Daniel Alai, Zinoviy Landsman and Michael Sherris

Systematic improvements in mortality results in dependence in the survival distributions of insured lives. This is not allowed for in standard life tables and actuarial models used for annuity pricing and reserving. Systematic longevity risk also 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 gamma distribution to incorporate dependence. Lifetimes are modelled using a truncated multivariate gamma distribution that induces dependence through a shared gamma distributed component. Model parameter estimation is developed based on the method of moments and generalized to allow for truncated observations.

Loretti Dobrescu, Dimitris Christelis, Alberto Motta

Using life-history survey data from eleven European countries, we investigate whether childhood conditions, such as socioeconomic status, cognitive abilities and health problems influence portfolio choice and risk attitudes later in life.

After controlling for the corresponding conditions in adulthood, we find that superior cognitive skills in childhood (especially mathematical abilities) are positively associated with stock and mutual fund ownership.

George Kudrna and Alan Woodland

Tax concessions are a common feature of private pension pillars around the world. Most countries exempt pension fund earnings from any taxation but tax either benefits (EET regime) or contributions (TEE regime) progressively as regular private income.

By contrast, Australia's superannuation taxation features concessional flat tax rates on contributions and fund earnings, with benefits being generally tax free. Concerned with the vertical equity of the current superannuation tax concessions, this paper provides a quantitative analysis of hypothetical replacements of the existing superannuation tax treatment with the EET and TEE regimes commonly found in other countries.

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 (Conesaet al. (2009)), predicated on the idea that capital is a complement with retirement leisure. 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.

Daniel Alai and Michael Sherris

Longevity risk arising from uncertain mortality improvement is one of the major risks facing annuity providers and pension funds.

In this paper we show how applying trend models from non-life claims reserving to age-period-cohort mortality trends provides new insight in estimating mortality improvement and quantifying its uncertainty. Age, period, and cohort trends are modelled with distinct effects for each age, calendar year, and birth year in a generalized linear models framework.

John Piggott and Rafal Chomik

Australia's retirement income provision system, comprising the 'three pillars' of a means-tested Age Pension, mandatory occupational superannuation and other, voluntary long term savings, is at the heart of understanding the fiscal implications of ageing.

While the Intergenerational Report, an account of long term fiscal sustainability, is celebrating its tenth birthday since the first edition was published, the Superannuation Guarantee (SG), first implemented in 1992, is about to turn a sprightly twenty. This paper considers the intergenerational reports as a prism for studying fiscal, demographic, and policy developments in the Australian retirement income system over the last decade and into the future.

Elena Capatina

In order to design and understand the effects of health care policy reforms, we need to better understand the different ways in which health affects individuals and their economic decisions.

This paper studies four channels through which health affects individuals: (1) productivity, (2) medical expenditures, (3) available time and (4) survival probabilities, and assesses their roles in determining labour supply, asset accumulation and welfare.

Kaarin Anstey

This report was prepared for Alzheimer's Australia by CEPAR Chief Investigator Kaarin Anstey and Mr Kim Kiely.

Kaarin Anstey

CEPAR Chief Investigator Kaarin Anstey made a submission to the ANPHA Consultation on the National Preventive Health Research Strategy.

Kaarin Anstey, Peter Butterworth, Tim Windsor and Dimity Crisp

This report was prepared for the National Seniors Productive Ageing Centre by CEPAR Investigators Kaarin Anstey, Peter Butterworth, Tim Windsor and Dimity Crisp.

Kaarin Anstey, Tim Windsor, Peter Butterworth, Dimity Crisp and Elissa Pearson

This research was prepared for the National Seniors Productive Ageing Centre by CEPAR Investigators Kaarin Anstey, Tim Windsor, Peter Butterworth, Dimity Crisp and Elissa Pearson.

Kaarin Anstey, Kerry Sargent-Cox and Carly Pymont

This 5-year validation study was funded by and prepared for the NRMA ACT Road Safety Trust by CEPAR Investigators Kaarin Anstey, Kerry Sargent-Cox and Carly Pymont.

