Abstract

Demographic projections are widely used by policymakers, planners, and researchers. They provide essential information for decision-making across sectors such as healthcare, education, and infrastructure. This study explores the use of demographic projections in Australia, focusing on government practitioners while also including respondents from academia and the private sector. Through a 15-minute online survey of 62 participants, the research identified who used projections, their purposes, and the features users valued most. Key findings highlighted significant differences in needs between government and academic users. Government practitioners prioritised medium-term horizons (10–19 years), national and state-level data, local-level data (e.g., SA2 and LGA), and frequent updates. Similarly, academic users in the small sample reported using national and state-level data but placed less emphasis on small-area projections. There is a strong demand for projections that include uncertainty ranges, yet many users reported limited confidence in interpreting and applying these measures. Additionally, government users emphasised the need for scenario-based projections to account for dynamic factors such as migration policies or economic shifts. Respondents also identified challenges, including insufficient granularity, infrequent updates, and limited transparency around projection assumptions. These findings underscore the importance of aligning research with the needs of government practitioners and fostering collaboration between researchers and policymakers. By addressing these gaps, this work aims to strengthen the usability of demographic projections and encourage future partnerships to enhance evidence-based policy and planning.

Funding: This paper was supported by an ARC Linkage Project (grant number: LP210200733) and the Australian Research Council's Centre of Excellence in Population Ageing Research (grant number: CE1101029). The findings and views reported in this article, however, are those of the authors and should not be attributed to our government partners.

Appendix: A Survey of Demographic Projection Users

Yuxin Zhou, Len Patrick Garces, Yang Shen, Michael Sherris, and Jonathan Ziveyi

Abstract: Risk-sharing rules have been applied to mortality pooling products to ensure these products are actuarially fair and self-sustaining. However, most of the existing studies on the risk-sharing rules of mortality pooling products assume deterministic mortality rates, whereas the literature on mortality models provides empirical evidence suggesting that mortality rates are stochastic and correlated between cohorts. In this paper, we extend existing risk-sharing rules and introduce a new risk-sharing rule, named the joint expectation rule, to ensure the actuarial fairness of mortality pooling products while accounting for stochastic and correlated mortality rates. Moreover, we perform a systematic study of how the choice of risk-sharing rule, the volatility and correlation of mortality rates, pool size, account balance, and age affect the distribution of mortality credits. Then, we explore a dynamic pool that accommodates heterogeneous members and allows new entrants, and we track the income payments for different members over time. Furthermore, we compare different risk-sharing rules under the scenario of a systematic shock in mortality rates. We find that the account balance affects the distribution of mortality credits for the regression rule, while it has no effect under the proportional, joint expectation, and alive-only rules. We also find that a larger pool size increases the sensitivity to the deviation in total mortality credits for cohorts with mortality rates that are volatile and highly correlated with those of other cohorts, under the stochastic regression rule. Finally, we find that risk-sharing rules significantly influence the effect of mortality shocks on fund balances since, under different risk-sharing rules, fund balances have different sensitivities to deviations in mortality credits.

Keywords: Risk-sharing rule, mortality pooling product, stochastic mortality rate, correlated mortality rate

Juergen Jung and Chung Tran

Abstract: In this paper we first provide empirical evidence on the long-lasting effects of poor health on stock market participation, asset portfolio composition, and the wealth gap over the lifecycle in the U.S. To quantify the importance of this health-wealth portfolio channel we formulate a structural lifecycle model that incorporates elastic labor supply, asset portfolio choice, and household heterogeneity in health status, health expenditure, health insurance, and earnings ability. Through counterfactual simulations, we demonstrate that the health-wealth portfolio channel plays a significant role in explaining variations in wealth gaps across groups and over the lifecycle. Finally, our findings highlight the important role of the health insurance system in reducing wealth inequality.

Keywords: Health and income risks, Health insurance, Heterogeneity, Lifecycle savings, Risky and safe assets, Asset portfolio, Inequality.

Cheng Wan, Hazel Bateman and Katja Hanewald

Abstract: We develop a rich life-cycle model to assess the demand for life annuities, critical illness insurance, and long-term care insurance by retirees in a portfolio-allocation setting. We calibrate our model to urban China, where retirees face limited public insurance and undeveloped private markets. We show that retirees with a low pension should allocate at least 30% of their financial wealth at retirement to a life annuity. Those with an average pension should allocate at least 30% to critical illness insurance. The allocation to long-term care insurance ranges from 5% to 33% across all economic profiles considered. Access to critical illness and long-term care insurance does not necessarily increase annuity demand. However, access to annuities decreases the demand for long- term care insurance. Our results suggest that countries with limited public insurance should first ensure the adequacy of retirement income and then focus on covering catastrophic medical expenses while providing basic long-term care services for all.

Keywords: Life-cycle saving; Annuity; Long-term care insurance; Critical illness insurance; Health insurance; Retirement; China

Cheng Wan, Hazel Bateman, Hanming Fang, and Katja Hanewald

Abstract: In many low- and middle-income countries, social insurance provides basic pension benefits with limited cover for illness and care costs, while private insurance markets are underdeveloped. Using an online survey of retirement insurance choices in urban China, we explore the stated demand for longevity, critical illness and long-term care (LTC) insurance. Most preferred is critical illness and LTC insurance cover for 50% of the expected out-of-pocket costs, and a monthly annuity of around 20% of average urban disposable income. We find that access to critical illness and LTC insurance can release precautionary savings for the purchase of annuities. Better product knowledge, higher financial competence, stronger bequest motives, and lower risk tolerance are linked to higher demand for critical illness and LTC cover but lower demand for annuities. Our results inform the development of retirement insurance markets in countries with ageing populations and gaps in social and private insurance.

