George Kudrna, Trang Le and John Piggott

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

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

We show that:

·      Indonesia will undergo pronounced population ageing driven by a reduction in total fertility rate. For example, the aged dependency ratio (65+/15-64) is projected to increase from less than 10% (in 2020) to over 46% in 2100. This is also attributed to an increasing life expectancy, particularly at older ages. For those at age 65, life expectancy is projected to increase by almost 20 years in 2100 (which is almost double the expected lifespan in the middle of the 20th century). Indonesia’s total population has also quadrupled to 273 million since 1950 and is projected to increase to 320 million in 2100. However, the annual population growth rate will become negative, reaching
-0.3% in 2100 due to population ageing.

·      Importantly, drawing on IFLS household survey data, this demographic transition is occurring in an economy where the majority of the labour force operates in informal employment not covered by a formal retirement income policy.

·      At older ages, people continue to derive their income mainly from employment, along with private transfers from their adult children and these two income sources will be impacted by fewer adult children (to provide private transfers) and longer lifespans (affecting the labour supply of older people).

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

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

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

JEL Classification Numbers: I13, I14, I15

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

Qiqi Wang, Katja Hanewald and Xiaojun Wang

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

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

Rafal Chomik and John Piggott 

This submission has grown from a series of interactions with the Royal Commission into Aged Care Quality and Safety secretariat, broadly focused on the question of financing aged care. Communications with the Commission have included a series of questions on this topic. This submission provides responses to these questions, but provide a broader frame for context and coherence.

Hazel Bateman and Inka Eberhardt

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

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

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

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

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

Hazel Bateman, Robbie Campo, David Constable, Isabella Dobrescu, Ailsa Goodwin, Junhao Liu, Ben R Newell and Susan Thorp

By mid-August 2020, Australian superannuation fund members had made more than 3 million applications to withdraw retirement savings under the COVID-19 Superannuation Early Release Scheme, supporting more than $31B in payments. The relaxation of conditions for early release of superannuation savings changed a fundamental feature of the Australian retirement savings system. Responses of members to the early release scheme highlight the effectiveness of the standard superannuation preservation rules. Early withdrawals have short-term and long-term consequences for individual members who take payments under the scheme, and for society as a whole.
We report results of a survey of over 3,000 members of Cbus, a leading industry fund, who withdrew some or all of their superannuation savings in the first phase of the COVID-19 early release scheme between April and June 2020.

Major findings include:

• Surveyed COVID-19 early release scheme applicants expressed urgent short-term need for funds and considerable uncertainty about the long-term consequences of their decision.
• The $10,000 limit both guided and constrained withdrawal amounts.
• Around 25% of surveyed members withdrew almost their entire account balance.
• Immediate financial need (59%) and concerns for future expenditures (27%) were the main reasons members gave for accessing savings. Those who had not experienced reduced working hours were more likely to withdraw for future concerns or to protect their savings.
• Around 30% of surveyed applicants were unsure of, or unconcerned about, the long-term consequences of their withdrawal.
• Around 50% of surveyed applicants either underestimated, or didn’t estimate, the impact of the withdrawal on their superannuation balance at retirement.
• Members who collected information from Cbus and from other sources, such as news services or social media, were half as likely to decide to withdraw within one day or less than members who used no information sources.
• Members who spent longer thinking and consulted more information sources before withdrawing their savings held more realistic expectations of impacts on retirement wealth.

Michael Sherris

This submission to the Royal Commission into Aged Care Quality and Safety provides responses for a possible approach to the Financing of Aged Care in Australia.

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

Abstract: Reducing the eligibility age for pension benefits is considered by many as a policy that will discourage labor supply by mature workers. This paper analyzes a recent Norwegian pension reform which effectively lowered the eligibility age of retirement from 67 to 62 for a group of workers. For the individuals we study, the expected present value of benefits was held constant by introducing flexible claiming and actuarially adjusting the periodic pension payment. This neutralized the income effect of decreasing the access age, while the absence of any earnings test ensured constant present value of the pension, independent of the age when it is claimed. This provides us with a unique opportunity to study the isolated impact of increased flexibility. This paper employs a particular difference-in-difference approach, which allows us to study the effect on the distribution of labor supply behavior (represented by earnings) instead of just the mean. As expected, we find that on average workers reduced their earnings and working hours. However, this initial negative effect is partially offset by an increase in labor force participation rate later at age 64 and 65. An increase in labor force participation after age 65 could well give a positive effect on earnings among elderly from age 62. Our findings thus suggest that increased flexibility could potentially serve as a policy aimed at increasing the labor supply of older workers through promoting gradual exit from the labor force.

Keywords: Retirement; Pension; Flexibility

Michael Sherris

This submission to the Royal Commission into Aged Care Quality and Safety provides initially some general background comments on Aged Care Financing and a discussion of Aged Care Risks and Private Market Insurance Product Innovation based on collaborative research on aged care financing and insuring. Against this background, it then provides selective responses to relevant Questions in the Consultation Paper 2 - Financing Aged Care.

Warwick McKibbin and David Vines 

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

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

Hans Fehr, Maurice Hofmann and George Kudrna 

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

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

Warwick McKibbin and Roshen Fernando

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

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

Peyman Firouzi-Naeim and Golnoush Rahimzadeh

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

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