest mid-life financial savings boost. Third, precautionary savings that insure against wage risks have similar plan effects to bequests, although they do not translate in any wealth dynamic. Finally, removing costless redraws on mortgages leads to higher financial savings, again displacing pension balances considerably more than housing wealth.

Keywords: lifetime savings, portfolio choice, income risk, defaults, method of moments

cepar award
Chung Tran and Sebastian Wende
Abstract: A dividend imputation system is designed to address double taxation of capital income by allowing companies to pass profit taxes paid at the corporate level to shareholders in form of franking tax credits. In this paper, we study implications of divided imputation in a small open economy model with firm heterogeneity and an internationally integrated capital market. Our analysis indicates that dividend imputation has opposing effects on investment and capital accumulation. On one hand, it mitigates the adverse effects of double taxation and induces more saving and investment; on other hand, it raises the cost of investment for firms that are not fully imputed, which subsequently results in less investment. Moreover, different tax treatments for resident and foreign investors amplify frictions in reallocation of capital across firms, which prevents inflows of foreign capital from fully offsetting the shortage of domestic savings. International investors are not marginal investors in our small open economy setting. Overall, the net effect on capital accumulation is analytically ambiguous, depending on which force is dominant. Our quantitative results indicate that the positive force is dominant and removing dividend imputation leads to decreases in domestic savings, aggregate capital and output. Interestingly, the overall government transfers, while tax burdens are shifted towards high income households and foreign investors.
Keywords: Double taxation; Franking tax credit; Firm heterogeneity; Overlapping generations; Open economy; Dynamic general equilibrium; Welfare.

Shu Chen, Yafei Si, Katja Hanewald, Bingqin Li, Hazel Bateman, Xiaochen Dai, Chenkai Wu, and Shenglan Tang


Background: Measuring chronological age alone does not provide sufficient context for understanding the impact of ageing on societal resource planning. The burden of age-related diseases (ARDs) reflects age-related morbidity and mortality at the population level, which unveils the underlying health burden of ageing. The current study aims to measure the ARD burden and its disparities at subnational level of China, a rapidly ageing country with regional imbalances in economic and health development, and assess the impact of health resource allocation on this burden.

Methods: We used the longitudinal data collected from the Global Burden of Diseases, Injuries, and Risk Factors Study (GBD) 2016 and 2019 to measure the ARD burden in 31 provinces in mainland China, and from China Statistical and Health Statistical Yearbooks for health resources and socio-economic indicators from 2010 to 2016. We first identified the ARDs, defined as diseases with incidence rates that increased quadratically with age, and calculated the burden as the sum of the disability-adjusted life-years (DALYs) of the ARDs. We further compared the disparities in the ARD burden by province, sex, and disease group, based on the ARD burden of non-communicable diseases (NCDs). The ARD burden-adjusted age for each province was also calculated by assuming each province shared the same age-specific burden rate as the national average. Historical changes in burden between 1990 and 2016 were assessed after standardising the age structure. Total health expenditures per capita, total health professional density, licensed doctor density, and licensed nurse density were used as proxy indicators for health resources. Panel data analysis approach was used to assess the impact of these indicators on the burden of ARDs from 2010 to 2016 based on multivariate regression models.

Findings: NCDs accounted for over 90% of China’s total ARD burden in 2019. There were significant regional disparities: the rate of ARD burden was lowest in the south-eastern coast provinces, followed by the central provinces, and trailed by the north-eastern and western provinces. In 2016, the ARD burden-adjusted ages of Shanghai, Beijing, and Zhejiang were the youngest, at 30·86, 30·90 and 36·21 years, respectively. In contrast, the respective ARD burden- adjusted ages of Sichuan, Heilongjiang, and Chongqing were 66·39, 66·14, and 62·98. After standardising the age structure, Tibet, Qinghai, Guizhou, and Xinjiang had the highest burden of ARDs and oldest ARD burden-adjusted age. Males are disproportionately affected by ARDs, with burden rate 70% higher than females. China’s overall age-standardised ARD burden has been decreasing since 1990. The largest decline was observed in the eastern provinces, followed by the central and western provinces. However, the burden rate of neurological disorders has continued to increase, albeit only by a small amount. Panel regression results showed increasing either health expenditures or health workforce density could not significantly lower the ARD burden. However, the existing urban-rural gap in health workforce density was positively associated with a consistent increase in the ARD burden. A 100% increase in the urban-rural ratio in total health professional density, licensed doctor density, and licensed nurse density led to 2·55% (p=0·09; 95% CI: -0·42, 5·53), 2·29% (p=0·07; 95% CI: -0·24, 4·80), and 2.21% (p=0·08; 95% CI: -0·31, 4·73) increases in the ARD burden respectively, ceteris paribus.

Interpretation: Older demographic structure does not necessarily mean higher ageing-related health burden. Resource planning for an ageing society should consider the burden of ARDs. In China, concerted efforts should be made to reduce the ARDs burden and its disparities, especially among western provinces which face greatest health threat due to future ageing. Continued investment in health is useful. Particularly, health workforce supply should be deliberately biased toward rural areas in western provinces.