Keywords: long-term care insurance, critical illness insurance, annuities, financial competence, risk aversion, health care

Yunxiao (Chelle) Wang, Katja Hanewald, Zilin (Scott) Shao and Hazel Bateman

Abstract: Reverse mortgage markets remain relatively small internationally, with one frequently cited reason being bequest motives. We study the role of reverse mortgages in intergenerational financial planning as a tool for families to bring forward bequests. We develop a new two-generation lifecycle model with parental altruism to compare the welfare gains of bequests and early bequests (inter vivos gifts) for homeowning parents and adult children seeking to purchase their first home. The two-generation model accounts for house price risk, interest rate risk, investment risk, wage growth, health shocks, long-term care costs, private pensions, and means-tested public pensions. The model results suggest that families across a range of wealth levels can enjoy large welfare gains when the parent uses a reverse mortgage both for retirement income and to gift the adult child a first home deposit. By replacing parent bequest utility with altruism, our model better captures the welfare gains of early bequest for both generations. Compared to literature which shows reverse mortgage demand decreasing as bequest motives increase, we find that as the parent cares more about the child’s wellbeing, through altruism, utility gains from reverse mortgages for the family increase.

Keywords: Retirement income, reverse mortgage, inter-generational transfers, altruism, gifting, long-term care costs, bank of mum and dad

Supplementary Material

Yuxin Zhou and Jan Dhaene

Abstract: There is a growing need for higher retirement incomes to cover the higher long-term care (LTC) costs when retirees become functionally disabled or ill. However, most of the existing mortality pooling products in the literature do not consider the health status of members. Hence, they do not provide higher retirement incomes to members who have LTC needs due to deteriorated health conditions. To address this issue, we propose a health contingent mortality pooling product that is actuarially fair and self-sustaining, featuring health-state-dependent income payments. The proposed framework allows free transitions between health states so that recovery from functional disability is allowed. The framework has the flexibility to allow any number of health states, while we use a five-state model with the health states constructed from two dimensions, which are functional disability and morbidity. Moreover, the product allows heterogeneity so members can have different ages, contributions, initial health states, joining times, and rates of investment returns. Allowing heterogeneous members to join helps increase the pool size and generate more stable income payments. We find that the proposed health-contingent pooling product consistently provides significantly higher retirement incomes to members with functional disability and morbidity, while the costs to healthy members are relatively low. We also find that the jump in income payments happens immediately when there is a transition to a less healthy state, allowing members to quickly obtain higher incomes to cover the higher costs incurred by being functionally disabled or ill. Meanwhile, if the member recovers from functional disability, the income payments will decrease to reflect the reduced LTC cost.

Keywords: Mortality pooling product, Long-term care, Retirement income, Health-contingent, Multi-state health model

Kyu Park and Michael Sherris

Abstract: Private long-term care insurance (LTCI) is not available in many countries, including Australia, with individuals relying on government aged care and their own retirement savings to meet aged care needs. We consider the design of private LTCI products to cover individual out-of-pocket aged care costs, assess their pricing using a recently published model of chronic illness and disability in Australia, evaluate the capital costs for insurers and their implications for pricing, and analyse the demand for the products through utility analysis. We consider individuals in good health as well as those who are disabled or with chronic illness and incorporate estimated trends in mortality and disability. Although we focus on Australia, the results have important implications and insights for other developed countries. We consider several LTCI products, encompassing stand-alone LTCI and a life care annuity (LCA). We incorporate public aged care co-payments, a comfortable consumption level and the aged pension for Australian retirees, as well as solvency capital requirement (SCR) based on the Solvency II into our analysis. We also include a systematic literature review of LTCI pricing approaches that informs our analysis. We show how the SCR is significant for the stand-alone LTCI premiums and reduced for the LCA premiums. Our demand analysis illustrates how LTCI products increase individual utility and welfare in most cases and quantifies how this is impacted by product expense loading, risk aversion, wealth levels, and bequest motives.

Mengyi Xu and Gaoyun Yan

Abstract: The length of stay in permanent residential care is a crucial metric for evaluating the utilization of institutional care and informing sustainable aged care policies. Understanding this metric is especially relevant in Australia, where the decision on how to pay the substantial nursing home accommodation costs must be made shortly after admission and is heavily influenced by the expected duration of stay. We investigate the length of stay in long-term institutional care by analyzing a cohort of older Australians first admitted to permanent residential care in 2008. By employing survival analysis that captures time-varying covariates, we find that, in addition to demographic factors like age and gender, the organization type of nursing homes and their service size significantly influence the length of stay. Failing to account for potential changes due to transfers between nursing homes can lead to a significant underestimation of the impact of organization type and service size.

Keywords: length of stay, nursing homes, AFT model, survival analysis, prospective cohort study

Katja Hanewald and Hazel Bateman

Introduction: In Australia, as in many countries, housing wealth is a key component of retiree household savings. This was underscored by the 2020 Retirement Income Review (Australian Treasury, 2020), which reported that for most households aged 65 and over, the family home is their largest asset. The review found that using superannuation assets more efficiently and accessing equity in the home can significantly boost retirement incomes without the need for additional superannuation contributions. Based on modelling and projections, the review concluded that using relatively small portions of home equity can substantially improve retirement incomes and that releasing home equity can boost retirement incomes with a modest impact on debt.

Australian retirees have several equity release options to access the wealth tied up in their homes without having to sell the property. The government’s Home Equity Access Scheme (formerly Pension Loans Scheme) allows older Australians to supplement retirement income by accessing home equity, with repayment deferred until the home is sold. Similarly, reverse mortgages offered by different providers allow homeowners to borrow against their home equity, with the loan repaid upon selling the property, relocating, or at the borrower’s death. Other options include home reversion schemes, where a portion of the home’s equity is sold for either a lump sum or regular payments, and shared appreciation agreements, which provide payments in exchange for a share in the property’s future sale value. While these options are increasingly recognised for their potential to improve financial flexibility in retirement, their overall uptake remains modest, suggesting a need for greater public awareness and understanding.

This paper aims to provide background information, summarise recent research in this area and identify policy suggestions.

