Hazel Bateman, Andy Lai, and Ralph Stevens

We assessed alternative presentations of investment risk using a discrete choice experiment which asked subjects to rank three investment portfolios for retirement savings across nine risk presentation formats and four underlying risk levels. Using Prospect Theory utility specifications we estimate individual-specific parameters for risk preferences in gains and losses, loss aversion, and error propensity variability.

Our results support presentations that describe investment risk using probability tails. Risk preferences and error propensity were found to vary significantly across sociodemographic groups and levels of financial literacy.

Julie R. Agnew, Hazel Bateman, and Susan Thorp

This paper presents new evidence from a national survey of non-retired individuals with superannuation accounts between the ages of 25 and 65. Fielded in June of 2012, the survey responses suggest that Australians often are ill informed about many important features of the superannuation system. This lack of retirement system knowledge is consistent with findings in other countries.

Specifically, the survey suggests that Australian respondents are most challenged by questions associated with the access age to their superannuation savings, the risky composition of balanced funds (a popular default investment option), and the tax treatment of superannuation contributions and investments.

Julie R. Agnew, Hazel Bateman, and Susan Thorp

Existing research shows that adjustment to retirement is correlated with pre-retirement planning. This study presents new insights into the retirement preparedness of Australians at the later stages of working life.

Recent surveys of those approaching and entering retirement show that the extent of planning around exiting the workforce, financial management, bequest provision and activities during retirement vary greatly.

Joelle H. Fong, Benedict SK. Koh, and Olivia S. Mitchell

This paper examines how inability to perform activities of daily living relates to the risk of nursing home admission over older adults' life courses.

Using longitudinal data on persons over age 50 from the Health and Retirement Study, we show that aging one year boosts the probability of having two or more disabilities by 9 to 12 percent in a multivariate logistic model.

Bei Lu and John Piggott

This paper proposes a Notional Defined Contribution (NDC) mechanism to ensure pension mobility for migrating workers, in both the accumulation and drawdown phases. Plan governance would ensure independence from the three existing pension systems. Although the plan's design would be of the NDC type, requiring no pre-funding, in practice the relatively young migrant demographic has the potential to generate considerable reserves.

An appropriately structured NDC plan of this type is shown to be viable by reference to a previously developed model of Zhejiang Province's social security systems.

Ermanno Pitacco

Many modern insurance products are designed as packages, whose items may be either included or not in the product actually purchased by the client.

For example: the endowment insurance which can include various rider benefits and options, the Universal Life insurance, the Variable Annuities, the presence of possible LTC benefits in pension products. The benefits provided by these products imply a wide range of "guarantees" and hence risks borne by the insurance company (or the pension fund). Guarantees and inherent risks clearly emerge in recent scenarios, in particular because of volatility in the financial markets and trends in mortality / longevity.

Erik Hernaes, Simen Markussen, John Piggott and Ola Vestad

The relationship between retirement and mortality is studied with a unique administrative data set covering the full population of Norway.

A series of retirement policy changes in Norway reduced the retirement age for a group of workers but not for others. By employing a difference-in-differences framework based on monthly birth cohort and treatment group status we first establish that the early retirement program significantly reduced the retirement age - this remains true when we account for program substitution, for example into the disability pension.

Joelle H. Fong, John Piggott, and Michael Sherris

This paper assesses the cost and risk faced by public sector, defined benefit plan providers arising from uncertain mortality, including longevity selection, mortality improvements, and unexpected systematic shocks.

Using longitudinal micro data on Australian pensioners, we quantify the extent of longevity selection at both aggregate and scheme level.

Bei Lu

This paper uses the China Health and Retirement Longitudinal Study (CHARLS) data to investigate the net impact on the old age household income inequality when the new rural pension plan is in place. Logit and OLS analysis are used to estimate the changes of the probability and value of family transfers when other variables change.

Results indicate that net private transfers are in most cases uncorrelated with household income, suggesting that the current public transfer (the new rural pension) will not crowd out private transfers. Based on these findings, Gini index simulations are employed to compare income inequality with and without rural public pension.

Meliyanni Johar and Shiko Maruyama

When siblings wish for the well-being of their elderly parents, the cost of caregiving and long-term commitment creates a free-rider problem among siblings. We estimate a sequential game to investigate externality and strategic interaction among adult siblings regarding their location choice relative to their elderly parents.

George Kudrna and Alan Woodland

In this paper we investigate the macroeconomic and welfare effects of the major changes of the mandatory superannuation reform proposed in the 2010-11 Australian federal budget. These changes include gradual increases in the mandatory employer contributions from 9 to 12 percent of gross earnings and a policy that effectively removes the concessional 15 percent tax on mandatory contributions for workers with annual taxable income of up to $37,000.

Jonathan Ziveyi, Craig Blackburn, Michael Sherris

This paper considers the pricing of European call options written on pure endowment and deferred life annuity contracts, also known as guaranteed annuity options. These contracts provide a guarantee value at maturity of the option. The contract valuation is dependent on stochastic interest rate and mortality processes.

Elisabetta Magnani, Garima Verma, Anu Rammohan

We model the allocation of time resources by adult children between competing caring activities - those towards coresiding elderly and those towards coresiding children.

We test the implications of our model for children's school performance by focusing on Indonesia, a country characterized by heterogeneity in social norms, population ageing and reliance on the family for elderly support.

Dominic Ho and Michael Sherris

The insurance linked securities (ILS) market is an increasingly important alternative asset class for which risk and return analysis differs from other asset classes. Measures of portfolio risk and return for an ILS portfolio are based on the expected losses and expected excess returns over the risk free rate.

Multiple criteria decision making (MCDM) has found successful applications to many real world decision problems. This paper examines the application of two popular MCDM methods, Analytical Hierarchy Process (AHP) and ELECTRE III, to ILS portfolios.

Maathumai Nirmalendran, Michael Sherris and Katja Hanewald

This paper provides a detailed quantitative assessment of the impact of solvency capital requirements on product pricing and shareholder value for a life insurer. A multi-period firm value maximization model for a life annuity provider, allowing for stochastic mortality and asset returns, imperfectly elastic product demand, as well as frictional costs, is used to derive optimal capital and pricing strategies for a range of solvency levels reflecting differences in regulatory regimes.

Elena Veprauskaite and Michael Sherris

This paper considers optimal reinsurance based on an assessment of the reinsurance arrangements for a large life insurer. The objective is to determine the reinsurance structure, based on actual insurer data, using a modified mean-variance criteria that maximises the retained premiums and minimizes the variance of retained claims while keeping the retained risk exposure constant, assuming a given level of risk appetite.

The portfolio of life and disability policies use quota-share, surplus and a combination of both quota-share and surplus reinsurance. Alternative reinsurance arrangements are compared using the modified mean-variance criteria to assess the optimal reinsurance strategy. The analysis takes into account recent claims experience as well as actual premiums paid by insured lives and to the reinsurers.

Dimitris Christelis and Loretti I. Dobrescu

Using micro data from eleven European countries, we investigate the impact of being socially active on cognition in older age. Cognitive abilities are measured through scores on numeracy, fluency and recall tests.

We address the endogeneity of social activities through panel data and instrumental variable methods. We find that social activities have an important positive effect on cognition, with the results varying by gender.

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.

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.

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.