David Rodgers

Abstract: Older male labour force participation in Australia plummeted in the last three decades of the twentieth century. This paper investigates the extent to which this fall in participation was due to a large share of these older men having fought in World War II. Australian World War II veterans could access retirement and disability benefits that the rest of the population could not; they also had worse health than non-veterans. Sharp quasi-random variation in service across birth cohorts in Australia enables the effects of WWII service to be measured. WWII veterans had slightly lower labour force participation over prime working years (around 1 percentage point lower in their late 40s), and then much lower participation from the age of 60 onwards (around 17 percentage points lower in their early 60s). Sixty was the access age for the retirement pension given to veterans. Survey data indicate that the retirement expectations of veterans, when young, were clustered at this age. Various measurements of the health effects of WWII service indicate ill health is unlikely to explain the sharp fall in labour participation at sixty. Despite these findings, in aggregate, WWII service can explain only a modest share of the fall in older male labour participation in Australia in the late twentieth century, suggesting other factors must be responsible for most of the fall. These results contribute to the litera- ture on the labour supply effects of retirement and disability programs. In particular, they are consistent with earnings tests having large effects on participation and program parameters framing retirement decisions.

Roshen Fernando and Warwick J. McKibbin

Abstract: This paper updates the analysis of the global macroeconomic consequences of the COVID-19 pandemic in McKibbin and Fernando (2020c) with data as of late October 2020. It also extends the focus to Asian economies and explores four alternative policy interventions coordinated across all economies. The first three policies relate to fiscal policy: an increase in transfers to households of an additional 2% of GDP in 2020; an increase in government spending on goods and services in all economies of 2% of GDP in 2020; an increase in government infrastructure spending in all economies in 2020. The fourth policy is a public health intervention similar to the approach of Australia that successfully manages the virus (flattens the curve) through testing, contact tracing and isolating infected people, coupled with the rapid deployment of an effective vaccine by mid-2021.

The policy that is most supportive of a global economic recovery is the successfully implemented public health policy. Each of the fiscal policies assists in the economic recovery with public sector infrastructure having the most short-term stimulus and longer- term growth benefits.

Keywords: COVID-19, pandemics, infectious diseases, risk, macroeconomics, DSGE, CGE, G- Cubed

Bao Doan, Jonathan J. Reeves and Michael Sherris

Abstract: Insurers and pension funds face the challenges of historically low interest rates and volatility in equity markets, that have been accentuated due to the COVID-19 pandemic. Recent advances in equity portfolio management with a target volatility have been shown to deliver improved on average risk adjusted return, after transaction costs. This paper studies these targeted volatility portfolios in applications to equity, balanced and target-date funds with varying constraints on leverage. Conservative leverage constraints are particularly relevant to pension funds and insurance companies, with more aggressive leverage levels appropriate for alternative investments. We show substantial improvements in fund performance for differing leverage levels and that the return per unit of risk is not significantly impacted by the leverage constraint. Of most interest to insurers and pensions funds, we show that the highest return per unit of risk is in targeted volatility balanced portfolios with equity and bond allocations. Furthermore, we demonstrate the outperformance of targeted volatility portfolios during major stock market crashes, including the crash from the COVID-19 pandemic.

Keywords: COVID-19 pandemic, Equity investment, Portfolio management, Target-date funds, Volatility management JEL classification: C53, G17.

Andrew Hunt and Andrés M. Villegas

Abstract: Rather than looking at the mortality rates directly, a number of recent academic studies have looked at modeling rates of improvement in mortality when making mortality projections. Although relatively new in the academic literature, the use of mortality improvement rates has a long-standing tradition in actuarial practice when allowing for improvements in mortality from standard motality tables. However, mortality improvement rates are dificult to estimate robustly and models of them are subject to high levels of parameter uncertainty, since they are derived by dividing one uncertain quantity by another. Despite this, the studies of mortality improvement rates to date have not investigated parameter uncertainty due to the ad hoc methods used to fit the models to historical data. In this study, we adapt the Poisson model for the numbers of deaths at each age and year, proposed in Brouhns et al. [Insurance: Mathematics and Economics 3 (2002) 31] to model mortality improvement rates. This enables models of improvement rates to be fitted using standard maximum likelihood techniques and allows parameter uncetainty to be investigated using a standard bootstrapping approach. We illustrate the proposed modeling approach using data for the England and Wales population.

Keywords: Mortality Improvements; Mortality forecasting; Parameter uncertainty; Robustness

George Kudrna, Trang Le and John Piggott

Abstract: This report documents and studies demographic and household survey data in Indonesia. The two key objectives are to provide (i) data for the calibration of the economic model that will be developed in this project; and (ii) stylized facts for the Indonesian household sector and economic behaviour of Indonesian households over their life cycle that will be closely captured by the economic model.

The focus of this report is on the demographic change, labour force and older people (and their resources) in Indonesia, using the United Nations demographic data (UN 2019) and the Indonesian Family Life Survey (IFLS) (documented by Strauss et al., 2016). In this report, “older people” can be thought of as those 50 and above.

We show 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 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 majority of the labour force operates in informal employment not covered by a formal retirement income policy.

·      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).

These findings indicate a pressing need for major social policy development over the next two decades to mitigate negative social and economic implications of this demographic shift and to avert large-scale poverty among older cohorts.

Bei Lu, Mi Hong, Guanggang Feng, John Piggott and Guy Mayraz

Abstract: This paper uses a unique dataset of seriously ill patients in China across the retirement window to analyse the impact of a change in the co-pay ratio at retirement on inpatient expenditures. We find that a decrease in the co-pay ratio (that is, a lower proportion of cost borne by the user) leads to an increase in medical insurance spending. Surprisingly, out-of-pocket spending also increases.  Individuals' Medical Saving Account (MSA) balances are associated with higher inpatient expenditures. Results indicate that cost-sharing arrangements in China are very sensitive to changes in the co-pay ratio, an effect which appears to be magnified by significant MSA balances. The reduction in the co-pay at retirement leads to substantial increases in medical expenditures at that time. If policy reform is aimed at containing aggregate health expenditures, the retirement age change in the co-pay rate should be re-visited.

JEL Classification Numbers: I13, I14, I15

Keywords: health policy, co-pay; cost-sharing, medical savings accounts, medical expenditure

Qiqi Wang, Katja Hanewald and Xiaojun Wang

Abstract: This article proposes a new model that combines a neural network with a generalized linear model (GLM) to estimate and predict health transition intensities. The model allows for socioeconomic and lifestyle factors to impact the health transition processes and captures linear and nonlinear relationships. A key innovation is that the model features transfer learning between different transition rates. It autonomously finds the relationships between factors and the links between the transition processes. We apply the model to individual-level data from the Chinese Longitudinal Healthy Longevity Survey from 1998–2018. The results show that our model performs better in estimation and prediction than standalone GLM and neural network models. We thus provide new estimates of the life expectancies for a range of population subgroups. The model can be easily applied to other datasets, and our results confirm that machine learning techniques are promising tools to model insurance risks.

Keywords: Neural networks, Transfer learning, Multi-state health transitions

Hazel Bateman and Inka Eberhardt

Abstract: Voluntary annuitization from defined contribution pension plans is uncommon, and in many countries, retirees self-insure against retirement risks by holding on to and even building up assets. Lack of awareness of retirement income products and their design and financial impact is a key reason for low take-up of annuity products. Using an online discrete choice experiment we test how a Fact Sheet presenting standardised information on key product features - income, risk, access to capital and death benefits - affects stated choices from a menu of annuity, phased withdrawal and bundled retirement income products. Our setting is Australia where retirees can choose how to decumulate their retirement savings. When using the Fact Sheet, participants chose the lifetime annuity and bundled annuity products most often, which is contrary to the actual behaviour of Australian retirees who predominantly take phased withdrawal products. Of five Fact Sheet information items, choices were mostly driven by the Product Rating (a 1-7 rating of protection against a fall in income due to inflation, market and longevity risk) and Average Annual Income. The lifetime annuity and the bundled lifetime annuity/phased withdrawal products were more likely to be chosen where Fact Sheets used graphs and tables to present information, and where the Product Rating is more salient. However perceptions of risk and control were more important to product choices than actual product knowledge or understanding of the Fact Sheet information. Our findings suggest that Fact Sheet information items, especially the prescribed Product Rating and the associated information on inflation, longevity and market risk decisions drive both perceptions and choice of retirement income product and must be carefully designed.

Keywords: information disclosure, retirement income products, discrete choice experiment, product perceptions

Qian Lu, Katja Hanewald, Andres M. Villegas and Xiaojun Wang

Abstract: Accurate old-age mortality projections for subnational areas are important for assessing health outcomes and valuing pension liabilities. However, subnational mortality data often face small sample sizes at older ages. In some countries, the underreporting of deaths and population num- bers poses additional problems. We propose a new Bayesian framework for old-age mortality that allows for death underreporting by introducing a reporting probability, which is defined as the ratio of reported deaths to real deaths and uses informative priors derived from demographic death distribution methods. We show that the proposed modeling framework works well for province-level old-age mortality data (ages 60–99) in China over 1982–2010. Compared to a more conventional framework that assumes the reported data are accurate and uses reported mortality data directly, the proposed framework provides a better fit, with a lower deviance information criterion. The proposed framework generates a reasonable mortality curvature and coherent forecasts for subpopulations with sparse or incomplete mortality data.

