George Kudrna

Like many other developed countries, Norway is facing a rapid ageing of its population that is attributed to both falling mortality and fertility rates in the past and projected life-expectancy increases over the next several decades. According to United Nations (2015), it is projected for Norway that by 2060, the share of the population 65+ will increase to over 25% (from 16% in 2015) and the potential support ratio will drop to 2 people in the labour force for each person aged 65 years and over.

Such fundamental demographic change will have wide-ranging implications for the Norwegian economy and, in particular, for its National Insurance Scheme (NIS) that provides citizens with old-age and disability pensions. It is estimated that if the old pre-reform National Insurance Scheme had remained unchanged, the government expenditure on the old-age pension would have more than doubled from about 6% of GDP in 2013 to 13% of GDP by 2060, with additional spending of around 4% of GDP on disability pension (Fredriksen et al., 2015).

Elena Capatina

Approximately one in four workers aged 25-40 who lacked private health insurance in 2010 in the US did not enroll in employer-provided health insurance (EPHI) that was available to them. In this paper, I study selection in EPHI among eligible employees using data from the Medical Expenditures Panel Survey from 2001 to 2010 and from the National Longitudinal Survey of Youth ’97 in 2010.

Controlling for firm and job characteristics that proxy for the choice of plans and premiums faced by workers, I find that individuals aged 25-40 who decline EPHI and remain privately uninsured have significantly worse health and health behaviors than those who enroll. No correlation between health and insurance take up is found in the 41-64 age group. 

George Kudrna and Chung Tran

In this study, we quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using a computable overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts.

The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but have adverse consequences in the short run that are particularly severe under the immediate fiscal consolidation plan. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive, and especially the poor. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. 

Christine Ma and Chung Tran

To what extent does population ageing limit fiscal capacity and affect fiscal sustainability? We answer this question through lens of fiscal space defined by budgetary room between the current tax revenue and the peak of Laffer curves. We use a dynamic general equilibrium, overlapping generations model calibrated to data from Japan and USA. Our findings show that the evolution of underlying demographic structures plays an important tole in shaping a country's fiscal capacity.

There will be significant contractions in fiscal space in Japan and USA when the two countries enter their late stage of demographic transition in 2040. In particular, the results from the model calibrated to Japan indicates that an increase in old-age dependency ration to over 70 percent can reduce Japan's fiscal space by 36 percent. 

Rafal Chomik and John Piggott

Abstract: Pension savings commonly attract lower taxes to encourage self-provision or to maintain neutrality between current and future consumption. As a result, in countries where funded pensions are prominent, tax costs appear large and poorly targeted while benefits seem unsubstantiated. Yet much of the criticism of tax arrangements is misconceived. In this paper we explain the basic concepts, tackle concerns related to the scale and fairness of tax expenditures, and present policy reform proposals. We do this by way of illustrative examples of saving over the lifecycle and across the earnings distribution. These are based on the Australian retirement income system – an instructive case, since it has significant pre-funding and high levels of measured tax expenditures that, in turn, attract considerable political interest.

Rafal Chomik

There is a growing recognition that social security systems with a wide scope and comprehensive coverage are an essential part of sustainable development and an ambition worth pursuing vigorously. This is also the case in countries with traditionally family-oriented support frameworks such as Asia.

Jennifer Alonso-García and Beatriz Rosado-Cebrián

The recent global financial crisis has intensified the public debate on the sustainability of pay-as-you-go pension schemes. The economic risk is expanding the effects of the already existent demographic risk in most European countries. Our objective is to analyse the effect of the alarming unemployment and inactivity patterns in Spain as of 2016 on the income from contributions and pension expenditures with respect to the GDP by using the Aggregate Accounting framework.

We analyse the pension expenditures for the current pattern as well as for full employment and conclude that while the economic risk outweighs the demographic risk until 2040, the main driver of expenditures lies in the ratio of pensioners to working age population in the long run. 

Jennifer Alonso-Garcia, Maria del Carmen Boado-Penas and Pierre Devolder

There are three main challenges facing public pension systems. First, pension systems need to provide an adequate income for pensioners in the retirement phase. Second, participants wish a fair level of benefits in relation to the contributions paid. Last but no least, the pension system would need to be financially sustainable in the long run.

In this paper, we analyse defined benefit versus defined contribution schemes in terms of adequacy, fairness and sustainability jointly. Also, risk sharing mechanisms, that involve changes in the key variables of the system, are designed to restore the financial sustainability at the same time that we study their consequences on the adequacy and fairness of the system.

Ermanno Pitacco

This paper provides some introductory remarks to critical biometric aspects underlying risk identification and risk assessment for life annuity portfolios and pension funds. On the one hand, statistical evidence shows, in many populations, a deceleration in mortality increase at very old ages, in particular a non-exponential increase in the age-pattern of mortality. On the other hand, causes of this feature of the age-pattern of mortality constitute a rather controversial issue.

Nevertheless, a deceleration in the mortality increase can analytically be explained by the (reasonable) assumption of heterogeneity with respect to mortality inside a cohort, and, in particular, in terms of non-observable risk factors, which can be represented, for each individual in the population, by his/her “frailty” level. T

Peter McDonald

Migration is one of the three demographic processes that contribute to changes in the size of a population, the other two being fertility and mortality. Fertility is the process by which births are added to a population and mortality is the process by which the population is reduced by deaths.

Unlike fertility and mortality, migration has the additional complexity that it affects two populations at the same time: the place of origin and the place of destination.

Shang Wu, Hazel Bateman and Ralph Stevens

Whereas there is ample evidence that life-contingent income products (life annuities) have the potential to improve individual welfare, combining them with health-contingent income products (resulting in so-called life care annuities) would serve to further increase welfare for individuals who are exposed to uncertain out-of-pocket healthcare expenditure later in life.

We develop a life-cycle model of annuitization, consumption, and investment decisions for a single retired individual who faces stochastic capital market returns, uncertain health status, differential mortality risks, and uncertain out-of-pocket healthcare expenditure with cost of dying. 