Mike Sherris CEPAR

Mengyi Xu, Jennifer Alonso Garcia, Michael Sherris, and Adam W. Shao

Abstract: We study the impact of housing wealth and individual preferences on demand for annuities and long-term care insurance (LTCI). We build a multi-state lifecycle model that includes longevity risk and health shocks. The preference is represented by a recursive utility function that separates risk aversion and elasticity of intertemporal substitution (EIS). When health shocks are considered, a higher level of risk aversion lowers the annuity demand, while a lower level of the EIS has the opposite effect. The impact diminishes with a weaker bequest motive, more liquid wealth, or access to LTCI, all of which increase the demand for annuities. The presence of home equity can enhance annuity demand, but the enhancement is marginal when the LTCI is available. The presence of home equity has a crowding-out effect on LTCI demand, and the effect is strengthened by a lack of bequest motives or a lower degree of risk aversion. The cash poor but asset rich may demand more LTCI coverage than their renter counterparts to preserve bequests. When both life annuities and the LTCI are available, we find that the product demand is robust to changes in risk aversion and the EIS, providing insights into product designs that bundle annuities and LTCI.

Keywords: Recursive utility, Housing, Life annuities, Long-term care insurance, Lifecycle model


George Kudrna

George Kudrna

Abstract: This paper investigates the economy-wide effects of mandating private (employment- related) pensions. It draws on the Australian experience with its Superannuation Guarantee legislation which mandates contributions to private retirement (superannuation) accounts. Our key objective is to quantify the long-run implications of alternative mandatory superannuation contribution rates for household economic decisions over the life cycle, household welfare, and macroeconomic and fiscal aggregates. To that end, we develop a stochastic, overlapping generations (OLG) model with labor choice and endogenous retirement, which distinguishes between (iordinary private (liquid) assets and (iisuperannuation (illiquid) assets. The benchmark model is calibrated to the Australian economy, fitted to Australian demographic, household survey and macroeconomic data, and accounting for a detailed representation of Australia’s government policy, including its mandatory superannuation system. The model is then applied to simulate the effects of alternative mandatory superannuation contribution rates, with a specific focus on the counterfactual of a legislated future rate of 12% of gross wages. Based on the model simulations, we show that in the long run, this increased mandate generates larger average household wealth, output and consumption per capita and (rational) household welfare across income distribution.

Keywords: Private Pension, Social Security, Income Taxation, Labor Supply, Endogenous Retirement, Stochastic General Equilibrium


Darapheak Tin and Chung Tran

Abstract: We study the nature of lifecycle earnings dynamics by documenting higher-order moments of earnings shocks over the lifecycle, using the Household, Income and Labour Dynamics in Australia (HILDA) Survey 2001-2020. Similar to other countries (e.g. see Guvenen et al. (2021) and De Nardi et al. (2021)), the distribution of earnings shocks in Australia displays negative skewness and excess kurtosis, deviating from the conventional linearity and normality assumptions. However, the sources of fluctuations and the role of family and government insurance are quite different. Wages account more for the dispersion of earnings shocks (second-order risk), while hours drive the negative skewness and excess kurtosis (third- and fourth-order risks, respectively). Wage changes are strongly associated with earnings changes, whereas hour changes are largely absent in upward movement and relatively small in downward movement of earnings changes. Family insurance via pooling income of family members and adjusting labor market activities of secondary earners, and government insurance embedded in the progressive tax and transfer system play distinct roles in reducing risks over age and by income group. Government insurance is more important in mitigating the dispersion of earnings shocks; meanwhile, family insurance is more dominant in mitigating the magnitude and likelihood of extreme and rare shocks. Family insurance interacts with government insurance; however, their joint forces fail to eliminate the non-Gaussian and non-linear features. Furthermore, comparison between groups reveals: (i) the risk equalizing effect of government insurance, and (ii) the persistent nature of risks for certain demographics such as female heads of household and non-parents. Hence, our findings shed new insights into the complexity of earnings dynamics and the importance of family and government insurance.

Keywords: Income dynamics; Earnings risk; Higher-order moments; Non-Gaussian shocks; Family insurance; Government insurance; Inequality.



Tsendsuren Batsuuri

Abstract: This paper investigates the effect of child dependency on the economy and external imbalances under an asymmetric demographic and productivity transition within a lifecycle model. It embeds dependent children within a two-country model with lifecycle features to examine child dependency’s effect on the economy and external imbalances. Specifically, the paper compares the effects of the same fertility and mortality shocks across models with and without children. Simulations show that child dependency changes both the steady-state and the transition dynamics under a demographic shock. The paper finds that while child dependency changes the direction of the impact of the fertility transition on external imbalances in the short run, it changes the magnitude of the effects in the long run. Furthermore, the model comparison shows that parameters must be chosen differently across models with and without child dependency to start from the same interest rate in the steady-state. Different calibration affects the magnitude of the transition dynamics of different models. These findings illustrate the importance of considering child dependency in studies that seek to explain the historical contribution of demographic changes to external imbalances, and suggest to approach studies that use models without child dependency for this purpose with caution.

Keywords: Global imbalances,Trade imbalances, Demographic transition, Life-cycle model


George Kudrna

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, Redistribution, Stochastic General Equilibrium.


Katja Hanewald, Hazel Bateman, Hanming Fang  and Tin Long Ho

Abstract: This paper explores new mechanisms to fund long-term care using housing wealth. Using data from an online experimental survey fielded to a sample of 1,200 Chinese homeowners aged 45-64, we assess the potential demand for new financial products that allow individuals to access their housing wealth to buy long-term care insurance. We find that access to housing wealth increases the stated demand for long-term care insurance. When they could only use savings, participants used on average 5% of their total (hypothetical) wealth to purchase long-term care insurance. When they could use savings and a reverse mortgage, participants used 15% of their total wealth to buy long-term care insurance. With savings and home reversion, they used 12%. Reverse mortgages do not require regular payments until the home is sold, while home reversion involves a partial sale and leaseback. Our results inform the design of new public or private sector programs that allow individuals to access their housing wealth while still living in their homes.

Keywords: Long-term care insurance, housing, reverse mortgages, home reversion, China

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