Keywords: Old-age mortality, Subnational modeling, Bayesian framework, Death underreporting

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

Abstract: Reducing the eligibility age for pension benefits is considered by many as a policy that 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 absence 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. This paper employs 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. As expected, we find that on average workers reduced their earnings and working hours. However, this initial negative effect is partially offset by an increase in labor force participation rate later at age 64 and 65. An increase in labor force participation after age 65 could well give a positive effect on earnings among elderly from age 62. Our findings thus suggest that increased flexibility could potentially serve as a policy aimed at increasing the labor supply of older workers through promoting gradual exit from the labor force.

Keywords: Retirement; Pension; Flexibility

Warwick McKibbin and David Vines 

Abstract: The COVID-19 crisis has caused the greatest collapse in global economic activity since 1720. Some advanced countries have mounted a massive fiscal response, both to pay for disease-fighting action and to preserve the incomes of firms and workers until the economic recovery is under way. But there are many emerging market economies which have been prevented from doing what is needed by their high existing levels of public debt and—especially—by the external financial constraints which they face. We argue in the present paper that there is a need for international cooperation to allow such countries to undertake the kind of massive fiscal response that all countries now need, and that many advanced countries have been able to carry out. We show what such cooperation would involve. We use a global macroeconomic model to explore how extraordinarily beneficial such cooperation would be. Simulations of the model suggest that GDP in the countries in which extra fiscal support takes place would be around two and a half per cent higher in the first year, and that GDP in other countries in the world be more than one per cent higher. So far, such cooperation has been notably lacking, in striking contrast with what happened in the wake of the Global Financial Crisis in 2008. The necessary cooperation needs to be led by the Group of Twenty (G20), just as happened in 2008–9, since the G20 brings together the leaders of the world’s largest economies. This cooperation must also necessarily involve a promise of international financial support from the International Monetary Fund, otherwise international financial markets might take fright at the large budget deficits and current account deficits which will emerge, creating fiscal crises and currency crises and so causing such expansionary policies which we advocate to be brought to an end.

Keywords: COVID-19, risk, macroeconomics, DSGE, CGE, G-Cubed (G20)

Hans Fehr, Maurice Hofmann and George Kudrna 

Abstract: Although Germans and Australians have very similar incomes per capita, Australians hold significantly more wealth than Germans. In addition, they typically own their place of residence while in Germany a majority of households are renters. The question is to what extent these differences in wealth levels and patterns are induced by national tax and transfer policies. In order to shed light on this issue, we apply an overlapping generations model with tenure choice where households face labour income and lifespan uncertainty. The model is calibrated to Germany featuring unfunded pension benefits based on individual earnings points accumulated during the working phase and a dual income tax system. Then the Australian tax and pension structures are implemented sequentially in order to distinguish the impact of higher capital taxation as well as means-tested and funded pensions. Our simulation results indicate that the Australian tax and pension design has a dramatic impact on asset levels and structures, explaining more than two thirds of the observed differentials in asset levels and homeownership rates. While capital taxation and means-testing shift the asset structures towards residential properties, the superannuation system increases the overall wealth level.

Keywords: OLG model, stochastic general equilibrium, tenure choice, optimal pension design

Warwick McKibbin and Roshen Fernando

Abstract: The COVID-19 global pandemic has caused significant global economic and social disruption. In McKibbin and Fernando (2020), we used data from historical pandemics to explore seven plausible scenarios of the economic consequences if COVID-19 were to become a global pandemic. In this paper, we use currently observed epidemiological outcomes across countries and recent data on sectoral shutdowns and economic shocks to estimate the likely impact of COVID-19 pandemic on the global economy in coming years under six new scenarios. The first scenario explores the outcomes if the current course of COVID-19 is successfully controlled, and there is only a mild recurrence in 2021. We then explore scenarios where the opening of economies results in recurrent outbreaks of various magnitudes and countries respond with and without economic shutdowns. We also explore the impact if no vaccine becomes available and the world must adapt to living with COVID-19 in coming decades. The final scenario is the case where a given country is in the most optimistic scenario (scenario 1), but the rest of the world is in the most pessimistic scenario. The scenarios in this paper demonstrate that even a contained outbreak (which is optimistic), will significantly impact the global economy in the coming years. The economic consequences of the COVID-19 pandemic under plausible scenarios are substantial and the ongoing economic adjustment is far from over.

Keywords: Pandemics, infectious diseases, risk, macroeconomics, DSGE, CGE, G-Cubed

Peyman Firouzi-Naeim and Golnoush Rahimzadeh

Abstract: Labor unions are among the largest institutions in the United States, and their role in regulating employee–employer relations is hard to ignore. Costly efforts to control the spread of COVID-19 (i.e., decreasing economic activity and increasing workplace safety measures), combined with the monopoly and collective voice faces of unions, emphasize the role unions can play in shaping the response of the workforce in coping with COVID-19. We analyze the effect of union size by utilizing state-level data in the United States and by employing a nonlinear probability model and general method of moments estimation. The results suggest new evidence of positive externalities for union employees compared with nonunion employees. We find that a 10% increase in unionization in the United States would lead to around 5% decrease in total cases of COVID-19 100 days after the onset of the virus, controlling for hours of work and differences in union members’ characteristics.

Keywords: COVID-19; labor unions; unionization; work environment

Jennifer Alonso-García, Michael Sherris, Samuel Thirurajah and Jonathan Ziveyi

Abstract: This paper considers variable annuity contracts embedded with guaranteed minimum accumulation benefit (GMAB) riders when policyholder's proceeds are taxed. These contracts promise the return of the premium paid by the policyholder, or a higher stepped up value, at the end of the investment period. A partial differential valuation framework, which exploits the numerical method of lines, is used to determine fair fees that render the policyholder and insurer profits neutral. Two taxation regimes are considered; one where capital gains are allowed to offset losses and a second where gains do not offset losses, reflecting  stylized institutional arrangements in Australia and the US respectively. Most insurance providers highlight the tax-deferred feature of a variable annuity. We show that the regime under which the insurance provider is taxed significantly impacts  supply and demand prices. If losses are allowed to offset gains then this enhances the market, narrowing the gap between fees, and even producing higher demand than supply fees. On the other hand, when losses are not allowed  to offset gains, then the demand-supply gap increases. When charging the demand price, we show that insurance companies would be profitable on average. Low (high) Sharpe ratios are not as profitable as policyholders are more likely to stay long (surrender).

Keywords: taxation; retirement income;  policyholder behavior;  pricing;  method of lines;  surrender;  variable annuity

Monisankar Bishnu, Shresth Garg, Tishara Garg and Tridip Ray

Abstract:In presence of imperfections in education loan market, the standard policy response of intervening solely on education front, funded through taxes and transfers, necessarily hurts the initial working population. The literature suggests compensating them via pay-as-you-go pensions as a possible solution. But for various reasons sustainability of PAYG pensions is under serious doubt. We carry out the optimal policy exercise of a utilitarian government in a dynamically ecient economy with pension and education support obeying the Pareto criterion. We find that expansion of one instrument along with the other emerges as the optimal response, however, once the complete market level of education is achieved, the optimal policy suggests phasing pensions out. Eventually, government leads the economy to an equilibrium with zero pension and the Golden Rule level of education. This is achieved by exploiting only market opportunities without relying on other factors including human capital externalities, general equilibrium effects or socio-political factors.

Keywords: Public education; PAYG pension; intergenerational transfers; welfare state

Joydeep Bhattacharya, Monisankar Bishnu and Min Wang

Abstract: This paper studies the welfare of time-inconsistent, partially sophisticated agents living un- der two different regimes, one with complete, unfettered credit markets (CM) and the other with endogenous borrowing constraints (EBC) where the borrowing limits are set to make agents indifferent between defaulting and paying back their unsecured loans. The CM regime cannot deliver the first best because partially sophisticated agents would undo plans laid out by previous selves and borrow too much. Somewhat counterintuitively, in some cases, the EBC regime may deliver higher welfare than the CM regime. These results speak to the aca- demic debate surrounding the creation and functioning of the CFPB (Consumer Financial Protection Bureau) in the U.S. and its implementation of the ability-to-repay rule on lenders after the 2007-8 crisis. Such institutions generate commitment publicly and may help time- inconsistent agents economize on the costs of private commitment provision.