Rafal Chomik and John Piggott

The fiscal challenges of population ageing can be tackled in a number of ways. These include investing in capital and productivity of the smaller workforce, greater saving for retirement, higher migration, an active population policy, reducing benefits for the old, and/or encouraging and enabling them to work longer.

This briefing focuses on the latter. It presents historical and international precedents for higher mature-age labour force participation rates in Australia, summarising available data as well as looking at the public policy response so far and the potential for further intervention.

Katja Hanewald and Michael Sherris

The recent international credit crisis has highlighted the significant exposure that banks and insurers, especially mono-line credit insurers, have to residential house price risk. This paper provides an assessment of risk models for residential property for applications in banking and insurance including pricing, risk management, and portfolio management.

Michael Keane and Olena Stavrunova

The size of adverse selection and moral hazard effects in health insurance markets has important policy implications. For example, if adverse selection effects are small while moral hazard effects are large, conventional remedies for inefficiencies created by adverse selection (e.g., mandatory insurance enrolment) may lead to substantial increases in health care spending.

Hazel Bateman, Christine Eckert, John Geweke, Jordan Louviere, Stephen Satchell and Susan Thorp

Financial regulators are weighing up the effectiveness of different templates for communicating investment risk to retirement savers since welfare depends on comprehension of risk information. We compare nine standard risk presentations using a discrete choice experiment where subjects choose between three retirement accounts. Switching between graphical or textual presentations, or between formats that emphasize benchmarks rather than return ranges or values at risk, affects predicted choices more than large changes in underlying risk.

Hazel Bateman and John Piggott

This paper documents developments in public sector pensions in Australia, and reports estimated unfunded liabilities associated with benefits promised to public sector employees.

Australia's experience with public sector pensions is unusual - currently, the defence forces and the judiciary apart, all new entrants to public sector schemes confront defined contribution (DC) plans.

Chung Tran and Alan Woodland

This paper proposes and assesses consistent multi-factor dynamic ane mortality models for longevity risk applications. The dynamics of the model produce closed-form expressions for survival curves.

The framework includes an arbitrage free model specication. Importantly, the mortality model provides consistent future survival curves with the same parametric form as the initial curve.

Thomas Post and Katja Hanewald

Theoretical studies suggest that unexpected changes in future survival probabilities, that is, longevity risk, are important determinants of individuals' decision making about consumption, saving, allocation of assets, and retirement timing.

Based on a data set that matches subjective survival expectations and savings indicators from the Survey of Health, Ageing and Retirement in Europe (SHARE) with life table data from the Human Mortality Database this study provides first empirical evidence that individuals are aware of longevity risk.

Katja Hanewald, John Piggott and Michael Sherris

This paper analyzes an individual's post retirement longevity risk management strategy allowing for systematic longevity risk, recent product innovations, and product loadings.

A complete-markets discrete state model and multi-period simulations of portfolio strategies are used to assess individual longevity insurance product portfolios with differing levels of systematic and idiosyncratic longevity risk.

Cagri Kumru and Athanasios C. Thanopoulos

This paper examines the impact of various fiscal policies, namely, taxes on consumption, labor and capital when agents have self-control preferences. Agents trade in a stochastic overlapping generations economy while facing borrowing constraints. We quantitatively show that modelling choices, such as, liquidity constraints, life-cycle structure and idiosyncratic earnings risks, that were previously considered to be critical in delivering a positive capital income tax, need not be binding in this regard.

We argue and quantitatively show that for a sufficiently large measure of individuals having self-control preferences instead of CRRA preferences, or alternatively, for a sufficiently high cost of exercising self control when all individuals are self-control types, the optimal capital income tax is zero. 

Michael Keane

This paper examines the effect of labor income taxation in life-cycle models where work experience builds human capital. In this case, the wage no longer equals the opportunity cost of time - which is, instead, the wage plus returns to work experience. This has a number of interesting consequences.

First, contrary to conventional wisdom, in such a model permanent tax changes can have larger effects on labor supply than temporary tax changes.

Second, even with small returns to work experience, conventional methods of estimating the inter-temporal elasticity of substitution will be very seriously biased towards zero.

Third, for plausible parameter values, both compensated and uncompensated labor supply elasticities are likely to be quite a bit larger than (conventional) estimates of the inter-temporal elasticity of substitution (despite the fact that the latter is typically viewed as an upper bound on the former).