Roshen Fernando and Warwick McKibbin

Abstract: Antimicrobial resistance (AMR) is a growing global health threat that led to 1.27 million deaths in 2019. Given the widespread use of antimicrobials in healthcare, agriculture, and industrial applications and a range of factors affecting AMR, including demographic trends and physical climate risks, an economy-wide approach is essential to understand and assess the economic consequences of AMR. We model the global economic impacts of AMR under six alternative scenarios. These scenarios are designed to incorporate assumptions about changes in AMR-related disease incidence, the impact of a central scenario about future demographic change on AMR over time, and explore the sensitivity of assumptions about the effects of AMR on agriculture productivity. We also examine the additional impacts of changing climate risks on the evolution of AMR (focusing on one climate scenario), the consequences of changes in country risk premia due to the differential impacts of the evolution of AMR on countries, and the global economic impacts of changes in government expenditure in response to AMR. Our results find a significant global economic burden of worsening AMR due to demographic change and climate change risks, as well as significant economic benefits of taking action to address AMR. We emphasize that a “one-health” approach to managing AMR will have substantial economic benefits over the coming decades.

Keywords: Antimicrobial Resistance, Antibiotic Resistance, Infectious Diseases, Economic Modelling

Loretti I. Dobrescu and Akshay Shanker

Abstract: We introduce a fast upper envelope scan (FUES) method to solve and estimate dynamic programming problems with discrete and continuous choices. FUES builds on the standard endogenous grid method (EGM). EGM applied to problems with continuous and discrete choices, however, does not by itself generate the optimal solution, as the first order conditions used to retrieve the endogenous grid are necessary but not sufficient. FUES sequentially checks the secant lines between EGM candidate solution points and eliminates those not on the upper envelope of the value correspondence by only allowing discontinuities in the policy function at non-concave regions of the value correspondence. Unlike previous methods used to perform EGM in discrete-continuous dynamic models, FUES does not require the monotonicity of the policy functions or analytical information of the value function gradient. It is also computationally efficient, straightforward to implement, and for sufficiently large EGM grid sizes, guaranteed to recover the optimal solution.

Key Words: discrete and continuous choices, non-convex optimization, Euler equation, computational methods, dynamic programming

Annamaria Olivieri and Daniela Tabakova

Abstract: Special-rate life annuities offer customized annuity rates, based on the lifestyle or health status of the individual. Their main purpose is to encourage the annuity demand, which is still underdeveloped in many markets; as better annuity rates are quoted for individuals showing a higher mortality profile, the number of individuals attracted by life annuities could increase. Providers should then gain larger pool sizes; however, this is possibly matched by a greater heterogeneity of the pool, due to several risk classes defined by the annuity design. Heterogeneity emerges not only in terms of different life expectancies, but also in respect of the dispersion of the lifetime distribution; indeed, situations resulting in a lower life expectancy also show greater variability of the lifetime. As it is well-known, pooling effects are reinforced by the pool size, while they are weakened by its heterogeneity, with a possibly unclear impact on the overall longevity risk to which the provider is exposed.

In this paper we investigate the longevity risk profile of an annuity pool consisting of several risk classes. We consider both the idiosyncratic and aggregate components of the risk, by modelling the random number of deaths and assuming a stochastic mortality dynamics. The heterogeneity of risk classes is represented alternatively in a deterministic and stochastic setting.

Our conclusions are in line with similar findings discussed in the literature, but obtained in a deterministic framework. Results suggest that the longevity risk profile of the provider is not significantly undermined by a greater pool heterogeneity, with a prevalence of the aggregate component whatever the pool composition.

Keywords: Underwritten annuities, Standard annuities, Enhanced annuities, Impaired annuities, Preferred risks, Substandard lives, Stochastic mortality, Longevity risk, Heterogeneity.

Roshen Fernando

Abstract: Medical advancements in the twenty-first century significantly contribute to increased longevity and the current global demographic trends, including population aging. While rising antimicrobial resistance (AMR) threatens the sustainability of longevity prospects, the current demographic trends also contribute to worsening AMR. We investigate the role of four demographic indicators (population growth, population aging, population density, and urbanization) in the resistance growth of seven pathogens against twelve antimicrobials in 30 countries from 2000 to 2020. We observe heterogeneous responses of different antimicrobial drug-pathogen combinations to demographic trends. We observe that the demographic trends could affect resistance growth more than antimicrobial consumption growth in some antimicrobial- drug pathogen combinations. We emphasize the importance of a broader exploration of factors affecting AMR evolution from a one-health approach and enhanced AMR surveillance, among others, to produce effective policy responses to tame AMR.

Keywords: Antimicrobial resistance, Infectious diseases, Demographic Trends, Population Growth, Population Aging, Urbanization, Econometrics, Machine Learning

Doreen Kabuche, Michael Sherris, Andrés M. Villegas and Jonathan Ziveyi

Abstract: Mortality risk sharing pools such as pooled annuity funds and tontines provide an attractive and effective solution for managing longevity risk. They have been widely studied in the literature. However, such arrangements are not optimal for individuals in need of long-term-care (LTC) insurance. Enhancing the design of pooled annuities and tontines factoring in LTC can aid in reducing the cost of LTC insurance. This paper presents a matrix-based approach for pooling mortality risk across heterogeneous individuals classified by functional disability states and chronic illness statuses. Based on multi-state models of functional disability and health statuses, we demonstrate how individuals with different health risks can share mortality risk in a pooled annuity design. A multi-state pool is formed by pooling annuitants vulnerable to longevity and LTC risks, determining the associated actuarially fair benefits based on individuals' health states. We provide a general structure for setting up a pooled annuity product that can be applied even for complex multi-state models. An extensive analysis is also carried out to illustrate our approach with numerical examples using US Health and Retirement Study (HRS) data. From the numerical illustrations, there is an increasing trend in the expected annuity benefits with higher upsides for individuals in poor health than those in good health, especially when systematic trends and uncertainty are considered in pricing. Smaller pool sizes and higher mortality credits among ill and disabled individuals due to higher death probabilities are the two main factors for the increased benefits in dependency.