Juergen Jung, Chung Tran and Matthew Chambers

We quantify the effects of population aging on the US healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of public vs. private insurance.

Without the Affordable Care Act (ACA), aging itself leads to a 36:6 percent increase in health expenditures by 2060 and a 5 percent increase in GDP which is driven by the expansion of the healthcare sector.

Monisankar Bishnu, Cagri S. Kumru and Arm Nakornthab

In this paper we derive the expression for optimal inheritance tax when agents' preferences are subject to temptation and self control problem. We consider a dynamic stochastic model as in Piketty and Saez (2013) where agents are heterogeneous in terms of bequest motives and labor productivities. In such a setup we show that the optimal inheritance tax rate decreases with the level of temptation, and thus it works as an incentive mechanism that leads to more bequests and makes succumbing to temptation less attractive.

In fact, when temptation is acute, a subsidy may be justified at any percentile of bequest received. This holds independent of the variation in the models used in the literature as well as the assumption of labor elasticity. The study also reveals some interesting observations. Though from the point of view of incentives, this result has the same essence as in Krusell et al. (2010) where temptation justifies a subsidy on capital, we show that unlike their other policy prescription, the long run equilibrium does not demand a constant subsidy. 

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

Short, standardized financial product disclosures should make comparisons easier, support better choices and reduce welfare losses. Using incentivized experiments, we investigate how and when prescribed fee and return information in standardized disclosures prompt efficient switches between retirement plans. Our choice data suggests members rely accurately on fee information but are reluctant to use returns information as a basis for switching plans, even when a switch is warranted.

This reluctance persists even when returns have very low volatility. In addition, many of the prescribed information items are poorly understood by members. A simplified disclosure format can lead to more efficient comparisons of returns and significantly higher final account balances.

George Kudrna

Population ageing, a demographic transition that will accelerate in NSW over the next few decades, is creating economic opportunities as well as significant challenges for the NSW economy and the state government. On the one hand, a growing number of seniors represent a powerful economic force in terms of their consumption spending and their housing assets.

On the other, a rapidly growing proportion of the elderly in the population will put upward pressure on publicly funded age-related expenditures, particularly on health care spending. Furthermore, reduced population growth and a declining proportion of the working-age population is expected to lower employment growth and demand for housing, negatively affecting the government's main sources of tax revenues - payroll tax and property taxes. 

Heather Booth, Leonie Tickle and Jiaying Zhao

Mortality change in Australia since 1907 is analysed in the light of Epidemiologic Transition theory. Australia began the twentieth century in the second age of the Epidemiologic Transition, the Age of Receding Pandemics. In the early decades of the twentieth century, Australia was a leader in the Transition with a life expectancy about 4 years higher than many other Western countries.

By 1950, however, this advantage had been lost. Nevertheless, Australia probably moved to the third Age of Degenerative and Man-Made Diseases before 1946, which is slightly in advance of most Western countries. Transition to the fourth Age of Delayed Degenerative Diseases, is clearly marked by a downturn in about 1970 in circulatory disease mortality, concurrent with other Western countries. 

Juergen Jung and Chung Tran

We quantitatively explore the welfare implications of three common approaches to providing social health insurance: (i) a mix of private and public health insurance (US-style), (ii) compulsory universal public health insurance (UPHI), and (iii) private health insurance for workers combined with government subsidies and price regulation.

We use a Bewley-Grossman lifecycle model calibrated to match the lifecycle structure of earnings and health risks in the US. For all three systems we find that welfare gains triggered by a combination of improvements in risk sharing and wealth redistribution dominate welfare losses caused by tax distortions and ex-post moral hazard effects. Overall, the UPHI system outperforms the other two systems in terms of welfare gains if the coinsurance rate is properly designed. 

Rafal Chomik and John Piggott

This note looks at the treatment of wealth in the income and assets tests that comprise the Age Pension means test. We demonstrate how the tests interact, the extent to which different assets are treated equally and whether the income and assets tests interact effectively across the asset distribution. Policymakers have equalised treatment of some asset classes but have been reluctant to go further.

Recent reforms have made the means test more aggressive with respect to assessable assets. This recognises the value of not only asset income but the underlying capital value. We show how a similar outcome can be achieved by implementing a comprehensive income test alongside deemed income rates that increase with assets. 

Rafal Chomik and John Piggott

This paper offers a discussion of adequacy of retirement benefits. We have the Australian context in mind, but introduce extensive international comparisons to provide perspective. We cover possible benchmarks against which to set benefits, how these might change depending on household structure, the actual levels at which different countries set basic and minimum pension levels, related taxation policy, and the policies and rationale for benefit indexation.

We focus primarily on adequacy in the context of poverty alleviation, but also investigate the idea of defining the adequacy of income replacement. This includes a discussion of design features that increase the likelihood that the retirement system will provide adequate income replacement and the measures that can guide our assessment of the outcomes. 

Cagri Kumru and Arm Nakornthab

We study the interaction between estate taxation and annuity demand both analytically and quantitatively. Our quantitative model is rich enough to capture the important features of the economy such as business investment, borrowing constraints, estate transmission, and wealth inequality. Having entrepreneurs in the model is essential to generate a realistic wealth distribution and analyze non-entrepreneurs (workers) and entrepreneurs' annuity demands separately.

The simple analytical model gives the direction of the relationship between estate tax rates and annuity demand: lower estate tax rates result in lower annuity demands. The quantitative model shows that annuity demand is indeed sensitive to the changes in the estate tax system. Removing the estate tax rate reduces the annuity demand substantially when the government's budget is balanced with an increase in the proportional income tax rate. 

Zixi Li, Adam W. Shao and Michael Sherris

Multiple state functional disability models do not generally include systematic trend and uncertainty. We develop and estimate a multi-state latent factor intensity model with transition and recovery rates depending on a stochastic frailty factor to capture trend and uncertainty. We estimate the model parameters using U.S. Health and Retirement Study (HRS) data between 1998 and 2012 with Monte Carlo maximum likelihood estimation method.