Keywords: endogenous borrowing constraints, overborrowing, financial protection

Olivia S. Mitchell

Abstract: In the wake of the global pandemic known as COVID-19, retirees, along with those hoping to retire someday, have been shocked into a new awareness of the need for better risk management tools to handle longevity and aging. This paper offers an assessment of the status quo prior to the spread of the coronavirus, evaluates how retirement systems are faring in the wake of the shock. Next we examine insurance and financial market products that may render retirement systems more resilient for the world’s aging population. Finally, potential roles for policymakers are evaluated.

Keywords: COVID-19, retirement, financial market, aging population

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp 

Abstract: We study stated preferences for long-term care insurance that pays income instead of reimbursing formal care costs. Our results show that long-term care income insurance is likely to provide two important benefits to aging societies. First, it can facilitate flexible, informal, long-term care - seniors who plan to rely on family members for extensive care find income insurance particularly attractive. Second, it can enhance risk-pooling - if long-term care income insurance were available, many seniors would release funds set aside to self-insure long-term care risk and purchase additional longevity insurance. Our results rule out adverse selection into the long-term care income insurance product on objective risk factors but show both adverse and advantageous selection effects on private information. We conclude that a flexible insurance product that supports informal care has both demand- and supply-side advantages over typical expense-reimbursement cover.

Keywords: Long-term care insurance; aged care; informal care; retirement incomes; annuity demand, online experiment.

Click here to download the online appendix. 

James Mahmud Rice, Jeromey B. Temple and Peter F. McDonald

Abstract: Inequality between generations is a central feature of human societies. Moreover, many institutions have developed within human societies that mould and shape intergenerational inequality, including the state. Nevertheless, intergenerational inequality remains ill-defined as a concept and is rarely directly measured empirically. This paper examines intergenerational inequality – in particular, intergenerational inequality in income. In order to provide greater definition to the concept of intergenerational inequality, the paper introduces a new measure of intergenerational inequality: the IGI index. With this new index added to its methodological toolkit, the paper examines the empirical evidence on intergenerational inequality in income, as well as how the state works to alter intergenerational inequality through the redistributive effect of public transfers. The empirical evidence examined is drawn from the recently developed Australian National Transfer Accounts, which include data on the incomes and public transfers paid and received by different ages and generations in Australia during the 28-year time period between 1981–82 and 2009–10. The analyses presented suggest that there are substantial inequalities in the incomes received by different generations, with earlier generations generally receiving less income in real terms over their lifetimes than later generations. As the state has operated through time – receiving public transfers from some individuals and paying public transfers to others – it has worked to increase intergenerational inequality. This implies that the state has worked to decrease the incomes of earlier generations relative to those of later generations. In this way, the state could be described as exhibiting a bias in favour of later generations.

Keywords: Australia, government, income, inequality, intergenerational transfers, life cycle

Bruce Chapman and John Piggott

Abstract: The JobKeeper scheme aims to provide financial assistance to those in danger of being laid off, and to assist business to stay afloat until more familiar economic and employment activity resumes. In financial terms, it is very significant: relative to population and GDP, it is the largest wage-subsidy scheme in the world. A critical issue, not so far addressed in public discussion, is how the initiative might be phased out when the economy recovers, in a way that facilitates the survival of business while at the same time minimising further fiscal outlays, and avoiding continuing to subsidise businesses that may not in normal times be viable.

This short paper addresses the question of how the JobKeeper program might be wound down at the end of its full subsidy term.

Keywords: Jobkeeper, debt model, COVID-19, policy structure, financial assistance

Weifeng Liu 

Abstract: Per capita carbon emissions are an important concept in international negotiations of climate policies and also in future projections of aggregate carbon emissions. This paper argues that the convergence studies on per capita carbon emissions in the literature are theoretically biased because demographic structure is not considered. The paper therefore links demographic change to carbon convergence analysis and examines historical convergence of per capita carbon emissions for a global sample of countries over the period of 1960-2014. The results show that although demographic structure does not change the existence of carbon convergence, the growth of worker shares is significant in most estimations in this paper, and it also affects the estimates of the convergence speed. The time period of empirical analysis also matters for the convergence results. The paper further extends the IPAT identity by introducing demographic structure as well as economic and energy structure, and argues that the convergence of per capita carbon emissions depends on the convergence of each component, and each component may converge within different time horizons. The paper proposes that emissions rights should be allocated across countries based on a mix of long-term, medium-term and short-term rules.

Keywords: Demographic change, carbon emissions, climate change, convergence analysis, IPAT

Weifeng Liu and Warwick McKibbin

Abstract: The world has been experiencing dramatic demographic change since the 1950s, with almost all countries facing ageing challenges this coming century. However, the timing and speed of this demographic transition are significantly asymmetric across countries. This paper examines the impacts of global demographic change on macroeconomic conditions, international trade, and capital flows in major economies in a global multi-region and multi-sector general equilibrium model. We separately simulate demographic shocks in six regions of the world economy to understand how each shock individually affects the world economy and then combine these shocks to obtain the consequences of global demographic change. The paper finds that future demographic change will have significant impacts on each region’s GDP, which will change the landscape of the world economy. However, the spillover effects on GDP across countries are relatively small. In young economies such as emerging Asia and Africa, while economic growth will significantly benefit from demographic dividends, demographic change does not improve per capita GDP. In ageing economies such as Japan and Europe, population ageing will decrease the real interest rate. However, this impact will be offset by rising interest rates in young economies. Due to the differential real interest rates, capital will flow from more ageing to less ageing economies. These capital flows can be substantial and beneficial for all economies.

Keywords: Global demographic change, consumption, investment, international capital flows, international trade, current account balances, DSGE, CGE, heterogeneous agents, G-Cubed

Weifeng Liu and Phitawat Poonpolkul

Abstract: This paper provides a framework to endogenize rates of return for risk-free bonds and risky capital in an overlapping generation model. The rate of return on capital is endogenized by introducing idiosyncratic production shocks to avoid computation challenges associated with aggregate production shocks in the literature. The framework enables the interaction between financial markets and macroeconomic conditions in a production economy. Based on this framework, the paper first examines life-cycle portfolio choice without demographic change, and illustrates that several factors such as borrowing costs, labor income and production risk play important roles in life-cycle portfolios. The paper then investigates the impacts of population aging on macroeconomic conditions, life-cycle behaviors and financial market structures. The results show that population aging leads to higher capital-labor ratios, and reduces the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in financial markets. The impacts on life-cycle variables are quite different in the fertility and mortality cases particularly at the late stage of life.

Keywords: Demographic change, portfolio choice, financial market structure, risk premium, idiosyncratic production shock, overlapping generation model.

Wei Zheng, Youji Lyu, Ruo Jia and Katja Hanewald

Abstract: We study how pension participation and expected pension benefits affect the consumption of working-age adults based on a nationally representative dataset from the China Health and Retirement Longitudinal Study during the period 2011–2015. We find that working-age adults covered by the Employees’ Basic Pension, a compulsory public pension scheme for employees in the formal sector, have a consumption rate (total consumption to permanent income) that is 29.9 percentage points higher than those who do not participate in any public pension scheme. However, the Residents’ Basic Pension, a low-benefit voluntary public pension scheme for other residents, only promotes the consumption of working-age adults with a low income. Focusing on pension participants, we find that if working-age adults’ expected replacement rate (expected pension benefits at retirement to permanent income) increases by one percentage point, their consumption rate will increase by three percentage points. Working-age adults who are older, poorer, or live in a rural area increase their consumption more in response to the expected replacement rate. Nondurable consumption is more responsive to the expected replacement rate than durable consumption. Overall, our findings suggest that pension expectations are critical to the consumption decisions of working-age adults and can, therefore, affect total consumption.

Keywords: Pension, Replacement rate, Consumption, Retirement, Aging

George Kudrna, Chung Tran and Alan Woodland

A means-tested pension system has a distinct feature that tailors the level of pension benefits according to individual status. In the context of population aging with widening gaps in life expectancies, this feature generates an automatic adjustment mechanism that mitigates the pressing fiscal cost of an old-age public pension program (fiscal stabilization device) and redistributes pension benefits to those in need with shorter life expectancies.

Keywords: Population Ageing, Sustainability, Social Security, Means Testing, Redistribution, Automatic Stabilizer, Overlapping Generations, Dynamic General Equilibrium.

Phitawat Poonpolkul 

Abstract: People in different age groups have shown to differ in their degrees of risk aversion. This study investigates the macroeconomic implications of population aging when households are assumed to be increasingly risk-averse in future utility when they age. The model incorporates risk-sensitive preferences used by Hansen & Sargent (1995), which are the only recursive preferences that can separate risk aversion and intertemporal elasticity of substitution while being monotonic, into a 16-generation discrete-time OLG model with undiversifiable income risk. Compared to a time-additive counterpart, risk-sensitive preferences capture precautionary saving motives that exacerbate adverse response of aggregate macroeconomic variables under a population aging scenario through demographic re-weighting and life-cycle redistrivution channels. Varying risk aversion also allows households to internalize future uncertanties when evaluating their welfare impacts of demographic change, resulting in non-monochomatic welfare dynamics with higher welfare loss under a high-risk environment and vice versa. Risk-sensitive preferences with age-dependent risk aversion can play an important role in optimal policy settings by introducing uncertainties into the welfare impact analysis, while taking into account more realistic risk-taking behaviour of different age cohorts. 