Fourth, for plausible parameter values, large welfare losses from proportional income taxation are quite consistent with existing (small) estimates of labor supply elasticities.

Craig Blackburn, Michael Sherris

This paper proposes and assesses consistent multi-factor dynamic affine mortality models for longevity risk applications. The dynamics of the model produce closed-form expressions for survival curves. The framework includes an arbitrage-free model specification.

There are multiple risk factors allowing applications to hedging and pricing mortality and longevity bonds, mortality derivatives and more general risk management problems. A state-space representation is used to estimate parameters for the model with the Kalman filter.

Hal Kendig

CEPAR Chief Investigator, Hal Kendig, calls for a well-resourced Aged Care and Support Research Program, and for greater leadership and strategic investment by the Australian Government in its resourcing of research funding for aged care, including the National Health and Medical Research Council (NHMRC) and the Australian Research Council (ARC). 

Hazel Bateman, Christine Ebling, John Geweke, Jordan Louviere, Stephen Satchell, Susan Thorp

This research studies the propensity of individuals to violate implications of expected utility maximization in allocating retirement savings within a compulsory defined contribution retirement plan. The paper develops the implications and describes the construction and administration of a discrete choice experiment to almost 1200 members of Australia's mandatory retirement savings scheme.

The experiment finds overall rates of violation of roughly 25%, and substantial variation in rates, depending on the presentation of investment risk and the characteristics of the participants.

Erik Hernaes, John Piggott, Ola Lotherington Vestad and Tao Zhang

This paper revisits the question of whether defined benefit pension plans inhibit labour mobility. Using national register data for three distinct periods, we define and calculate a measure of changes in individual pension entitlements which we term potential portability gain.

Estimation results indicate that the effect of portability gains on the propensity to change jobs is either weak or non-existent, and there are no signs of gains or losses in pension entitlements being reflected in wages for job changes.

Shu Su and Michael Sherris

Heterogeneity in mortality rates is known to exist in populations, undermining the use of age and sex as the only rating factors for life insurance and annuity products. Life insurers underwrite life products using a variety of rating factors to allow for this heterogeneity. In the case of life annuities, there is limited underwriting used.

Chao Qiao and Michael Sherris

Group Self-annuitisation Schemes (GSAs), or Pooled Annuity Schemes, are designed to share uncertain future mortality experience including systematic improvements. They have been proposed because of the significant uncertainty of future mortality improvement on pension and annuity costs.

Carolyn Njenga and Michael Sherris

Mortality risk models have been developed to capture trends and common factors driving mortality improvement. Multiple factor models take many forms and are often developed and fitted to older ages.

In order to capture trends from young ages it is necessary to take into account the richer age structure of mortality improvement from young ages to middle and then into older ages.

Juergen Jung and Chung Tran

In this paper we develop a stochastic dynamic general equilibrium overlapping generations (OLG) model with endogenous health capital to study the macroeconomic effects of the Affordable Care Act of March 2010 also known as the Obama health care reform.

We find that the insurance mandate enforced with fines and premium subsidies successfully reduces adverse selection in private health insurance markets and subsequently leads to almost universal coverage of the working age population.

Renuka Sane and John Piggott

Many countries have policies offering transfers or other entitlements, subject to a resources test. In most cases, these exempt the family home. While the impacts of means-tested programs on saving and labor supply have been extensively studied, exempting the owner-occupier home has escaped analytic attention.

We assess the exemption of the owner-occupied home from the Australian age-pension on residential mobility and housing trade-downs.

Dr. Meimanat Hosseini-Chavoshi, Dr. Jeromey Temple and Dr. Tim Adair

This report was prepared by CEPAR research fellow Dr. Meimanat Hosseini-Chavoshi, Dr. Jeromey Temple and Dr. Tim Adair for the Productive Ageing Centre. National Seniors Australia, Canberra.

Hal Kendig

This report was produced for the ACT Community Services Directorate, Department of Disability, Housing and Community.

CEPAR Chief Investigator Hal Kendig also presented this research at The Australian National Univeristy in May 2013.