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

Rafal Chomik and Cris Townley

Australia’s aged care system is evolving. It is where the challenges of population ageing are most apparent and where policy choices have direct impact on the lives of Australians. This fact sheet takes stock of recent changes in aged care policy, industry, and labour force, and highlights research seeking to address its challenges.

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

Rafal Chomik, Simon Graham, Sophie Yan, Hazel Bateman, John Piggott

This series of three CEPAR research briefs explores the current state, and projected future, of Australia’s retirement income system, marrying policy developments with the latest research. Brief 1 describes the demographic context and structure of the system, how retirement resources compare across benchmarks, countries, and generations. Brief 2 focuses on the public, poverty-alleviation element of Australia’s retirement income, primarily the Age Pension. Brief 3 looks at private, income replacement provision, particularly superannuation.

Rafal Chomik, Simon Graham, Sophie Yan, Hazel Bateman, John Piggott

This series of three CEPAR research briefs explores the current state, and projected future, of Australia’s retirement income system, presenting the latest data and highlighting relevant research. Brief 1 described the demographic context, system structure, and overall trends in retirement resources. The present brief, Brief 2, focuses on the public element of retirement income provision, primarily related to the Age Pension. It discusses policy trends, the design of pension access, benefit level, and means testing, as well as poverty and fiscal outcomes. Brief 3 covers private retirement income provision, particularly the superannuation pillar.

Rafal Chomik, Simon Graham, Sophie Yan, Hazel Bateman, John Piggott

This series of three CEPAR research briefs takes stock of the current state, and projected future, of Australia’s retirement income system, presenting the latest data and highlighting relevant research. Brief 1 described the demographic context, system structure, and overall trends in retirement resources. Brief 2 focused on the public element of retirement income provision, primarily the Age Pension. Here, Brief 3 covers private retirement income provision, focusing on superannuation. This is done by first looking at providers (i.e., industry structure) and members (i.e., financial behaviour), then investigating the accumulation (i.e., balances, contributions, and leakages) and decumulation (e.g., products) stages, as well as touching on issues related to housing, taxation, and public sector superannuation. What becomes apparent is that Australia’s superannuation system is of considerable benefit to households and the wider economy. But it continues to evolve. Its competitive environment is changing and policymakers are looking at ways to improve efficiency and developing measures for a retirement income framework in which individuals will be better able to manage risks in retirement.

Xiangling Liu