Keywords: Demographic change, risk-sensitive preferences, overlapping-generation model, precautionary savings, risk aversion 

Qian Lu, Katja Hanewald and Xiaojun Wang

Abstract: China has experienced large improvements in mortality rates, but there remain substantial variations at the provincial level. This paper develops new models to project mortality at both the national and provincial levels in China. We propose two models in a Bayesian hierarchical framework based on principal components and a random walk process, and compile a new comprehensive database containing mortality data for 31 provinces over the period 1982–2010. The baseline two-level model with a national–province hierarchy allows for information pooling across provinces, common national factors and consistency conditions. The extended three-level model with a national–region–province hierarchy pools information in the region and also allows for common factors within the region. Both models provide good estimates and reasonable forecasts for China and its provinces. The baseline two-level model provides good fit and reasonable forecasts with equal width intervals for the provinces. The three-level model has a better fit with a lower deviance information criterion and provides forecast intervals reflecting regional uncertainty. The sensitivity analyses show that the forecasts are robust when changing the trend assumptions and regional groups.

Keywords: Mortality modelling, Bayesian framework, Hierarchical models, Coherent mortality projection, China

Dandan Yu and Denzil G. Fiebig

Abstract: The present study examines the reciprocal relationship between Internet use and cognitive function over time among middle-aged and older populations in China. We use data from the first three waves of the China Health and Retirement Longitudinal Study (CHARLS), where participants provided information on Internet use and cognitive function measures at the baseline in 2011 as well as two follow-ups in 2013 and 2015. Cross-lagged panel models were fitted to test the reciprocal association over these four years. Middle-aged and older individuals with higher cognitive function were more likely to be regular Internet users. After controlling for the effects of cognition two years prior, Internet users tended to score higher on cognitive tests than non-users. These findings survived across alternative subsamples and model specifications. Our results suggest that cognitive decline in later life may explain the lower technology adoption rate among older individuals. Meanwhile, Internet use could serve as a protective factor against cognitive decline in mid-life and older adulthood. 

Keywords: Internet use; Cognitive Function; Cross-Lagged Panel; China

Sisi Yang and Katja Hanewald

Abstract: The Chinese government has launched a series of health reforms to establish universal health insurance coverage, particularly for vulnerable groups, including older adults. However, the current public health insurance system is highly fragmented, consisting of different programs with different levels of premiums and benefits. We analyse whether the universal health insurance system increases the life satisfaction of middle-aged and older Chinese people and to what extent the type of health insurance affects the life satisfaction of this group. Our study is based on data from the China Health and Retirement Longitudinal Study, a nationally representative longitudinal survey of Chinese aged 45 and above, in 2011, 2013, and 2015. We find that the life satisfaction of middle-aged and older adults does not depend on having any health insurance coverage but varies with the type of health insurance coverage, controlling for potential confounding variables such as health status, occupation, hukou status, education, and other demographic variables. Individuals covered by the most generous program, the Government Medical Insurance, reported a higher life satisfaction. In comparison, individuals covered by the Urban Employee Medical Insurance, the Urban Resident Medical Insurance, and the New Rural Cooperative Scheme reported a lower life satisfaction by 0.155, 0.106, and 0.112 standard deviations, respectively. Our results suggest that establishing a more equitable health insurance system should be the next step in health reforms in China.

Keywords: Life satisfaction, Health insurance, Older adults, Health, China

Kevin Krahe, Michael Sherris, Andrés M. Villegas and Jonathan Ziveyi

Abstract: We develop and assess a value-based longevity index that closely tracks the value of longevity-linked liabilities with the potential to signicantly lower the costs and improve the efficiency of index-based longevity hedging techniques relative to standard mortality rate indices, currently referenced in financial markets. As the US is one of the largest countries in terms of market potential for such an index, we use US economic and population data to demonstrate that hedging with our proposed index generates a material reduction in basis risk relative to indices based purely on mortality rates. This is aided by the use of a multi-population continuous-time affine mortality model and a dynamic Nelson-Siegel model for interest rates. We allow both interest rate and ination risks to impact the value of longevity-linked liabilities in our longevity risk hedging. We also bridge the gap between continuous-time and discrete-time multi-population mortality models and show that the continuous-time models are as effective in hedging liabilities as the often used discrete-time models, while being more familiar to nancial market participants.

Keywords: Value-based longevity index, longevity risk, interest rate risk, inflation risk, longevity basis risk, longevity hedging

Zhiping Huang, Michael Sherris, Andrés M Villegas and Jonathan Ziveyi

Abstract: This paper assesses and compares multi-factor continuous time ane mortality models applied to age-cohort mortality curves that are well suited for theoretical and practical application in nance and insurance. Models based on Gaussian distributed mortality rates, as well as the Cox-Ingersoll-Ross (CIR) process allowing for Gamma distributed mortality rates, are compared, also quantifying the probability of negative rates in the Gaussian models. In particular, we introduce the Gaussian Arbitrage-Free Nelson-Siegel (AFNS) mortality model incorporating level, slope and curvature factors. The models have appealing features including ecient estimation and computation. We estimate models using age-cohort data to capture cohort eects more eectively and in order to explain the variability in cohort mortality curves in the continuous time framework. The models allow for Poisson variation in the model estimation using the Kalman lter. The ane mortality models facilitate the derivation of closed-form survivor curves allowing for ecient valuation of mortality-linked claims. The models can also incorporate factor dependence allowing for age-dependence in the mortality curves. Importantly we show that the Gaussian independent factor AFNS model performs very well in explaining and forecasting cohort mortality.

Keywords: mortality models, continuous time, cohort curve, affine rates, Kalman filter

Shuanglan Li, Héloïse Labit Hardy, Michael Sherris, Andrés M. Villegas

Abstract: Pooled annuity products, where the participants share systematic and idiosyncratic mortality risks as well as investment returns and risk, provide an attractive and effective alternative to traditional guaranteed life annuity products. While longevity risk sharing in pooled annuities has received recent attention, incorporating investment risk beyond fixed interest returns is relatively unexplored. Incorporating equity investments has the potential to increase expected annuity payments at the expense of higher variability. We propose and assess a strategy for incorporating equity investments along with managed-volatility for pooled annuity funds. We show how the managed volatility strategy improves investment performance, while reducing pooled annuity income volatility and downside risk, as well as an investment strategy that reduces exposure to investment risk over time. We quantify the impact of pool size when equity investments are included, showing how these products are viable with relatively small pool sizes.

Keywords: pooled annuity, equity investment, managed volatility, longevity risk 

Michael Sherris and Pengyu Wei

Abstract: This paper proposes a multi-state model of both functional disability and health status in the presence of systematic trend and uncertainty. We classify each individual observation along two dimensions: health status (other than disability) and disability and use the multi-state latent factor intensity (MLFI) model to estimate the transitions rates. The model is then used to calculate (healthy) life expectancy and price a variety of insurance products. We illustrate the importance of various factors and quantify the potential losses from model misspecification. Our results suggest that insurers should pay great attention to health status, trend, and systematic uncertainty in disability/mortality modeling and insurance pricing. We also find that integrating LTC insurance with life annuity can help to reduce the systematic uncertainties.

Keywords: functional disability; health status; trend; systematic uncertainty

Rafal Chomik and John Piggott

Demographic and technological changes are two megatrends set to transform labour markets around the world. These shifts are already under way and are expected to accelerate, particularly in East and South East Asia, which is home to the world’s oldest and fastest ageing societies and a region with an enviable pace of economic development.

The literature on the nature and impacts of each trend is vast, but the study of the interactions between them is often incidental and rarely in the Asian setting. Yet demography, technology, structural change and economic development are all related. Rapid economic development seen in many parts of Asia is the product of beneficial demographic trends as well as technological catch-up to the production productivity frontier. And technological advancements in medicine have precipitated the increasing levels of life expectancy seen around the world. While more years in good health raise prospects of working for longer, technological and structural change risk leaving older cohorts behind.

Keywords: Asia, labour market, population ageing, technology advances

Katja Hanewald, Ruo Jia and Zining Liu

Abstract: This paper studies income inequality in old age and its development over the life cycle. We develop a theoretical framework and a new empirical method to show that income is more unequally distributed in old age than in working age. We combine the regression-based inequality decomposition method and the three-step mediating effect test to analyze the transmission of income inequality from initial socioeconomic differences to income inequality in old age. Our study is based on a panel of over 4,000 old households from the China Health and Nutrition Survey
during 1991-2015. We find that the urban-rural gap and educational inequality are the primary causes of old-age income inequality. The effect of the urban-rural gap is partially mediated by educational inequality. Inequality accumulates with age and is reinforced in old age by the Chinese public pension system, which is fragmented by occupational sector.