The model shows significant reductions in disability and mortality rates during this period and allows us to quantify uncertainty in transition rates arising from the stochastic frailty factor. Recovery rates are very sensitive to the stochastic frailty. There is an increase in expected future lifetimes as well as an increase in future healthy life expectancy. 

George Kudrna

This report summarises the results obtained by Kudrna (2015) for the effects of hypothetical changes in the existing taper rate of the Age Pension income test.

Using an overlapping generations (OLG) model stylised to the Australian economy, Kudrna examined the implications of changing the income taper for lifecycle labour supply, consumption and savings of households, for key macroeconomic and fiscal aggregates and for household welfare. 

Torben M. Andersen

How should pensions be taxed? In many cases pension savings are usually taxed more leniently than other forms of savings. What is the rationale for this? And are those concerns best targeted via taxation or mandatory pension savings?

These issues are discussed with outset in the experience of the Scandinavian countries (Denmark and Sweden). These countries are also interesting because they have implemented a dual income taxation scheme; i.e. they pursue an ETT-taxation regime vis a vis pensions. It is argued that the incentive structure related to pension savings and retirement can not be seen independently from how private pensions (and savings more generally) affect public pensions via meanstesting. 

Christian Keuschnigg

The gains in life expectancy are expected to double the dependency ratio and increase population by 10% in Switzerland until 2050. To quantify the effects on pensions, taxes and social contributions, we use an overlapping generations model with five margins of labor supply: labor market participation, hours worked, job search, retirement, and on-the-job training.

A passive fiscal strategy would be very costly. A comprehensive reform, including an increase in the effective retirement age to 68 years, may limit the tax increases to 4 percentage points of value added tax and reduce the decline of per capita income to less than 6%.

Jukka Lassila and Tarmo Valkonen

We study transitions from EET tax regime to TEE regime in a defined-benefit pension scheme with a numerical overlapping generations model, using stochastic mortality projections as inputs. In a traditional pension scheme with no automatic longevity rules, such as a link between life expectancy and pensions or retirement age, the tax regime shift can be used to improve public finances, when longevity increases.

Diminished private saving and weaker labour supply incentives are among the downsides. Especially the latter makes the reform welfare-reducing, if the improvement in state finances is not used to relieve taxation of labour.

Bernd Genser and Robert Holzmann

Pension policy reforms across the world in recent decades are a reaction to the changing demographic and socioeconomic environment. While pension scheme redesign has received much attention, the tax treatment of contributions, returns, and benefits of retirement savings remains mostly unattended and the taxation of internationally portable pensions is terra incognita for economists.

This paper focuses on the huge differences in old-age pension taxation within and across OECD countries and highlights fiscal equity and efficiency issues that emerge in a world of internationally mobile workers and pensioners. It highlights that pension taxation differs widely not only across countries but also across pension pillars within a country, creating savings and mobility distortions and fiscal equity problems at individual and country level. 

Carl Emmerson and Paul Johnson

Private pension saving is hugely important in the UK and traditionally the taxation of pensions has been relatively stable and rather generous, beyond the treatment offered by an expenditure tax regime. Recently, though, there have been substantial changes. Annual and lifetime allowances have been cut dramatically, largely as a way of increasing tax revenues. At the same time the requirement to annuitise pension wealth has been abolished, making pension saving look much more similar to other forms of saving.

Meanwhile the tax treatment of other important forms of saving has been made more generous. The motivation for many of the reforms enacted has been largely one of increasing tax revenues. They have been encouraged by a misunderstanding of the purpose, and cost, of the current system. T

Axel Borsch-Supan and Christopher Quinn

The paper motivates and describes the tax treatment of German retirement benefits and pensions after the 2005 reform initiated by the German Federal Constitutional Court. The main question is whether this reform has produced a “level playing field” among the many instruments generating retirement income in Germany.

The paper briefly outlines rational principles for the taxation of retirement benefits and pensions and compares these with current practice in Germany and abroad.

Mengyi Xu, Michael Sherris and Ramona Meyricke

Insurers and pension funds provide life annuities and pensions that are impacted by both aggregate mortality improvement and individual mortality heterogeneity. Aggregate population mortality trends have shown significant improvement over long periods of time. Individual mortality heterogeneity arises from differing risk characteristics across individuals.

This paper assesses the extent that systematic mortality improvement varies with individual risk characteristics. To do this, a Lee-Carter model is used to assess if mortality improvement varies for groups of individuals with similar risk characteristics along with an individual mortality model that allows for heterogeneity with time trends to assess systematic risk.

Hal Kendig, Kate O’Loughlin, Rafat Hussain, Karla Heese and Lisa Cannon

Attitudes to Intergenerational Equity: Baseline Findings from the Attitudes to Ageing in Australia (AAA) Study. This paper reports preliminary findings and methodology from the 2009-10 baseline data from the national Attitudes to Ageing in Australia (AAA) survey in the context of related national and international literature.

It reviews socio-economic and policy developments as possible influences on intergenerational attitudes from the time of the baseline survey to the 2015-16 survey round currently underway. Findings are presented on socio-economic variations in perceptions of the life-long opportunities of the baby boom cohort compared to earlier and later cohorts, the age fairness of government benefits and policy changes, including raising the pension eligibility age. Future research directions are outlined.

George Kudrna and Chung Tran

This study quantifies the macroeconomic and welfare effects of three proposed fiscal measures to eliminate Australian government budget deficits and to reduce public debt by 2030, namely: (i) temporary income tax hikes; (ii) temporary consumption tax hikes (increases in the GST rate); and (iii) temporary transfer payment cuts. Our quantitative analysis is based on a computable overlapping generations (OLG) model that is tailored to the Australian economy.

The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but severe adverse consequences during the fiscal consolidation period.

Erik Hernæs, Simen Markussen, John Piggott, Knut Røed

We exploit a comprehensive restructuring of the early retirement system in Norway in 2011 to examine labor supply responses to pension reform strategies that rely on changes in work incentives (flexibility) or access ages (prescription), respectively.