Keywords: long-term care insurance, pooled annuity, multi-state models, functional disability, health status.

Loretti I. Dobrescu and Akshay Shanker

Abstract: We introduce a fast upper envelope scan (FUES) method to solve and estimate dynamic programming problems with discrete and continuous choices. FUES builds on the standard endogenous grid method (EGM). EGM applied to problems with continuous and discrete choices, however, does not by itself generate the optimal solution, as the first order conditions used to retrieve the endogenous grid are necessary but not sufficient. FUES sequentially checks EGM candidate solution points and eliminates those not on the upper envelope of the value correspondence by only allowing discontinuities in the policy function at non-concave regions of the value correspondence. Unlike previous methods used to perform EGM in discrete-continuous dynamic models, FUES does not require the monotonicity of the policy functions. It is also computationally efficient, straightforward to implement, and for sufficiently large EGM grid sizes, guaranteed to recover the optimal solution.

Key Words: discrete and continuous choices, non-convex optimization, Euler equation, computational methods, dynamic programming

Yafei Si, Hazel Bateman, Shu Chen, Katja Hanewal, Bingqin Li, Min Su and Zhongliang Zhou

Abstract: Overuse of health care is a potential factor in explaining the rapid increase in health care expenditure in many countries; however, it is difficult to measure overuse. This study employed the novel method of using unannounced standardised patients (SPs) to identify overuse, document its patterns and quantify its financial impact on patients in primary care in China. We trained 18 SPs to present consistent cases of two common chronic diseases and recorded 492 physician patient interactions in 63 public and private primary hospitals in a capital city in western China in 2017 and 2018. Overuse, defined as the provision of unnecessary medical tests and drugs, was identified by a panel of medical experts based on national clinical guidelines. We estimated linear regression models to investigate how hospital, physician and patient characteristics were associated with overuse and to quantify the financial impact of overuse after controlling for a series of fixed effects. We found overuse in 72.15% of the SP visits. The high prevalence of overuse was similar among public and private hospitals, low-competence and high-competence physicians, male and female physicians, junior and senior physicians and male and female patients, but it varied between patients presenting different diseases. Compared to the non-overuse group, overuse significantly increased the total cost by 117.8%, the test cost by 58.8% and the drug cost by 100.3%. The financial impact of overuse was consistent across the aforementioned hospital, physician and patient characteristics. We suggest that the overuse observed in this study is unlikely to be attributable to physician incompetence but rather to the financing framework for primary care in China. These findings illuminate the cost escalation of primary care in China, which is a form of medical inefficiency that should be urgently addressed.

Keywords: health care expenditure, overuse, primary care, standardised patient, China

Supplementary Material

Abstract: We examine individuals’ retirement behaviour in response to changes in the State Pension eligibility age introduced in various Pension Acts in the UK. Our findings show that the annual probability of retirement reduced significantly in response to a one-year increase in State Pension eligibility age, by 16 pp and 13 pp for men and women respectively. They also show that women adjusted their expected retirement age downwards in response to an increase in their SP eligibility age. These findings suggest that whilst an increase in the State Pension eligibility age induces individuals to postpone actual retirement, it does not lead to individuals  revising their expected retirement age upwards, which could result in suboptimal retirement planning. The latter can be problematic for those who rely disproportionately on State Pension as their main source of income and, arguably, targeted communication campaigns are needed to improve retirement planning

Keywords: Retirement, Expectations, United Kingdom Household Longitudinal Study

Abstract: In this paper, we investigate the dynamics of age-cohort survival curves under the assumption that the instantaneous mortality intensity is driven by an affine jump-diffusion (AJD) process. Advantages of an AJD specification of mortality dynamics include the avail- ability of closed-form expressions for survival probabilities afforded by an affine mortality specification and the ease with which we can incorporate sudden positive and negative shocks in mortality dynamics, reflecting events such as wars, pandemics, and medical advancements. As we are interested in modelling the evolution of mortality rates, we propose a state-space approach to calibrate the parameters of the affine mortality process. This ensures consistent survival curves in the sense that forecasts of survival probabilities have the same parametric form as the fitted survival curves. As the resulting state-space model is non-Gaussian due to the presence of jumps, we apply and assess a particle filter-based Markov chain Monte Carlo approach to estimate the model parameters. We illustrate our methodology by fitting one- factor Cox-Ingersoll-Ross and Blackburn-Sherris mortality models with asymmetric double exponential jumps to historical age-cohort mortality data from USA. We find that these one-factor models with jumps have good in-sample fit, but their forecasting performance suggests the need for additional latent factors to improve the accuracy of forecasts.

Key words: Affine mortality models, affine jump-diffusion, age-cohort mortality rates, particle filter, particle Markov chain Monte Carlo

Abstract

Background: Maintaining and optimising intrinsic capacity (IC) across a person’s life course is a core component of the World Health Organization’s model of healthy ageing. However, the contribution of cumulative health inequalities over time to subtle changes in IC in late life is not well understood. 

Methods: We included 21,783 participants aged 45+ from the China Health and Retirement Longitudinal Study and calculated a validated prognostic value of IC. We included eleven early-life factors to investigate their direct influence on IC over thirty years later and cumulative influence through four current socioeconomic factors. We used multivariable linear regression and concentration index decomposition to investigate the contributions of each determinant to IC inequalities. Mediation analysis identified the direct and cumulative contribution of early-life factors. 

Results: Participants with an advantaged environment in childhood and a higher current socioeconomic position had a significantly higher IC score. This inequality was greatest for cognitive capacity and sensory capacity. Overall, early-life factors directly explained 13.92% (95% CI: 12.07% to 15.77%) of IC inequalities, while 28.57% (95% CI: 28.19% to 28.95%) of IC inequalities were explained through the cumulative effects of socioeconomic inequalities over a person’s life course. 