Keywords: Inequality; Decomposition; Urban-rural gap; Pensions; China

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

Abstract: The implications of current balance information for retirement provision are considerably difficult to grasp or anticipate. We study how balance and/or income projections motivate the voluntary savings intentions of pension plan participants over a sequence of ten choices. To this effect, we collect savings intentions from 1,615 respondents aged 25-57 years via an online experimental survey that compares four different formats for retirement account information. The formats are (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 retirement income. Regardless of information format, merely inviting plan participants to top up their retirement account prompts substantial increases in savings, especially among older respondents. At the first choice round, the income projection triggers marginally more voluntary saving intentions than the lump sum projection alone. However at both the first choice and over sequential choices, the combination of balance and income projections is what matters most. Furthermore, even though older respondents save at a higher level across all treatments, younger respondents are more sensitive to income balance projections than the older survey respondents.

Joanne Kaa Earl, Mydair Hunter and Hazel Bateman

Abstract:Objectives: Downsizing is the term used to describe the move to a smaller dwelling and the decumulation of possessions, often taking place at older age. Two psychological theories: Selection, Optimisation and Compensation (SOC) and Time Perspective (TP); were applied to explain post-downsizing perspectives.

Method: Participants were community dwelling older adults (N = 352) aged 55 years and over who downsized during the preceding five years. An online survey was used to collect data about factors determining decision-making as well as psychological aspects of the downsizing experience including regret, retirement adjustment, satisfaction with life, stress, and distress.

Results: In general only a small proportion (17.6%) of participants indicated regret about moving. Consistent with the SOC theory younger people were more highly represented in the group expressing regret. Lower levels of satisfaction with the move were associated with a Past Negative Time Perspective, lower levels of life satisfaction and higher levels of stress and psychological distress. The top five factors for downsizing included: house was too big; to be closer to family; lifestyle preferences; yard too hard to manage; and alleviation of financial strain.

Conclusion: Whilst most people do not express regret with the move, it can be a stressful process. Some factors associated with lower levels of satisfaction such as Past Negative Time Perspective may be more difficult to change than others. Understanding the post-downsizing experience of others can help better prepare people before they move to anticipate responses and possibly contribute to better retirement adjustment.

Keywords: Downsizing, Time Perspective, Regret, Older adults

Mengyi Xu, Michael Sherris and Adam W. Shao

The transition from defined benefit to defined contribution (DC) pension schemes has increased the interest in target annuitization funds that aim to fund a minimum level of retirement income. Prior literature has studied the optimal investment strategies for DC funds that provide minimum guarantees, but far less attention has been given to portfolio insurance strategies, especially for target annuitization funds. We evaluate the performance of option-based and constant proportion portfolio insurance strategies for a DC fund that targets a minimum level of inflation-protected annuity income at retirement. We show how the portfolio allocation to an equity fund varies depending on the member’s age upon joining the fund, displaying a downward trend through time for members joining the fund before ages in the mid-30s. We demonstrate how both portfolio insurance strategies provide strong protection against downside equity risk in financing a minimum level of retirement income. The option-based strategy often leads to higher accumulated savings at retirement and is also shown to provide a more robust level of protection when equity markets are more volatile and when contributions to the pension fund are lower.

Keywords: portfolio insurance strategies, defined contribution, pension risk management, target annuitization fund

Anca-Stefania Jijiie, Jennifer Alonso-García and Séverine Arnold (-Gaille) 

Abstract: Many OECD countries have addressed the issue of increased longevity by mainly increasing the retirement age. However, this kind of reforms may lead to substantial transfers from those with shorter lifespans to those that will live longer than the average, as they do not necessarily take into account the socio-economic differences in mortality. The contribution of our paper is therefore twofold. Firstly, we illustrate how both a Defined Benefit and a Notional Defined Contribution Pay-As-You-Go scheme can put the lower social economic classes at a disadvantage, when compared to the actuarially fair pensions. In contrast to that, higher classes experience a gain. This is due to the fact that mortality rates per socio-economic class are not considered by either scheme. Consequently, we propose a model that determines the parameters for each scheme and class which would render the pensions fairer even when no socio-economic mortality differences are considered.

Keywords: retirement age, pay-as-you-go, public pensions, adequacy, fairness, class-specific parameters

Yuanyuan Deng and Hugo Benítez-Silva

Abstract: Using survey and administrative data from the Medicare Current Beneficiary Survey, we analyze the effect of labor supply, health insurance coverage, and delays in Medicare enrollment on Medicare costs. We use our empirical findings to compute the average aggregate yearly savings linked to individuals working and insurance coverage that translates into Medicare being a secondary payer, at around $5.37 billion per year in the 1999-2010 period. We also quantify average aggregate yearly savings of another $10.17 billion per year, in the same time period, resulting from the delays in enrollment into the Medicare system.

Keywords: Medicare Costs, Labor Supply, Medicare Secondary Payer Effect, Delays in Medicare Enrollment

Sarah Kaakai, Héloïse Labit Hardy, Séverine Arnold (-Gaille) and Nicole El Karoui

A growing number of studies indicate a widening of socioeconomic inequalities in mortality over the past decades. It has therefore become crucially important to understand the impact of heterogeneity and its evolution on the future mortality of heterogeneous populations. In particular, recent developments in multi-population mortality have raised a number of questions, among which is the issue of evaluating cause-of-death reduction targets set by national and international institutions in the presence of heterogeneity. The aim of this paper is to show how the study of the population data and the population dynamics framework contribute to addressing these issues, by providing a new viewpoint on the evolution of aggregate mortality indicators in the presence of heterogeneity. Our findings rely on two unique datasets on the English population and cause-specific number of deaths by socioeconomic circumstances, over the period 1981-2015. The analysis of the data first highlights the complexity of recent demographic developments, characterized by significant composition changes in the population, with considerable variations according to the age class or cohort, along with a widening of socioeconomic inequalities. We then introduce a dynamic framework for studying the impact of composition changes on the mortality of the global population. In particular, we are interested in quantifying the impacts of cause-of-death mortality reduction in comparison with changes of composition in a heterogeneous population. We show how a cause of death reduction could be compensated for in the presence of heterogeneity, which could lead to misinterpretations when assessing public policies impacts and/or for the forecasting of future trends.

Keywords: Population Dynamics, Deprivation, Heterogeneity, Cause-of-Death Mortality, Cohort Effect

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

This paper studies the effect on the labor supply decisions of senior workers of reducing the eligibility age of retirement combined with actuarial neutrality, based on one particular group of private sector workers. In the 2011 Norwegian pension reform they had a fixed pension access age of 67 replaced by a flexible access age from 62 with constant present value of benefits. In a non-linear difference-in-difference approach, exploiting the absence of earnings tests, we find no effect on labor force participation. Aggregate earnings fell, mostly driven by high earners reducing their earnings. The increased liquidity seems to facilitate phased retirement.

Keywords: Retirement; Pension; Flexibility

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp

We examine stated preferences for long-term care insurance that pays extra income instead of reimbursing care costs. Our results show that long-term care income insurance is likely to provide two important benefits to aging societies. First, it can facilitate flexible, informal, long-term care – seniors who plan to rely on family members for extensive care find income insurance particularly attractive. Second, it can enhance risk-pooling – if long-term care income insurance were available, many seniors would release funds set aside to self-insure against the risk of needing long-term care to purchase additional longevity insurance. Our results also rule out adverse selection into the long-term care income insurance product on objective risk factors. However, participants who subjectively rate themselves at higher risk of needing long-term care will select into insurance, indicating either adverse selection that is based on private information or subjective mismeasurement of future care costs.

Keywords: Long-term care insurance; aged care; informal care; retirement incomes; annuity experiment

Click here to download the online appendix.

George Kudrna and John Piggott

Abstract: This paper argues for retirement policy formulation and reforms to re-orient towards greater reliance on non-contributory means tested pensions as a primary retirement income delivery structure. These pensions will become more relevant as the number of contingent workers increases in the global north; and have the potential to reach informal workers in emerging economies who have exhausted their earnings capacity. We show that this kind of pension structure can be efficient, equitable and sustainable. If properly designed, it is especially well-suited to an ageing demographic. We briefly discuss the Australian model as an example of how well this can work.