We find that increasing the returns to work is a powerful policy: The removal of an earnings test, implying a doubling of the average net take-home wage, led to an increase in average labor supply by 7 hours per week (30%)  at age 63 and by 8 hours (46%)  at age 64. The responses primarily came at the extensive margin.  

Cagri S. Kumru, John Piggott and Athanasios C. Thanopoulos

This study analyzes the relative performance in terms of welfare of the current US PAYG system compared to an array of cost equivalent alternative specifications of means-tested pension programs. We conduct our analysis under two different settings. While in the first setting, individuals have standard preferences, in the second setting individuals have self-control preferences. We show that the implications of the reform substantially differs across the two settings.

Jennifer Alonso-Garcia and Pierre Devolder

The notional defined contribution pension scheme combines pay-as-you-go financing and a defined contribution pension formula. The return on contributions is based on an index set by law, such as the growth rate of GDP, average wages, or contribution payments. The volatility of this return compromises the system's pension adequacy and therefore guarantees may be needed. Here we provide a minimum return guarantee to the pension contributions.

The price is calculated in a utility indifference framework. We obtain a closed-form solution for a general dependence structure with exponential preferences and in presence of stochastic short interest rates.

Yang Shen, Michael Sherris and Jonathan Ziveyi

We present a numerical approach to the pricing of guaranteed minimum maturity benefits embedded in variable annuity contracts in the case where the guarantees can be surrendered at any time prior to maturity that improves on current approaches. Surrender charges are important in practice and are imposed as a way of discouraging early termination of variable annuity contracts.

We formulate the valuation framework and focus on the surrender option as an American put option pricing problem and derive the corresponding pricing partial differential equation by using hedging arguments and Itô's Lemma. Given the underlying stochastic evolution of the fund, we also present the associated transition density partial differential equation allowing us to develop solutions.

Rafal Chomik, John Piggott, Alan Woodland, George Kudrna and Cagri Kumru

Means testing can balance the need for adequate incomes in retirement with economic efficiency objectives to an extent that is seldom appreciated by policymakers. It is an inexpensive way of ensuring a minimum level of retirement income. The means test may create disincentives to work and save for those wishing to target a certain benefit level, but such distortions are dwarfed by disincentives from much larger earnings related pensions with associated payroll taxes or social insurance premiums.

This paper summarises means testing design and implementation issues as well as tackling a key criticism relating to the claimed distortions created by means testing. In doing so, we discuss a number of recent analytical and empirical insights based on state of the art macroeconomic modelling.

Cagri Kumru and John Piggott

This paper studies the interaction between capital income taxation and a means tested age pension in the context of an overlapping generations model, calibrated to the UK economy.

Recent literature has suggested a rehabilitation of capital income taxation predicated on the idea that a capital income tax may be a partial substitute for the optimal age-based taxes when they are infeasible. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlements.

Bei Lu, Zhenzhen Yang, John Piggott and Hong Mi

Understanding subjective life expectancy (SLE) is critical for pension design and longevity insurance markets. Yet there are very few studies that focus on this question.

This paper is the first of its kind to analyse subjective life expectancy in China. It draws on a recent longitudinal survey data (two years) in which participants were asked about their life expectancies. 

Jessica Loke

For many countries, age pension expenditure will increase dramatically over the next few decades due to a shift in demographics. In the literature, research and solutions have mostly been concerned with separate financing systems, such as pay-as-you-go, means-testing and superannuation. A broad comparison between the systems has received limited attention.

This paper examines the cost and economic welfare of these programs using a stochastic overlapping generations model calibrated to the Australian economy. Including the benchmark, eight different models are evaluated. In addition to reducing fiscal burden, analysis indicates that models with an enforced savings component result in increased social welfare as agents accumulate large asset stockpiles allowing them, in aggregate terms, to consume more with a lower labour supply.

Bernd Genser

In the last decades all over the world pension policy reforms have tried to account for the changing demographic and socio-economic framework. An excellent starting point for economic analyses of reform strategies is the Mirrlees Review which argues that pension policy should simultaneously address pension benefit design and the taxation of pensions.

We focus on old-age pension taxation and address policy conflicts which come along with international migration of citizens as employees and pensioners. The widely implemented system of deferred income taxation of pensions benefits generates problems of international tax equity when workers who were exempted from income tax on their old-age pension saving emigrate and receive pension benefits in another country.

Robert Holzmann

A rising share of individuals are spending at least some part of their working life abroad and acquiring pension rights. While the portability of pensions and other social benefits has received some analytical attention over the recent decade, limited analytical guidance currently exists on the taxation of retirement provisions within a country, and none for the taxation of internationally portable pensions.

For both national and international taxation of pensions, the actual taxation approaches are characterized by a high level of diversity, complexity, and inconsistency within and across countries that risk harming labor mobility and creating fiscal unfairness. 

Bei Lu, Xiaoting Liu and John Piggott

Long-term care (LTC) policy in China is in its infancy, and it is highly decentralised. Where policy structures exist, they are poorly resourced. Although China’s demography is still young by developed country standards, it is ageing very rapidly, and by mid-century will have “caught up” with many countries in the developed world with respect to population ageing. LTC policy development, therefore, is becoming a priority in China. We argue that it should be formulated with population ageing as a framework.

Policy designs, which take account of and encourage, informal care provision, will be critical to the fiscally sustainable delivery of LTC. In China, informal care is sometimes seen as very scarce because of the one child policy.  With only one child, it is argued, there will be less informal care offered than in societies with larger families.

Xiaodong Fan and Jed De Varo

Using NLSY data, we show that job hopping is associated with lower wages for college graduates (but not high school graduates), controlling for ability, labor market experience, and current job tenure. The effect is most pronounced for job tenures less than one year, strongest for early-career workers, and mitigated when job hopping severs matches that were formed during economic downturns.