Conclusion: In China, unfavourable early-life factors appear to directly decrease late-life health status, particularly cognitive and sensory capacities rather than locomotor functioning, psychological capacity or homeostasis, and these effects are exacerbated by the cumulative socioeconomic inequalities over a person’s life course. Interventions in early life and subsequently across the life course may be effective in reducing these disparities. 

Keywords: intrinsic capacity, healthy ageing, life course inequality, cognition, China

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George Kudrna

Abstract: This paper investigates the economy-wide effects of mandating private (employment- related) pensions. It draws on the Australian experience with its Superannuation Guarantee legislation which mandates contributions to private retirement (superannuation) accounts. Our key objective is to quantify the long-run implications of alternative mandatory superannuation contribution rates for household economic decisions over the life cycle, household welfare, and macroeconomic and fiscal aggregates. To that end, we develop a stochastic, overlapping generations (OLG) model with labor choice and endogenous retirement, which distinguishes between (i) ordinary private (liquid) assets and (ii) superannuation (illiquid) assets. The benchmark model is calibrated to the Australian economy, fitted to Australian demographic, household survey and macroeconomic data, and accounting for a detailed representation of Australia’s government policy, including its mandatory superannuation system. The model is then applied to simulate the effects of alternative mandatory superannuation contribution rates, with a specific focus on the counterfactual of a legislated future rate of 12% of gross wages. Based on the model simulations, we show that in the long run, this increased mandate generates larger average household wealth, output and consumption per capita and (rational) household welfare across income distribution.

Keywords: Private Pension, Social Security, Income Taxation, Labor Supply, Endogenous Retirement, Stochastic General Equilibrium

George Kudrna, John Piggott and Phitawat Poonpolkul

Abstract: This paper examines the economy-wide effects of government policies to extend public pensions in emerging Asia - particularly pertinent given the region's large informal sector and rapid population ageing. We first document stylized facts about Indonesia's labour force, drawing on the Indonesian Family Life Survey (IFLS). This household survey is then used to calibrate micro behaviours in a stochastic, overlapping-generations (OLG) model with formal and informal labour. The benchmark model is calibrated to the Indonesian economy (2000- 2019), fitted to Indonesian demographic, household survey, macroeconomic and fiscal data. The model is applied to simulate pension policy extensions targeted to formal labour (contributory pension extensions to all formal workers with formal retirement age increased from 55 to 65), as well as to informal labour (introduction of non-contributory social pensions to informal 65+). First, abstracting from population ageing, we show that: (i) the first set of pension policy extensions (that have already been legislated and are being implemented in Indonesia) have positive effects on consumption, labour supply and welfare (of formal workers) (due largely to the formal retirement age extension); (ii) the introduction of social pensions targeted to informal workers at older age generates large welfare gains for currently living informal elderly; and (iii) the overall pension reform leads to higher welfare across the employment-skill distribution of households. We then extend the model to account for demographic transition, finding that the overall pension reform makes the contributory pension system more sustainable but the fiscal cost of non-contributory social pensions more than triples to 1.7% of GDP in the long run. As an alternative, we examine application of a means- tested social pension system within the overall pension reform. We show that this counterfactual reduces the fiscal cost (of social pensions) and further increases the welfare for both current and future generations.

Keywords: Informal Labour, Population Ageing, Social Security, Taxation, Redistribution, Stochastic General Equilibrium.

Manuela Naldini, Myra Hamilton and Elisabeth Adamson

Abstract: The social investment paradigm has received widespread attention as an approach to ‘prepare’ individuals, families, and societies to respond to new social risks they are likely to encounter throughout the life course, particularly those associated with post-industrialisation and globalisation. Early childhood education and care (ECEC) and policies that support women to participate in employment have been a central focus of the social investment paradigm.

But while post-industrialisation and globalisation are closely linked to increases in migration, migrant families are largely absent from social investment policies. From a social investment perspective, access to ECEC and work/care reconciliation policy measures are crucial for migrant children and families. Yet there is a gap in the social investment literature when it comes to access to ECEC and work/care reconciliation policies by migrant families.

Against this backdrop, this paper asks: To what extent are migrant families included or excluded from ECEC and work/care reconciliation policies in the two countries?

Drawing on a comprehensive analysis of eligibility for and access to ECEC and work/care policies by migrant families in Australia and Italy, this paper critically examines the capacity of the social investment approach to respond to new life course risks associated with migration and mobility.

This paper compares social investment policies for migrant families in two countries: Australia and Italy. These two countries have markedly different migration, employment, and care regimes, with both similarities and differences in the organisation of ECEC and policies to promote work/care reconciliation.

It draws attention to the way in which the emergence of the social investment paradigm to address ‘new social risks’ does not take account of the importance of migration and mobility in the contemporary life course.

George Kudrna, John Piggott and Phitawat Poonpolkul

Abstract: This paper examines the economy-wide effects of government policies to extend public pensions in emerging Asia - particularly pertinent given the region’s large informal sector and rapid population ageing. We first document stylized facts about Indonesia’s labour force, drawing on the Indonesian Family Life Survey (IFLS). This household survey is then used to calibrate micro behaviours in a stochastic, overlapping-generations (OLG) model with formal and informal labour. The benchmark model is calibrated to the Indonesian economy (2000-2019), fitted to Indonesian demographic, household survey, macroeconomic and fiscal data. The model is applied to simulate pension policy extensions targeted to formal labour (contributory pension extensions to all formal workers with formal retirement age increased from 55 to 65), as well as to informal labour (introduction of non-contributory social pensions to informal 65+). First, abstracting from population ageing, we show that: (i) the first set of pension policy extensions (that have already been legislated and are being implemented in Indonesia) have positive effects on consumption, labour supply and welfare (of formal workers) (due largely to the formal retirement age extension); (ii) the introduction of social pensions targeted to informal workers at older age generates large welfare gains for currently living informal elderly; and (iii) the overall pension reform leads to higher welfare across the employment-skill distribution of households. We then extend the model to account for demographic transition, finding that the overall pension reform makes the contributory pension system more sustainable but the fiscal cost of non-contributory social pensions more than triples to 1.7% of GDP in the long run. As an alternative, we examine application of a means-tested social pension system within the overall pension reform. We show that this counterfactual reduces the fiscal cost (of social pensions) and further increases the welfare for both current and future generations.