Keywords: Pensions, retirement policy, labour market, population ageing

Katja Hanewald, Hazel Bateman, Hanming Fang and Shang Wu

George Kudrna and Alan Woodland 

Keywords: Pension, concessional tax, superannuation, tax changes, Australia

Hazel Bateman

Keywords: Pension, savings, income tax, retirement savings, Australia

Rafal Chomik and John Piggott 

Tax expenditures occur when the tax treatment favors a certain activity. The forgone tax is thought to be analogous to spending and can thus attract commensurate attention. This concept was first articulated some 50 years ago by Stanley Surrey of the US Treasury Department (Surrey 1969), but exemptions to tax are as old as tax itself.1,2

Keywords: Tax expenditures, budgets, pensions, retirement, tax costs

Hazel Bateman, Ralph Stevens, Jennifer Alonso Garcia and Eduard Ponds

Using an online experimental survey we investigate perception (in terms of understanding, riskiness and control) and valuation (elicited using iterative multiple price lists) of lifetime annuities relative to flexible drawdown products. We find that for those participants who are engaged with the experimental tasks, information provision and an online calculator can substantially reduce or eliminate behavioral drivers of the complex task of valuation of annuities. Providing balanced information and multiple opportunities to learn about the key features of the products, including impact of potential outcomes, narrows the gap between the willingness to pay and willingness to accept, and, offsets the effects of low financial capability, information framing and real-world institutional settings.

Juergen Jung and Chung Tran

We study the optimal progressivity of a personal income tax system in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our results, based on a dynamic general equilibrium model calibrated to the US economy, indicate that accounting for health risk substantially aects the social insur- ance/redistribution role of a progressive income tax system. When health risk is present but access to health insurance is limited, the optimal income tax system is more progressive in order to provide more social insurance/redistribution to unhealthy low income individuals. However, when more inclusive health insurance systems are considered, such as Medicare for all, then the optimal level of tax progressivity decreases signicantly. Importantly, when health expenditure risk is eliminated, the optimal income tax progressivity becomes more similar to the optimal progressivity level in previous studies using models with income risk only.

Yi Chen and Hanming Fang

Family planning plays a central role in contemporary population policies. However, little is known about its long-term consequences in old age because of the identification challenge. In this study, we examine how family planning affects the quality of life of the Chinese elderly. The direction of the effect is theoretically unclear. On the one hand, having fewer children allows parents to reallocate more resources to themselves, improving their well-being. On the other hand, having fewer children also leads to less care and companionship from children in old age. To empirically probe the effect of family planning, we identify the causal impact by exploiting the provincial heterogeneity in implementing the “Later, Longer, Fewer” policies in the early 1970s. We find that the policies greatly reduced the number of children born to each couple by 0.85. Parents also receive less support from children in terms of living arrangements, inter vivos transfers, and emotional support. Finally, we find that family planning has drastically different effects on elderly parent's physical and mental well-being. Whereas parents who are more exposed to the family planning policies consume more and enjoy slightly better physical health status, they report more severe depression symptoms. Our study calls for greater attention to the mental health status of the Chinese elderly.

Hanming Fang and Jin Feng

A detailed overview of the current state of the Chinese pension system, as well as its development, its problems and some ideas for future reforms.

Jennifer Alonso Garcia, Hazel Bateman, Johan Bonekamp, Arthur van Soest and Ralph Stevens

We investigate the importance of alternative motives for choosing a saving and consumption trajectory after retirement. Using an online experimental survey, we elicit the impact on advised spending patterns and underlying saving motives of alternative retirement drawdown designs, comprising different combinations of annuity income and wealth, and of major life events such as becoming frail or losing a spouse. We find that individuals' saving motives are revised in anticipation of major life events. They are less responsive to variation in `experimental' retirement drawdown arrangements, remaining aligned to prevailing institutional arrangements. Our results suggest that the main explanations for the widespread behaviour of retirees to hold onto their wealth are the desire to hold precautionary savings for health and other unforeseen expenses, facilitating an intra-household bequest, and making it possible to enjoy life now as well as later.

George Kudrna, Chung Tran and Alan Woodland

A means-tested pension system has a distinct feature that tailors the level of pension benefits according to individual economic status. In the context of population aging with widening gaps in life expectancies, this feature generates an automatic adjustment mechanism that (i) mitigates the pressing fiscal cost of an old-age public pension program (fiscal stabilization device) and (ii) redistributes pension benefits to those in need with shorter life expectancies (redistributive device). To evaluate this automatic adjustment mechanism, we employ an overlapping generations model with population aging. Our results indicate that this novel mechanism plays an important role in containing the adverse effects of population aging on the fiscal costs and progressivity of a pension system. More pronounced aging scenarios further strengthen the role of this mechanism. A well-designed means test rule can create a sufficiently strong automatic mechanism to keep public pensions sustainable and equitable. Importantly, it is feasible to devise a pension reform that better adapts a means-tested pension system to more pronounced demographic trends, but does not lower the welfare of current and future individuals of all ages and income.

Keywords: Population Aging, Sustainability, Social Security, Means Testing, Redistribution, Automatic Stabilizer, Overlapping Generations, Dynamic General Equilibrium.

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

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.

Key words: Long-term care, China, Mortality, Markov Chain Model

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. Retirement policy and provision, regardless of the approach adopted, are necessarily shaped by fund members’ labor market experience. In China, heterogeneity is dramatic across provinces and between urban and rural settings – in development stage, cost of living, formalization level, and other characteristics. Interestingly, mature age life expectancy is remarkably uniform among formal sector workers at the time of retirement. Somewhat greater heterogeneity arises when membership of the Rural and Urban Residents Pension Scheme (RURPS) is considered, but mature age life expectancy varies by only a couple of years. The implications of a stylized NDC structure covering all three of China’s major pension systems, calibrated to be actuarially fair to different contributing members, are examined. Each system has a different contribution rate and retirement age, consistent with different life expectancies. A complementary social pension is also proposed. The chapter concludes that an increased presence of the NDC paradigm could raise aggregate welfare, especially in the large and growing Urban Employee Pension Scheme (UEPS).

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.

Key Words: ADL, Assistance needs, Life expectancy, Residential care, Australia

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

Xiangling Liu

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%.

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.

In this paper, we provide a survey of scientific contributions on mortality heterogeneity, focusing on modeling both observable and unobservable heterogeneity. We start with an overview of methodological contributions to heterogeneity and frailty modeling, coming from both the demographical and the actuarial context. We then shift to contributions analyzing the impact of frailty, in its various interpretations, on the results (cash flows, profits, etc.) of life insurance and life annuity portfolios and related risk profiles.

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

Fedor Iskhakov and Michael Keane

We structurally estimate a life-cycle model of consumption, labor supply and retirement, using data from the Australian HILDA panel. We use the model to evaluate effects of Australia’s Age Pension system and income tax policy on labor supply, consumption and retirement. Our model accounts for human capital, savings, uninsurable wage risk and credit constraints. We account for “bunching" of hours by assuming a discrete set of hours levels, and we investigate labor supply on both the intensive and extensive margins. Our model allows us to quantify the effects of anticipated and unanticipated tax and pension policy changes at different points of the life-cycle. Our results imply that Australia’s Age Pension system as currently designed is poorly targeted. Our simulations suggest that a doubling of taper rates, combined with a 5.9% reduction of income tax rates, would be budget neutral and Pareto improving.

Michael Keane, Jonathan Ketcham, Nicolai Kuminoff and Timothy Neal

Abstract: We propose new methods to model choice behavior and conduct welfare analysis in complex environments where it is untenable to assume that choices fully reveal preferences. In particular, we investigate how Medicare beneficiaries choose prescription drug plans (PDPs) under the Medicare Part D program. Our approach is novel in that we estimate a multinomial logit model for PDP choice that allows for heterogeneity in both preferences and the behavioral choice process. We find the data can be well characterized by a mixture of three behavioral types: The “rational” type constructs expected out-of-pocket costs E(OOP) rationally, and, ceteris paribus, seeks to minimize premiums plus E(OOP) as theory suggests. The second type constructs expected out-of-pocket (OOP) costs rationally, but puts too much weight on premiums relative to E(OOP) in choosing plans. A third type, who we label “confused,” places weight on irrelevant financial aspects of drug plans, implying they fail to construct E(OOP) rationally. A consumer is more likely to be the “confused” type if they suffer from Alzheimer’s disease and/or depression. We use the model to quantify the monetary and welfare losses that arise from suboptimal decision making for the population, for the behavioral types, and for people with cognitive limitations. We also evaluate policies to simplify the choice set to reduce these losses.

Keywords: Random utility model, Mixture of experts, Mixed Logit, Market mapping, Hedonic Utility, Decision utility, Medicare, Health insurance, Behavioral economics

Yajing Xu, Michael Sherris and Jonathan Ziveyi

The pricing of longevity-linked securities depends not only on the stochastic uncertainty of the underlying risk factors, but also the attitude of investors towards those factors. In this research, we investigate how to estimate the market risk premium of longevity risk using investable retirement indexes, incorporating uncertain real interest rates using an affine dynamic Nelson-Siegel model. A multi-cohort aggregate, or systematic, continuous time affine mortality model is used where each risk factor is assigned a market price of mortality risk. To calibrate the market price of longevity risk, a common practice is to make use of market prices, such as longevity-linked securities and longevity indices. We use the BlackRock CoRI Retirement Indexes, which provides a daily level of estimated cost of lifetime retirement income for 20 cohorts in the U.S. Although investment in the index directly is not possible, individuals can invest in funds that track the index. For these 20 cohorts, we assume risk premiums for the common factors are the same across cohorts, but the risk premium of the factors for a specific cohort is allowed to take different values for different cohorts. The market prices of longevity risk are then calibrated by matching the risk-neutral model prices with BlackRock CoRI index values. Closed-form expressions and prices for European options on longevity zero-coupon bonds are derived using the model and compared to prices for standard options on zero coupon bonds. The impact of uncertain mortality on long term option prices is quantified and discussed.