A model of employer learning is proposed in which prior job history signals worker ability. We analyze it both for symmetric and asymmetric employer learning, showing that the equilibrium under asymmetric learning is consistent with the evidence for college graduates.

Emily Dabbs and Cagri Kumru

Social security plays an essential role in an economy, but if designed incorrectly can distort the labour supply and savings behaviour of individuals in the economy. We explore how well the Australian means-tested pension system provides social insurance by calculating possible welfare gains from changing the settings in the current means-tested pension system.

This work has been explored by other researchers both in Australia and in other pension providing economies. However, most research ignores the fact that welfare gains can be found by reducing the cost of the programme. To exclude these trivial welfare gains, this paper fixes the cost of the system. We find that the means-tested pension system is welfare reducing, but does provide a better outcome than an equivalent costing PAYG system. 

Shang Wu, Anthony Asher, Ramona Meyricke and Susan Thorp

Using eight years of data drawn from the records of Australia's Centrelink agency, we describe the income, asset and decumulation patterns of over 10,000 age pensioners. Analysis of this longitudinal data set shows that age pensioners, on average, preserve both financial and residential wealth, consuming conservatively and, ultimately, passing on substantial bequests.

While younger households do run down financial wealth early in retirement, older households generally maintain their assessable asset balances, and some even manage to save. The largest falls in assets are linked to changes in household structure due to death or the breakdown of a relationship. So, as in many other developed countries, age pensioners in Australia appear to 'under-consume', holding on to assets, and even building a buffer, well into their later years.

Xiangling Liu

This paper estimates the income elasticity of house prices over a long-term time period of 1991 to 2012 for 144 LGAs in New South Wales of Australia. The income elasticity of house prices is estimated to be 0.69 by multi-factor panel data models accounting for cross-section dependence and serial correlation.

The estimate confirms a co-integrated long-run relationship between real house prices and real income. Alternatively, the income elasticity is estimated to be 0.46 using traditional spatial autoregressive models, where the spatial matrix is specified as a distance weighted matrix. The spatial effect of house price in one location is estimated significantly to be 0.84.

Xiaodong Fan

This article documents "sharp retirement" among white male workers in the United States - retirement accompanied by a discontinuous decline in labor supply. It then proposes and estimates a life-cycle model with habit persistence to explain such precipitous decline in labor supply upon retirement as workers quitting "cold turkey" to break the "work habit". Counterfactuals reveal heterogeneous responses from different retirement types.

In response to reducing Social Security benefits by 20%, individuals choosing sharp retirement respond mostly on the extensive margin by delaying retirement eight months, while individuals retire smoothly respond mostly on the intensive margin by increasing yearly labor supply and delaying retirement only one month. Comparison shows the work habit model produces more empirically plausible results than other approaches.

Xiaodong Fan, Hanming Fang and Simen Markussen

This paper analyzes the connection between two concurrent trends since 1950: the narrowing and reversal of the educational gender gap and the increased labor force participation rate (LFPR) of married women. We hypothesize that the education production for boys is more adversely affected by a decrease in the mother's time input as a result of increasing employment.

Therefore, an increase in the labor force participation rate of married women may narrow and even reverse the educational gender gap in the following generation. We use micro data from the Norwegian registry to directly show that the mother's employment during her children's childhood has an asymmetric effect on the educational achievement of her own sons and daughters.

Xiaodong Fan, Ananth Sashadri and Christopher Taber

We develop and estimate a life-cycle model in which individuals make decisions about consumption, human capital investment, and labor supply. Retirement arises endogenously as part of the labor supply decision.

The model allows for both an endogenous wage process through human capital investment (which is typically assumed exogenous in the retirement literature) and an endogenous retirement decision (which is typically assumed exogenous in the human capital literature). We estimate the model using Indirect Inference to match the life-cycle profiles of wages and hours from the SIPP data.

Yajing Xu, Michael Sherris and Jonathan Ziveyi

Cohort effects have been identified in many countries. However, some mortality models only consider the modelling and projection of age-period effects. Others, that incorporate cohort effects, do not consider cohort specific survival curves that are important for pricing and hedging purposes.

In this paper, we consider modelling mortality development on a cohort basis, propose and assess a multi-cohort mortality model in an affine framework. We model the mortality intensity with common factors that affect all the cohorts as well as cohort specific factors that only affect specific cohorts, so that the correlations among cohorts are not perfect.

Ching Choi and Peng Yu

Population ageing can contribute to a shortage in labour supply. An obvious and popular response to this is to encourage workers to delay their retirement.

While Australian labour force participation rates among older men are showing signs of increase recently after long term declines and rates among women have continued to increase gradually, these rates are still below the Organisation for Economic Co-operation and Development (OECD) average, and for most age groups they are lower than those in the USA and New Zealand and much lower than in South Korea and Japan. Delaying retirement in Australia is therefore a possible policy response to the ageing of the population.

George Kudrna

The Australian government has recently strengthened the means test of the age pension by raising the income reduction (taper) rate and also introduced labour earnings exemptions from the means testing to encourage labour supply of older Australians. This paper assesses economy-wide implications of further hypothetical changes to the means testing of the age pension that represents Australia's first pension pillar. To this end, we apply an overlapping generations (OLG) model for Australia, with the capacity to investigate changes in the taper and labour earnings exemptions.

Our results indicate that further increases in the taper combined with lower income tax rates lead to higher per capita labour supply and assets, as well as to welfare gains in the long run, while labour earnings exemptions have largely positive effects on average labour supply at older ages. Further increases in the taper also generate significant reductions in overall government spending on the pension and, therefore, could be used as an alternative policy to increasing the pension access age.

George Kudrna, Chung Tran and Alan Woodland

In this paper, we investigate two fiscal policy options to mitigate fiscal pressure arising from an ageing of Australian population: pension cuts or tax hikes. Using a computable overlapping generations model, we find that while the two policy options achieve the same fiscal goal, the macroeconomic and welfare outcomes differ significantly. Future generations prefer pension cuts, whereas current generations prefer tax hikes to finance age-related government spending commitments.