Keywords: Informal Labour, Population Ageing, Social Security, Taxation, Re- distribution, Stochastic General Equilibrium.

Abstract: Can projections of retirement wealth and income motivate pension plan participants to save more? Results of field and online experiments show that participants who see both retirement balance and income projections increase voluntary savings. In the field study, conducted by a large Australian pension plan in 2013-14, participants of the treatment group received current balance, projected retirement balance and projected retirement income information, while participants of the control received only current balance information. Within one year of the treatment, the frequency, and average amount, of voluntary savings by treated plan participants rose significantly, as did the rate of participants interactions with the plan. In the related online experiment conducted in 2017, we tested the relative effect of information on (i) current balance; (ii) current balance and projected retirement balance; (iii) current balance and projected retirement income; and (iv) current balance, projected retirement balance and projected retirement income. Consistent with the field trial, the combination of retirement balance and income projections motivates a significantly higher retirement savings accumulation, after a sequence of ten savings decisions, than current balance information alone. Together our results strongly endorse recent changes to retirement plan benefit statement guidelines initiated by pension regulators globally.

Keywords: pensions, field experiment, benefit projections

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

Abstract: Many consider that reducing the eligibility age for pension benefits 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 abolition 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. We employ 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. Older workers are found to stay longer in the labor market but with reduced intensity, implying a higher incidence of gradual exit. On average the reform leads to small and statistically insignificant increases in aggregate earnings over ages 62 to 66. The fiscal effect was negligible, due to actuarial adjustments of pensions and small changes in aggregate earnings. We do however find a reduced inflow to disability, which may add to any positive fiscal effect. Our findings thus suggest that increased pension flexibility could promote gradual exit from the labor market, allowing improved individual choice and positive welfare effects. It could also be an important component of a broader pension reform.

Keywords: Retirement, Pension, Flexibility

Abstract: The paper examines climate mitigation strategies to reach net-zero emissions by mid-century, focusing on smoothing macroeconomic costs in the short- to medium-term—the horizon relevant for policymakers. It explores a comprehensive policy package, which complements carbon pricing with an initial green fiscal stimulus, consisting of green public investment and subsidies to renewables production. Model simulations show that thanks to the green public spending, the policy package boosts global output relative to the baseline for the first 15 years of the low-carbon transition. Subsequent transitional output costs resulting from further increases in carbon prices are moderate of the order of 1 percent of baseline global GDP by 2050. The findings suggest that upfront green fiscal packages could help smooth the transition to a low-carbon economy. In the current context of the Covid-19 economic crisis, they would help support the recovery from the crisis and put the global economy on a greener, more sustainable path.

Keywords: Climate Change, Net-Zero Emissions, Green Infrastructure, Macroeconomics, DSGE, CGE, G-Cubed

Michael Keane and Timothy Neal

Abstract: There is a long standing controversy over the magnitude of the Frisch labor supply elasticity. Macro economists using DSGE models often calibrate it to be large, while many micro data studies find it is small. Several papers attempt to reconcile the micro and macro results. We offer a new and simple explanation: Most micro studies estimate the Frisch using a 2SLS regression of hours changes on income changes. But available instruments are typically “weak.” In that case, we show it is an inherent property of 2SLS that estimates of the Frisch will (spuriously) appear more precise when they are more shifted in the direction of the OLS bias, which is negative. As a result, Frisch elasticities near zero will (spuriously) appear to be precisely estimated, while large estimates will appear to be imprecise. This pattern makes it difficult for a 2SLS t-test to detect a true positive Frisch elasticity. We show how the use of a weak instrument robust hypothesis test, the Anderson-Rubin (AR) test, leads us to conclude the Frisch elasticity is large and significant in the NLSY97 data. In contrast, a conventional 2SLS t-test would lead us to conclude it is not significantly different from zero. Our application illustrates a fundamental problem with 2SLS t-tests that arises quite generally, even with strong instruments. Thus, we argue the AR test should be widely adopted in lieu of the t-test.

Keywords: Frisch elasticity, labor supply, weak instruments, 2SLS, Anderson-Rubin test

Hans Fehr, Maurice Hofmann and George Kudrna 

Abstract: This paper studies the role of pensions and income taxes in determining homeownership and household wealth. It provides a cross-country analysis, using tax and pension policy designs in Germany, the US and Australia. These developed nations have similar incomes per capita but very different homeownership rates, with the US and Australia having much higher homeownership compared to Germany. The question is to what extent the observed differences in homeownership are induced by national tax and transfer policies. To that end, we develop a stochastic, overlapping generations (OLG) model with tenure choice. The model is calibrated to Germany featuring German statutory public pension and dual income tax systems, and then applied to study the effects of alternative income tax and pension policy structures. Our simulation results indicate that the US and Australian policy designs have a dramatic impact on homeownership, explaining more than half of the observed differentials. We also show significant macroeconomic effects due to differences in tax and pension policies.

Keywords: Housing demand, social security, income taxation, stochastic general equilibrium

Boda Kang, Yang Shen, Dan Zhu and Jonathan Ziveyi

Hazel Bateman, Isabella Dobrescu, Junhao Liu, Ben R. Newell & Susan Thorp

Abstract: The Australian COVID-19 Early Release Scheme (ERS) allowed people in financial hardship immediate access to up to $A20,000 of their ‘preserved’ retirement savings between April and December 2020. Using data from a large Australian pension fund, we examine what drives people’s decisions to take advantage of the ERS. We find that while the majority of survey respondents withdrew money for immediate consumption needs, a substantial proportion of them were concerned about future needs. Most withdrawers thought about the decision for less than a week and many appeared to use the $A10,000 per round limit as an anchor in choosing their withdrawal amount. Conditional on eligibility, the probability of withdrawal was significantly higher where respondents (i) were more concerned about future needs, (ii) did not think about the long-term impact, and (iii) under-estimated or did not estimate the fall in their retirement savings. Our results suggest that many people who withdrew under the scheme did not fully understand the consequences of their choice. These findings raise the question of whether the framing of ‘mandatory’ retirement savings as a mental account to finance retirement has been irrevocably damaged.