Elena Capatina, Michael Keane and Shiko Maruyama

Michael Sherris, Yajing Xu and Jonathan Ziveyi.

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp

We investigate whether a life care annuity - the integration of a life annuity with long-term care insurance (LTCI) - can enhance insurance participation to mitigate the economic puzzle of under- insurance in the longevity insurance and LTCI markets. Using an online choice experiment, we elicit individuals' preferences for consumption in different health conditions and their demand for a life care annuity and its health-contingent income feature. We find that on average people prefer to spend more in good health than in bad health. However, those who are more forward looking, have certain cultural backgrounds, and have higher long-term care risk have a stronger preference for consumption in bad health. Results also show that over half of the participants prefer income-indemnity LTCI paying cash benefits than expense-reimbursement insurance. These preferences are mainly driven by the flexibility provided by income-indemnity insurance and by the needs to compensate for informal care. While we find no evidence of selection effects in the purchase decision of life care annuities, we find that individual preferences over the income features of the product could potentially lead to a separating equilibrium of various risk types. We also document other determinants of the demand for life care annuities, including availability of informal care, financial circumstances, awareness of long-term care risk, and product knowledge.

Michael Sherris, Yajing Xu and Jonathan Ziveyi

Multi-country risk management of longevity risk provides new opportunities to hedge mortality and interest rate risks in guaranteed lifetime income streams. This requires consideration of both interest rate and mortality risks in multiple countries. For this purpose, we develop value-based longevity indexes for multiple cohorts in two different countries that take into account the major sources of risks impacting life insurance portfolios, mortality and interest rates. To construct the indexes we propose a cohort-based affine model for multi-country mortality and use an arbitrage-free multi-country Nelson-Siegel model for the dynamics of interest rates. Index based longevity hedging strategies have the advantages of efficiency, liquidity and lower cost but introduce basis risk. Graphical risk metrics are a way to effectively capture the relationship between an insurer’s portfolio and hedging strategies. We illustrate the effectiveness of using a value–based index for longevity risk management between two countries using graphical basis risk metrics. To show the impact of both interest rate and mortality risk we use Australia and UK as domestic and foreign countries, and, to show the impact of mortality only, we use the male populations of the Netherlands and France with common interest rates and basis risk arising only from differences in mortality risks.

Michael P Keane and Ramna Thakur

India has a high level of out-of-pocket (OOP) health care spending, and lacks well developed health insurance markets. As a result, official measures of poverty and inequality that treat medical spending symmetrically with consumption goods can be misleading. We argue that OOP medical costs should be treated as necessary expenses for the treatment of illness, not as part of consumption. Adopting this perspective, we construct poverty and inequality measures for India that account for impoverishment induced by OOP medical costs. For 2011/12 we estimate that 4.1% of the population, or 50 million people, are in a state of “hidden poverty” due to medical expenses. Furthermore, while poverty in India fell substantially from 1999/00 to 2011/12, the fraction of the remaining poverty that is due to medical costs has risen substantially. Economic growth appears less “pro-poor” if one accounts for OOP medical costs, especially since 2004/05, and especially in rural areas.

Jennifer Alonso-García, Hazel Bateman, Johan Bonekamp, and Ralph Stevens

Implied endorsement is considered, together with inertia, as an explanation for the stickiness of defaults. This paper explores whether implied endorsement can serve as an explanation for the stickiness of defaults in the retirement decumulation phase. Using an experimental survey fielded in both the Netherlands and Australia, we analyze whether individuals perceive mandatory minimum withdrawals from their pension wealth set by the government as implicit advice from the government (“government knows best”) or recommendations from peers (“what most people do”). We find that vulnerable groups, such as those with low financial resources and pension capabilities, are more likely to find implied endorsement important. However, those who are overconfident about their capabilities find it less important and are susceptible to adverse choices. As expected, the peer effect is reduced for those with less opportunity to participate in a social network.
 

Susan Thorp, Hazel Bateman, Isabella Dobrescu, Ben R. Newell, and Andreas Ortmann

Simplified disclosures can make comparisons between complex financial products easier, and increase consumer expertise. We use incentivized experiments to investigate whether and to what extent simpler information on fees and investment returns assists retirement plan members to make competent choices.We find that members switch quickly from a high-fee plan to the low-fee alternative when fees are shown in nominal dollars. Showing fees as percentages, however, significantly slows down their transition to a low-fee plan. Complex returns information makes it hard for members to recognize and react to relatively poor investment performance, while simplified information reduces losses considerably.

Jennifer Alonso-García, Hazel Bateman, Johan Bonekamp, Arthur van Soest and Ralph Stevens

Using an online experimental survey, we investigate the importance of rational and psychological motives for saving in retirement for soon to be retired individuals. Our experimental task uses vignettes to elicit the impact of alternative retirement income policy settings comprising combinations of regular income and wealth, and major life events such as becoming frail and/or losing a spouse. Findings indicate that people modify their savings motives where a major life event is expected and the precautionary health savings motive becomes more important if the health of a spouse is expected to deteriorate in the near future. Our experimental survey is fielded in the Netherlands and Australia to allow investigation of the importance of the prevailing institutional settings (annuitized pension wealth in the Netherlands versus flexible drawdowns in Australia). Findings suggest that norms and awareness of the potential risks faced in the actual institutional setting are more important for the ranking of savings motives than the experimental institutional setting for the retirement income provision (income through full annuitization versus flexible withdrawal). This suggests that retirees may be slow to adjust their saving motives and spending patterns following an actual policy shift from flexible drawdowns to annuitization or vice versa.

Robert Holzmann, Jennifer Alonso-García, Heloise Labit-Hardy, and Andrés M. Villegas

Strong and rising empirical evidence across countries finds that longevity is highly heterogeneous in key socioeconomic characteristics, including income. A positive relationship between lifetime income and life expectancy at retirement amounts to a straight tax/subsidy mechanism when the average cohort life expectancy is applied for annuity calculation, as done under nonfinancial defined contribution (NDC) schemes. Such a regressive redistribution and the ensuing labor market distortion put into doubt main features of the NDC scheme and call for alternative benefit designs to compensate for the heterogeneity. This paper explores five key mechanisms of compensation: individualized annuities; individualized contribution rates/account allocations; a two-tier contribution structure with socialized and individual rate structure; and two supplementary approaches under the two-tier approach to deal with the income distribution tails, and the distortions above a ceiling and below a floor. Using unique data from England and Wales and the United States, the analysis indicates that both individualized annuities and a two-tier contribution scheme are feasible and effective and thus promising policy options. To this end, however, a de-pooling of gender will be required.

Ermanno Pitacco

These Lecture Notes aim at introducing technical and financial aspects of the life annuity products, with a special emphasis on the actuarial valuation of life annuity benefits. The text has been planned assuming as target readers:

• advanced undergraduate and graduate students in Economics, Business and Finance;
• advanced undergraduate students in Mathematics and Statistics, possibly aiming at attending, after graduation, actuarial courses at a master level;
• professionals and technicians operating in insurance and pension areas, whose job may regard investments, risk analysis, financial reporting, and so on, hence implying communication with actuarial professionals and managers.

Bei Lu, John Piggott, and Bingwen Zheng

This paper discusses the potential expansion of the role of the Notional Defined Contribution paradigm in the ongoing reforms of retirement provision in China. China has remarkably high nominal retirement coverage of its population. At the same time, however, issues of sustainability, equity and governance are challenging and real. Further, while many broad policy guidelines are set by the central government, jurisdictions at other levels – provincial, city and sometimes even district – have major control over implementation, covering administration, benefit rates, and other important features of retirement policy. 

Retirement policy and provision, under whatever approach or approaches that are adopted, are necessarily shaped by the labour market experience of fund members. In China, heterogeneity is dramatic across provinces, and between urban and rural settings, in development stage, cost of living, formalisation level, and other characteristics. Interestingly, we find that mature age life expectancy is remarkably uniform. The variation in life expectancy at 60 is less across provinces than it is between men and women nationally.

We conclude that while an increased presence of the NDC paradigm has the potential to increase aggregate welfare, especially in the large and active Urban Employee Pension Scheme (UEPS), sub-national heterogeneity limits the applicability of any universal pension system in China. In particular, some form of more traditional vesting may serve to enhance formal labour force participation, supporting China’s future growth.  