Interestingly, taxing consumption or income results in opposing effects on macroeconomic aggregates and welfare across different skill types of households. Increases in the consumption tax rate have positive effects on labour supply, domestic assets and output per capita (similarly to pension cuts), but reduce the welfare of low income households most.

Changyu Liu and Michael Sherris

Pension funds and life insurers offering annuities hold long term liabilities linked to longevity. Risk management of life annuity portfolios aims to immunize or hedge both interest rate and mortality risks. Standard fixed interest duration-convexity hedging must be adapted to allow for both interest rate and longevity risk.

We develop an immunization approach along with a delta-gamma based approach allowing for both risks incorporating models for mortality and interest rate risk. The immunization and hedge effectiveness of fixed-income coupon bonds, annuity bonds, as well as longevity bonds, is compared and assessed using simulations of portfolio surplus outcomes for an annuity portfolio. 

Man Chung Fung, Katja Ignatieva and Michael Sherris

Developing a liquid longevity market requires reliable and well-designed financial instruments. An index-based longevity swap and a cap are analysed in this paper under a tractable stochastic mortality model. The model is calibrated using Australian mortality data and analytical formulas for prices of longevity derivatives are provided. Hedge effectiveness is examined under a hypothetical life annuity portfolio subject to longevity risk.

The paper presents various hedging features exhibited by a longevity swap and a cap based on different assumptions underlying the market price of longevity risk, the term to maturity of hedging instruments, as well as the size of the underlying annuity portfolio. The results are demonstrated to have important implications for the optimal use of longevity hedging instruments with linear and nonlinear payout structures.

Severine Arnold and Michael Sherris

This paper applies cointegration techniques, developed in econometrics to model long-run relationships, to cause-of-death data. We analyze the five main causes of death across five major countries, including USA, Japan, France, England & Wales and Australia. Our analysis provides a better understanding of the long-run equilibrium relationships between the five main causes of death, providing new insights into similarities and differences in trends.

The results identify for the first time similarities between countries and genders that are consistent with past studies on the aging process by biologists and demographers. The insights from biological theory on aging are found to be reflected in the cointegrating relations in all of the countries included in the study.

Adam W. Shao, Michael Sherris and Joelle H. Fong

This paper presents a comprehensive assessment of premiums, reserves and solvency capital requirements for long-term care (LTC) insurance policies using Activities of Daily Living (ADLs) and U.S. data. We compare stand-alone policies, rider benefit policies (LTC insurance combined with whole life insurance), life care annuities (LTC insurance combined with annuities), and shared LTC insurance in terms of premium cost and solvency capital requirements.

Premiums and best-estimate reserves for generic LTC insurance policies are determined using Thiele's differential equation. Product features such as the elimination period and the maximum benefit period are compared using a simulation-based model.

George Kudrna, Chung Tran and Alan Woodland

In this paper, we develop a small open economy, overlapping generations model that incorporates non-stationary demographic transition paths to study the dynamic fiscal effects of demographic shift in Australia. Our main results are summarised as follows. First, the demographic shifts towards population ageing lead to a change in the tax base from labor income to capital/asset income and consumption. The effect on income tax revenue is non-linear along the transition paths. Second, the changes in demographic structure cause substantial increases in old-age related spending programs including health, aged care and pensions.

Significant adjustments in other government expenditures and taxes will be required to finance the larger old-age related benefits in the future. In particular, the government will have to either cut other expenditures by around 32 percent or increase consumption taxes by 28 percent by 2050 to finance these benefits. Third, the increase in survival rates, rather than the decline in fertility rates, is the main driving factor behind these fiscal costs. Fourth, increases in fertility and immigration are not effective solutions to such budget challenges.

Ermanno Pitacco

Long-term care insurance (LTCI) covers are rather recent products, in the framework of health insurance. It follows that specific biometric data are scanty, and pricing problems then arise because of difficulties in the choice of appropriate technical bases.

Different benefit structures imply different sensitivity degrees with respect to changes in biometric assumptions. Hence, an accurate sensitivity analysis can help in designing LTCI products, and, in particular, in comparing standalone products to combined products, i.e. packages including LTCI benefits and other lifetime-related benefits.

Yang Chang and Michael Sherris

Existing longevity indices commonly use age-based mortality rates or period life expectancy. We propose an alternative cohort-based value index for insurers and pension funds to manage longevity risk. This index is an expected present value of a longevity linked cash flow valued using a specied cohort mortality model and a commonly used interest rate model. Since interest rate and longevity risk are inherent with any longevity linked obligation and interest rate risk can be effectively hedged, this index will provide a better measure of the longevity risk than current indices.

Current mortality models are largely age-period based, so we develop a cohort based stochastic mortality model with age-dependent model parameters that provides realistic cohort correlation structures as an underlying basis for the value index. We show how the model improves fitting performance compared to other cohort models, particularly for very old ages, and has a familiar model formulation for financial market participants. We also demonstrate the hedge effectiveness of the index

Heather Booth, Pilar Rioseco and Heather Crawford

Few studies of the association between social networks (SN), social support (SS) and self-rated health (SRH) address the role of demography in determining that association. Yet demography defines social-structural context, differentiates family from friend networks and influences network structures. This study examines the SN-SRH association through cross-cutting analyses of four demographically-defined groups (Males, Females, Partnered, Unpartnered) and three networks (Family, Friend, Group).

The findings question the validity of studies assuming only positive causation and underline the importance of demographic differentiation of both population and networks for understanding the SN-SRH association.

Daniel Alai, Zinoviy Landsman and Michael Sherris

We generalize model calibration for a multivariate Tweedie distribution to allow for censored observations; estimation is based on the method of moments. The multivariate Tweedie distribution we consider incorporates dependence in a pool of lives via a common stochastic component. Pools may be interpreted in various ways, from nation-wide cohorts to employer-based pension annuity portfolios.

In general, the common stochastic component is representative of systematic longevity risk, which is not accounted for in standard life tables and actuarial models used for annuity pricing and reserving.