Keywords: pension early access, retirement savings, mental accounts, COVID-19

Michael Sherris 

Abstract: The Final Report of the Royal Commission into Aged Care Quality and Safety (2021) highlighted the challenges in developing a sustainable financing system for Aged Care in Australia. The Report recommended additional funding both in the short term and longer term, to provide an adequate level of aged care quality for older Australians including exploring an actuarially based contributory social insurance scheme for aged care. Sustainable financing of aged care requires a balance between government tax-based financing, individual contributions during working life through an aged care levy, co-payments for aged care costs for those receiving aged care and means testing for these co-payments. There should be a role for private market insurance and financing to supplement government financed aged care support.

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp

Abstract: We collect and analyze stated preferences for long-term care insurance that pays income in poor health states instead of reimbursing formal care costs. Around 75% of the sample of 1008 pre-retirees chose to purchase at least some long-term care income insurance from a menu that also included liquid wealth and a life annuity. Our results show that long term care income insurance is complementary to informal care and is attractive to seniors who plan to rely on family members for extensive care. Those who have access to extensive informal care demand 25-37% more health- contingent income per year than those who do not. Females who expect to rely exclusively on extensive care from family members are willing to buy more cover than males. We also find that if long-term care income insurance were available, many healthier seniors would release funds set aside to self-insure long-term care risk and purchase additional longevity insurance.

Keywords: Long-term care insurance; longevity insurance; aged care; informal care; retirement incomes; social care.

Online Appendix: online-appendices-flexible-insurance-for-informal-long-term-care-2021.pdf (cepar.edu.au)

Hazel Bateman, Paul Gerrans, Susan Thorp and Yunbo Zeng

Abstract: We administered an online survey to elicit consumers’ subjective assessments of their decision state for the purchase of life insurance - from pre-aware to purchase decision - in a setting of both active choice and default cover. We find that household formation and financial assets are associated with higher decision states, but not always with being capable and ready to choose. The financially literate are more likely to be in a higher state, but the less financially literate are spread across several states. We also find that personal values matter for readiness to make a choice about life insurance with respondents who place more value on benevolence and self- determination more likely to be aware of life insurance and capable to choose. We conclude that personal values help consumers choose suitable cover and that interventions to increase cover and improve suitability of life insurance should target progression through the decision states.

Keywords: Life insurance, decision states, personal values, financial literacy, defaults.

Michael Keane and Timothy Neal

Abstract: It is well-understood that 2SLS has poor properties if instruments are exogenous but weak. We clarify these properties, explain weak instrument tests, and study how behavior of 2SLS depends on instrument strength. A common standard for acceptable instruments is a first-stage F-statistic of at least 10. But we show 2SLS has poor properties in that context: Besides having little power, 2SLS generates artificially low standard errors precisely in those samples where it generates estimates most contaminated by endogeneity. This problem persists even when instruments are very strong, causing one-tailed 2SLS t-tests to suffer from severe size distortions unless F approaches 10,000. The Anderson-Rubin test alleviates this problem, and should be used even with strong instruments. A first-stage F of 50 or more is necessary to give reasonable confidence that 2SLS will outperform OLS. Otherwise, OLS combined with controls for sources of endogeneity may be a superior research strategy to IV.

Keywords: Instrumental variables, weak instruments, 2SLS, endogeneity, Anderson-Rubin test, F-test, size distortions of tests

George Kudrna, Philip O'Keefe and John Piggott

Abstract: This paper reviews the current state of knowledge about pension policy and pension policy formulation in emerging economies undergoing demographic transition, and, with this background, indicated possible directions for future policy development. The countries we consider are primarily located in East and Southeast Asia, a region which is home to more than 30% of the world's population, and are characterised by increasing life expectancy, falling and /or low fertility ratios, immature social protection policy structures, high rates of informal employment, and in many cases, high rates of co-residency.

These features point to the relevance of strands of research which do not normally sit together in thinking about the evidence base for pension policy formulation and its impacts. They include fiscal implications; impacts on economic growth and intergenerational affordability; the relationship between alternative pension models and labour market (in)formality; the role of public benefits in the context of multi-generation households and intergenerational transfers; and the limitations of pension administration for older people who have worked in the informal sector for most or all of their lives.

The paper documents what we know about these various aspects of the issue and identifies knowledge gaps. On the basis of the evidence we do have, we indicate policy reform directions, in particular regarding development of social pensions directed to older people who have worked in the informal sector.

Roshen Fernando, Weifeng Liu and Warwick J McKibbin

Abstract: This study assesses the global economic consequences of climate-related risk in three broad areas: (1) the macroeconomic impacts of physical climate risk due to chronic climate change associated with global temperature increases and climate-related extreme shocks; (2) the macroeconomic effects of climate policies designed to transition to net zero emissions by 2050 (transition risk); and (3) the potential macroeconomic consequences of changes in risk premia in financial markets associated with increasing concern over climate events.

We consider four widely used climate scenarios (Representative Concentration Pathways, or RCP), and identify the physical damage functions due to chronic climate risks. The chronic climate risks include sea-level rise, crop yield changes, heat-induced impacts on labor, and increased incidence of diseases. We also estimate the future incidence of climate-related extreme events, including droughts, floods, heat waves, cold waves, storms and wildfires, based on climate variable projections under the climate scenarios.

After translating physical climate shocks into economic shocks to labor force and sectoral productivity, we investigate the macroeconomic consequences under the climate scenarios using the G-Cubed model. The results demonstrate that physical climate risk is likely to cause large economic losses in all RCP scenarios, both through chronic climate change and extreme climate shocks.