Elena Capatina, Michael Keane, and Shiko Maruyama

In the US healthcare system, patients of different socio-economic status (SES) often receive disparate treatment for similar conditions. Prior work documents this phenomenon for particular treatments/conditions, but we take a system-wide view and examine socio-economic disparities in spending for all medical conditions at the 3-digit ICD-9 level. We also compare SES spending gradients for those covered by private vs. public insurance (Medicare). Using data on adult respondents from the Medical Expenditure Panel Survey 2000-14, we estimate multivariate regressions for individual medical spending (total and out-of-pocket) controlling for medical conditions, demographics, health, and insurance, separately by sex, education, and age. Within age-sex categories, we assess how spending on each condition varies with education (a proxy for SES). In the predominantly privately insured population aged 24-64, system spending for several of the most socially costly conditions is strongly increasing in education (e.g., breast cancer for women and chest symptoms for men). These disparities are not explained by differences in health, insurance status, or ability-to-pay, suggesting they arise due to discrimination. However, we find no positive SES gradients for individuals over 64 covered by the public Medicare program, suggesting that Medicare plays an important role in improving equity.

Chung Tran and Sebastian Wender

We quantify marginal excess burden, defined as the change in deadweight loss for an additional dollar of tax revenue, for different taxes. We use a dynamic general equilibrium, overlapping generations model featured with heterogeneous agents and a realistic structure of corporate finance and taxes. Our main results, based on an economy calibrated to Australian data, indicate that company taxes are more distorting than personal income and consumption taxes. Specifically,
the marginal excess burden for the company income tax is 83 cents per dollar of tax revenue raised, compared to 34 cents and 24 cents for the personal income and consumption taxes, respectively. A broader analysis of more tax instruments confirm that the relatively larger excess burden of company taxes ultimately falls on households. Importantly, the marginal excess burden is distributed unevenly across skill types, generations and ages. This highlights political challenges when obtaining popular support for raising taxes. Hence, our analysis demonstrates that marginal excess burden can be an useful tool for evaluating both efficiency and distributional implications of a tax increase at the margin.

Han Li, Katja Hanewald and Shang Wu

With rapid economic growth and medical advances, longevity and health in China have been continuously improving in recent decades. However, health inequalities across Chinese provinces are still large. In this paper, we provide a province-by-province analysis of healthy life expectancy at birth for China. We develop a predictive multiple regression model utilizing information on life expectancy, health and socio-economic factors to estimate healthy life expectancy for Chinese provinces. Unlike the standard Sullivan method, the model we propose does not require data on ill-health prevalence rates which are not publicly available for each province. The model is estimated using data from the Global Burden of Disease Study for life expectancy and healthy life expectancy at birth for 139 countries in the years 1990, 2005 and 2013. We assess the predictive ability of the fitted model using appropriate hold-out samples and conclude that the model has good out-ofsample performance. Based on the proposed model, we provide estimates of healthy life expectancy at birth in 2015 for 31 provincial-level regions in China for both males and females. We then discuss the implications of our results for the design of public policies and the development of insurance and banking products in China.

Jennifer Alonso-Garcia and Michael Sherris.

Australia and the Netherlands both combine an unfunded non-contributory at rate pension with prefunded earnings related retirement schemes. Notwithstanding this similarity ofstructure, however, the two systems are very dierent. The Netherlands mandates annuitized drawdown structures. In Australia, no prescription, or even guidance, is oered. In both cases, products that better meet the needs of increasingly heterogeneous retirement cohorts are under consideration. We analyze the impact of various popular product choices in the Netherlands and in Australia on the welfare of individuals allowing for dierent income levels.

Jennifer Alonso-García and Pierre Devolder

Notional Defined Contribution pension schemes are defined contribution plans which are pay-as-you-go financed. From a design viewpoint, the countries where NDCs have been implemented cannot guarantee sustainability due to the choice of notional return paid to the contributions and the indexation rate paid to pensions. We study how the scheme should be designed to achieve liquidity and solvency with a limited set of assumptions in a continuous overlapping generations model that increases traceability of the results. The adequacy and actuarial fairness are also jointly studied in the numerical example for the population of Belgium. We find that the proposed indexation and notional rate ensure sustainability and actuarial fairness. However, the effect on pension adequacy depends on the generosity of the scheme at retirement.

Adam W. Shao, Hua Chen and Michael Sherris

We consider the impact of housing and the availability of reverse mortgages and long-term care insurance on a retiree's optimal portfolio choice and consumption decisions. Individuals decide how much to borrow against their home equity and how much to insure health care costs with long-term care insurance. We build a multi-period life cycle model that takes into consideration longevity risk, health shocks and house price risk.

We use an endogenous grid method along with a regression based approach to improve computational efficiency and avoid the curse of dimensionality. Our results show that borrowing against home equity dominates long-term care insurance reflecting higher consumption in earlier years and inclusion of longevity insurance. Long-term care insurance transfers wealth from healthy states to disabled states but reduces earlier consumption because of the payment of upfront insurance premiums. 

Katja Hanewald, Han Li and Adam W. Shao

Rapid population aging in China has urged the need to understand health transitions of older Chinese to assist the development of social security programs and financial products aimed at funding long-term care. In this paper, we develop a new flexible approach to modeling health transitions in a multi-state Markov model that allows for age effects, time trends and age-time interactions.

The model is implemented in the generalized linear modeling framework. We apply the model to evaluate health transitions of Chinese elderly using individual-level panel data from the Chinese Longitudinal Healthy Longevity Survey for the period 1998–2012. Our results confirm that time trends and age-time interactions are important factors explaining health transitions in addition to the more commonly used age effects. 

Bei Lu, Hong Mi, Yana Zhu and John Piggott

This paper will document the Qingdao Long-term Care Medical Insurance (LTCMI) programme in order to properly understand and analyse its recipient demographics and the determinants of cost differentials for clients presenting with different patterns of disability, and to estimate a full-coverage Long-term Care (LTC) programme cost in Qingdao.

Information on Activity of Daily Living (ADL) status and mortality patterns in different care locations will be used.

Shang Wu, Hazel Bateman, Ralph Stevens, and Susan Thorp

We study the demand for income-indemnity long term care (LTC) insurance, a product that pays income in LTC states whether care services are used or not. We conduct an experimental survey where participants divide their (hypothetical) retirement savings between three products: a LTC income product, a life annuity and a liquid investment account.

Objective measures of exposure to LTC risk indicate little to no selection eects for the LTC income product. However subjective measures of exposure to LTC risk show that the LTC income product is more attractive to participants who perceive a higher risk that they will need LTC. This could either indicate adverse selection due to private information or subjective mis-measurement by participants of their future LTC costs. 

Jennifer Alonso Garcia, Oliver Wood and Jonathan Ziveyi

This paper extends the Fourier-cosine (COS) method to the pricing and hedging of variable annuities embedded with guaranteed minimum withdrawal benefit (GMWB) riders. The COS method facilitates efficient computation of prices and hedge ratios of the GMWB riders when the underlying fund dynamics evolve under the influence of the general class of Levy processes. Formulae are derived to value the contract at each withdrawal date using a backward recursive dynamic programming algorithm.

Numerical comparisons are performed with results presented in Bacinello et al. (2014) and Luo and Shevchenko (2014) to confirm the accuracy of the method. The efficiency of the proposed method is assessed by making comparisons with the approach presented in Bacinello et al. (2014). We find that the COS method presents highly accurate results with notably fast computational times. 

Rafal Chomik, John Piggott and Peter McDonald

APEC economies encompass a wide range of socio-economic profiles – poor to rich, young to old, regulated to free market. These differences can be instructive for those seeking international policy lessons. They also create new opportunities for cooperation that have the potential to improve wellbeing across member economies. How economies and regions manage demographic change will define their success in what will be an ‘ageing century’. 

To write an overview paper on the role of demographic change on labour force and economic growth in APEC requires some unifying framework to organise the issues. Here we apply a supply-side, GDP accounting framework to decompose the contribution of population, participation, and productivity to GDP per capita (the 3P’s). 

Nikolay Gudkov, Katja Ignatieva and Jonathan Ziveyi

This paper values Guaranteed Minimum Withdrawal Benefit (GMWB) riders embedded in variable annuities assuming that the underlying fund dynamics evolve under the influence of stochastic interest rates, stochastic volatility, stochastic mortality and equity risk. The valuation problem is formulated as a partial differential equation (PDE) which is solved numerically by employing the operator splitting method.

Boda Kang and Jonathan Ziveyi

In this paper we analyse how the policyholder surrender behaviour is influenced by changes in various sources of risk impacting a variable annuity (VA) contract embedded with a guaranteed minimum maturity benefit rider that can be surrendered anytime prior to maturity. We model the underlying mutual fund dynamics by combining a Heston (1993) stochastic volatility model together with a Hull and White (1990) stochastic interest rate process.

The model is able to capture the smile/skew often observed on equity option markets (Grzelak and Oosterlee, 2011) as well as the influence of the interest rates on the early surrender decisions as noted from our analysis.