Rafal Chomik and John Piggott

This chapter sets the context for the rest of the volume. The focus is mostly on countries in East and South-East Asia, but it includes contrasting comparisons to key regional countries such as India and Australia.

Rafal Chomik and John Piggott

We briefly compare the Australian and US economies and demographies, and then describe the Australian arrangements and assess its economic efficiency and efficacy in delivering retirement support. We focus especially on the means testing of the first pillar in Australia and the mandated membership of pre-funded private pension plans.

Daniel H. Alai, Katja Ignatieva and Michael Sherris

Stochastic mortality models have been developed for a range of applications from demographic projections to financial management. We assess and further develop this model. We generalise random shocks from a univariate gamma to a univariate Tweedie distribution and allow for the distributions to vary by age.

George Kudrna

The Australian government has recently strengthened the age pension means test by raising the income taper and also introduced labour earnings exemptions from the means testing to encourage labour supply of older Australians. This paper assesses economy-wide implications of further hypothetical policy changes to the means testing of the age pension.

Fedor Iskhakov, Susan Thorp and Hazel Bateman

We develop and simulate a stochastic lifecycle model to investigate optimal annuity purchases at retirement. Retirees can invest in risky assets, purchase fairly priced immediate or deferred lifetime annuities, and are eligible for a targeted safety net pension. We match baseline parameters to current Australian settings and conduct scenario analyses over a wide range of individual preferences and financial market outcomes.

Yang Chang and Erik Schlogl

We take a more fundamental approach and explicitly model liquidity risk as the driver of basis spreads, reducing the dimensionality of the market for the frequency basis from observed spread term structures for every frequency pair down to term structures of two factors characterising liquidity risk. To this end, we use an intensity model to describe the arrival time of (possibly stochastic) liquidity shocks with a Cox Process.

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

Using an online incentivised discrete choice experiment, we study how well individuals judge financial advice and whether factors other than advice quality influence their evaluations.

Katja Hanewald and Fanny Kluge

Family Structures have changed profoundly in most developed countries in recent decades. Declining fertility and marriage rates and increasing divorce rates, together with longer life expectanies, make financial planning more challenging. Our study analyzes the impact of family structure on individual's attitudes toward risk and on their savings and investment decisions based on data from the German Socio-Economic Panel Study (SOEP) over the period 2004-2010.

Yang Shen and Michael Sherris

This paper considers the lifetime asset allocation problem with both idiosyncratic and systematic longevity risks, in which the stochastic mortality model is given by a general diffusion process.

Adam Wenqiang Shao, Katja Hanewald and Michael Sherris

We analyse the combined impact of house price risk and longevity risk on the pricing and risk profile of reverse mortgage loans in a stochastic multi-period model.

Hazel Bateman, Jeanette Deetlefs, Isabella Dobrescu, Ben Newell, Andreas Ortmann and Susan Thorp

Low levels of non-default decision making among superannuation members in Australia are assumed to be evidence of a lack of interest and capability.

Using member records and survey data from a large Australian superannuation fund, we test the relationship between attitudes towards retirement savings and observable levels of non-default activities (such as making voluntary contributions, choosing or changing investment options and changing insurance cover).

Kostas Mavromaras and Rong Zhu

In this paper we estimate the interdependence of labour force participation decisions made by Australian couples from 2001 to 2011. We focus on couples with a mature age husband, and estimate the interdependence of the participation decision of the couple.

We fnd that the decision of a wife to work or not influences positively, and in a casual fasion, the decision of her husband to work or not.

Ermanno Pitacco

We address life annuities and pensions, looking in particular at transfers/sharing of biometric risks, i.e. risks related to the annuitant's lifetime and health status, involved by the policy conditions or the pension plan rules.

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

Using an online incentivised discrete choice experiment, we study how well individuals judge financial advice and whether factors other than advice quality influence their evaluations. We find evidence that some individuals rely on extraneous signals to judge advice quality and observe some persistency in adviser choice over time.

Hazel Bateman and Kevin Liu

Using data from the China Household Finance Survey - a new nationally representative survey of 8,438 households we critically assess the Chinese pension system using both individual and economy-wide criteria.

We advocate that the key to sustainable reform will be the establishment of a regulatory framework with well-defined governance structures for both publicly and privately managed pension assets.

Craig Blackburn, Katja Hanewald, Annamaria Olivieri and Michael Sherris

This paper assesses the impact of longevity risk management on insurer shareholder value and solvency for an annuity portfolio.

George Kudrna, Chung Tran and Alan Woodland

In this paper we develop an overlapping generations (OLG) model that incorporates non-stationary demographic transition paths to study the dynamic fiscal effects of demographic shift in Australia. Our main results are summarised as follows. First, demographic shift results in lower per capita output and increased capital outflows. Second, the changes in demographic structure lead to a shift in the tax base from labor income to capital income and consumption. Third, there are substantial increases in old-age related expenditures including health, aged care and pensions.

Ramona Meyricke and Michael Sherris

The cost of capital is an important factor determining the premiums charged by life insurers issuing life annuities. Insurers will be able to offer more finely priced annuities if they can reduce this cost whilst maintaining solvency. This capital cost can be reduced by hedging longevity risk with longevity swaps, a form of reinsurance. We assess the costs of longevity risk management using longevity swaps compared to costs of holding capital under Solvency II.

Shang Wu, Ralph Stevens and Susan Thorp

Modeling of subjective survival is critical to the use of mortality expectations in economic models and the life insurance industry. Subjective scaling factors that are used to adjust average survival probabilities for individual expectations are often based on a single observation of personal life expectancy and assumed to be constant for any projected target age. Using survey data on subjective survival probabilities over a range of target ages and from an array of age cohorts, we estimate individual subjective scalings of population mortality probabilities.