We then explore the impact of country-specific economy-wide carbon taxes as a representative policy action to drive the global economy to achieve net-zero emissions by mid-century. Transition risks vary according to the ambition and the design of policies to reduce emissions. The results demonstrate that there can be potentially significant costs associated with policies to reduce emissions, and the costs differ across sectors and across countries.

We also address whether changes in climate risk perceptions can significantly impact the real economy through changes in risk premia in financial markets. We calculate shocks to financial risk premia based on relationships between historical climate shocks and changes in financial market risk premia. We apply these shocks to risk premia under the RCP scenarios and find that the cost of rising risk premia can be of a magnitude consistent with historical experience. The cost appears to be smaller than the economic costs of changes in physical climate risk and transition risk.

Keywords: Climate change, Extreme events, Climate shocks, Climate risk, Macroeconomics, DSGE, CGE, G-Cubed

Ou Yang, Jongsay Yong, Yuting Zhang and Anthony Scott

Abstract: We quantify competition in Australia’s residential aged care sector and study how competition is associated with the quality of care and prices in the sector. Competition is defined three ways: the number of competitors within 10 km radius of the facility; the distance (in km) to the third closest competing facility; and Herfindahl-Hirschman index based on market share of facilities within 10 km. We further examine whether quality and price differ by ownership types (government owned, for profit and not for profit), after controlling for competition. We find that more competition is not associated with better quality or lower prices. Government-owned facilities, in comparison to for-profit and not-for-profit facilities, are found to provide higher quality in some domains but not in others yet tend to charge lower prices than other ownership types. The results indicate the possibility of market failures in aged care. Two key sources of market failures, the lack of public reporting of quality of care and price transparency, should be addressed as policy priorities before competition can work in residential aged care markets.

Keywords: Nursing home completion; Aged care quality; Aged care prices; Australia.

Rob Bauer, Inka Eberhardt, and Paul Smeets

Abstract: To understand what motivates individuals to look at their pension situation and take adequate savings decisions, we conduct two field experiments with 226,946 and 257,433 pension fund participants. We find peer-information statements do not increase the rate at which individuals check their pension information, but lottery-type financial incentives do. Offering a few large prizes rather than many small prizes is most effective. However, the uptake of pension information does not lead to improved pension knowledge nor to increased self-reported savings three weeks after our intervention.

Dilan SriDaran, Michael Sherris, Andrés M. Villegas and Jonathan Ziveyi

Abstract: Given the rapid reductions in human mortality observed over recent decades and the uncertainty associated with their future evolution, there have been a large number of mortality projection models proposed by actuaries and demographers in recent years. However, many of these suer from being overly complex, thereby producing spurious forecasts, particularly over long horizons and for small, noisy datasets. In this paper, we exploit statistical learning tools, namely group regularisation and cross validation, to provide a robust framework to construct such discrete- time mortality models by automatically selecting the most appropriate functions to best describe and forecast particular datasets. Most importantly, this approach produces bespoke models using a trade-o between complexity (to draw as much insight as possible from limited datasets) and parsimony (to prevent overfitting to noise), with this trade-o designed to have specific regard to the forecasting horizon of interest. This is illustrated using both empirical data from the Human Mortality Database and simulated data, using code that has been made available within a user-friendly open-source R package StMoMo.

Keywords: Mortality projection, regularisation, cross validation, Age-period-cohort model 

Michael Keane

Abstract: The Retirement income system in South Korea is a patchwork of different programs, none of which is particularly effective at reducing poverty among senior citizens. Program benefits are very poorly targeted, meaning a very large fraction of the elderly receive modest benefits that are generally inadequate to lift a houshold out of poverty. The consequence is that South Korea has the highest elderly poverty rate in the OECD. I will argue that a better targeted system - with more generous benefits aimed at the fewer recipients - is likely to be welfare enhancing.

However, it seems clear that elderly poverty in Korea cannot be addressed merely by reforming the retirement income system. To address the root causes of the problem, structural reforms are needed to break down Korea's dual labor market system. Under that system, a large share of workers are in informal jobs where they do not make or receive mandated retirement contributions.

Martin Eling, Omid Ghavibazoo and Katja Hanewald

Abstract: We investigate the relationship between self-reported willingness to take financial risks and ownership of life insurance and long-term care insurance. For a representative sample of individuals aged 50+ from 14 countries and controlling for demographic and socioeconomic determinants of insurance demand, we find a positive link between willingness to take financial risks and ownership of both long-term care insurance and life insurance. The link is stronger for whole life insurance compared to term life insurance and long-term care insurance. Two robustness tests that (i) use risky asset ownership instead of willingness to take financial risks and (ii) focus on specific demographic and socioeconomic groups confirm the results for life insurance, while the results for long-term care insurance are less clear. Our empirical results cannot be explained by the classical expected utility framework and thus support recent research indicating that alternative models (e.g., prospect theory) are needed to explain insurance demand.

Keywords: Risk attitudes; Long-term care insurance; Life insurance; SHARE data

Yu Fu, Michael Sherris and Mengyi Xu

Abstract: China and the U.S. are two contrasting countries in terms of functional disability and long-term care. China is experiencing declining family support for long-term care and developing private long-term care insurance. The U.S. has more developed public aged care and private long-term care insurance than China. Changes in the demand for long-term care are closely related to levels of and trends in mortality and functional disability. To understand future potential demand for long-term care, we compare mortality and functional disability experiences in both China and the U.S using multi-state latent factor intensity model to estimate time trends and systematic uncertainty in transition rates. The estimation results show that if trends continue, both countries will experience longevity improvement with morbidity compression and a declining proportion of the older population with a functional disability. Although the elderly Chinese have an estimated shorter life expectancy, they are expected to spend a smaller proportion of that future lifetime functionally disabled in contrast to the U.S. Systematic uncertainty is shown to be significant in future trends in disability rates and our model estimated higher uncertainty in trends for the Chinese elderly, especially for urban residents.

Keywords: Functional disability; life expectancy; systematic trend and uncertainty; multi-state latent factor intensity model