Daniel H. Alai, Zinoviy Landsman and Michael Sherris

Systematic improvements in mortality increases dependence in the survival distributions of insured lives. This is not accounted for in standard life tables and actuarial models used for annuity pricing and reserving. Furthermore, systematic longevity risk undermines the law of large numbers; a law that is relied on in the risk management of life insurance and annuity portfolios. This paper applies a multivariate Tweedie distribution to incorporate dependence, which it induces through a common shock component.

Katja Hanewald, Thomas Post and Michael Sherris

We study the optimal product choice of home equity release products from the homeowner's perspective in the presence of longevity, long-term care, house price, and interest rate risk.

Loretti I. Dobrescu

This paper develops a dynamic structural life-cycle model to study how heterogeneous health and medical spending shocks affect the savings behavior of the elderly. Individuals are allowed to respond to health shocks in two ways: they can directly pay for their health care expenses (self-insure) or they can rely on health insurance contracts. There are two possible insurance options, one through formal contracts and another through informal care provided by family.

Hal Kendig and Nina Lucas

Social change in Australia over the post WW II era -including increasing prosperity, massive immigration, and increasing public support - has brought overall improvements in intergenerational relationships and outcomes for older people. The future, however, is more problematic, especially for vulnerable individuals and families over the life course, in the context of rapid societal ageing, uncertain economic prospects, and changing political ideologies.

Michael Sherris and Qiming Zhou

Mortality models used to assess longevity risk and retirement funding have been extended to stochastic models with trends and systematic risk. Systematic risk cannot be readily diversified in an insurance pool or pension fund. It is an important factor in assessing solvency and highlighting the tail risk in longevity insurance and pension products. This paper overviews recent developments in models for mortality heterogeneity and uses a model calibrated to both population mortality and health condition data to consider the impact of model risk and heterogeneity in assessing solvency and tail risk for longevity risk products.

Joelle H. Fong, Adam W. Shao and Michael Sherris

We apply generalized linear models to evaluate disability transitions for individuals in old age based on a large sample of U.S. elderly. We estimate a multi-state model for long-term care insurance applications, and find significant differences in disability rate patterns and levels from the commonly-used Robinson (1996) model.

Cagri S. Kumru and Saran Sarntisart

Self-control problem is an important determinant of individuals' economic decisions. The decision maker's future utility is affected by unwanted temptation. This implies that implications of various government policies would differ if one incorporates these behavioural aspects. Public finance instruments could, however, be used to correct anomalies created by temptation. The purpose of this paper is to examine the question of optimal taxation when individuals have self-control problems.

Daniel Cho, Katja Hanewald and Michael Sherris

We analyse the risk and profitability of reverse mortgages with lump-sum or income stream payments from the lender's perspective. Reverse mortgage cash flows and loan balances are modelled in a multi-period stochastic framework that allows for house price risk, interest rate risk and risk of delayed loan termination.

Shiko Maruyamaya and Meliyanni Johar

When siblings are concerned for the well-being of their elderly parents, the costs of care giving and long-term commitment create a free-rider problem. If siblings living near their parents can share the costs, this positive externality exacerbates the under-provision of proximate living. Location decisions allow siblings to make a commitment to not provide long-term support for parents, and if decisions are made in birth order, elder siblings may enjoy the first-mover advantage. To quantify these effects, we study siblings' location decisions relative to parents by estimating a sequential participation game that features rich heterogeneity.

Vanessa Loh and Hal Kendig

An uncertain economic outlook and the certitude of an ageing population highlight the importance of productivity across all age groups for Australia's future. This paper provides national findings on both paid, tax-generating and unpaid, voluntary productivity across the life course, focusing primarily on the baby boomer cohort now in late middle age.

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

We report the results of two laboratory experiments that study how university student and staff participants chose retirement savings investment options using 'user‐friendly' information prescribed by regulators.

Adam Wenqiang Shao, Michael Sherris and Katja Hanewald

This paper estimates and compares methods of constructing disaggregated house price indices from existing house price models using individual sales data for Sydney. Nine alternative house price models are selected to cover the most frequently used methods in the literature: the mean model, median models (standard and stratified), hedonic models (restricted and unrestricted hedonic), repeat-sales models (age-adjusted and Case-Shiller weighted), and a hybrid of the hedonic and repeat-sales model.

Ramona Meyricke and Michael Sherris

This paper quantities the financial impact of frailty on underwritten annuities. The heterogeneity implied by underwriting factors and frailty is quantified by fitting Generalized Linear Mixed Models to longitudinal data for a large sample of US males.

Daniel Alai, Hua Chen, Daniel Cho, Katja Hanewald and Michael Sherris

In this paper, we compare cash flows and risk profiles from the provider's perspective for reverse mortgage and home reversion contracts.

Severine Gaille, Michael Sherris

This paper applies VECM to cause-of-death mortality rates in order to assess the dependence between these competing risks. We analyze the five main causes of death in Switzerland.

Cagri S. Kumru and Saran Sarntisart

In this paper we provide a model that aims to answer the following questions: First, under what conditions an alternative banking system would arise? Second, what are the growth, and welfare implications of these banking systems?

Andy Wong, Michael Sherris, and Ralph Stevens

This paper uses stochastic mortality and interest rate models to assess life and annuity capital requirements and quantify the benefits of natural hedging taking into account relative profit loadings on products.

Daniel H. Alai, Severine Gaille and Michael Sherris

Changes in underlying mortality rates significantly impact insurance business as well as private and public pension systems. Individual mortality studies have data limitations; aggregate mortality studies omit many relevant details. The study of causal mortality represents the middle ground, where population data is used while cause-of-death information is retained. We use internationally classified cause-of-death categories and data obtained from the World Health Organization. We model causal mortality simultaneously in a multinomial logistic framework.

Julie R. Agnew, Hazel Bateman, and Susan Thorp

We implement a customised survey to a representative sample of 1,024 Australians to examine the relationship between financial literacy and retirement planning.

Overall we find aggregate levels of financial literacy similar to comparable countries with the young, least educated, unemployed and those not in the labor force most at risk. However, unlike the international norm, we find that financial skills increase with age.