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Working Papers

Katja Hanewald

Katja Hanewald, Hazel Bateman, Hanming Fang and Shang Wu

Reverse mortgages provide an alternative source of retirement funding by allowing older homeowners to borrow against their home. However, a recent pilot program of reserve mortgage products in several large Chinese cities saw almost no take up. To ascertain the demand for reverse mortgages in China, we conduct and analyze two online surveys that focus respectively on homeowners aged 45-65 as potential purchasers, and on adult children in the 20-49 age group representing children of potential purchasers. We address the reported shortcomings of the pilot reverse mortgage product by testing an improved product design presented in a clear and comprehensive format. In stark contrast, we find that 89% of older Chinese homeowners would be interested in this new reverse mortgage product, and 84% of adult children would recommend such a product to their parents. Participants in both surveys reported that they would use the reverse mortgage payments to fund a more comfortable retirement and to pay for better medical treatments and aged care services. Respondents’ interest in reverse mortgages was associated with their familiarity and understanding of the product, and its perceived potential to address liquidity constraints in retirement. Health status, aged care preferences and proxies for intergenerational links were also important. Our results are contrary to the common perception of intergenerational expectations of wealth transfer in China, and provide new evidence in support of the potential development of China’s reverse mortgage market.
Financial growth

Hazel Bateman, Ralph Stevens, Jennifer Alonso Garcia and Eduard Ponds

Using an online experimental survey we investigate perception (in terms of understanding, riskiness and control) and valuation (elicited using iterative multiple price lists) of lifetime annuities relative to flexible drawdown products. We find that for those participants who are engaged with the experimental tasks, information provision and an online calculator can substantially reduce or eliminate behavioral drivers of the complex task of valuation of annuities. Providing balanced information and multiple opportunities to learn about the key features of the products, including impact of potential outcomes, narrows the gap between the willingness to pay and willingness to accept, and, offsets the effects of low financial capability, information framing and real-world institutional settings.

Financial independence

Juergen Jung and Chung Tran

We study the optimal progressivity of a personal income tax system in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our results, based on a dynamic general equilibrium model calibrated to the US economy, indicate that accounting for health risk substantially aects the social insur- ance/redistribution role of a progressive income tax system. When health risk is present but access to health insurance is limited, the optimal income tax system is more progressive in order to provide more social insurance/redistribution to unhealthy low income individuals. However, when more inclusive health insurance systems are considered, such as Medicare for all, then the optimal level of tax progressivity decreases signicantly. Importantly, when health expenditure risk is eliminated, the optimal income tax progressivity becomes more similar to the optimal progressivity level in previous studies using models with income risk only.


Hanming Fang and Jin Feng

A detailed overview of the current state of the Chinese Pension System, as well as its development, its problems and some ideas for future reforms.

Mother and daughter

Yi Chen and Hanming Fang

Family planning plays a central role in contemporary population policies. However, little is known about its long-term consequences in old age because of the identification challenge. In this study, we examine how family planning affects the quality of life of the Chinese elderly. The direction of the effect is theoretically unclear. On the one hand, having fewer children allows parents to reallocate more resources to themselves, improving their well-being. On the other hand, having fewer children also leads to less care and companionship from children in old age. To empirically probe the effect of family planning, we identify the causal impact by exploiting the provincial heterogeneity in implementing the “Later, Longer, Fewer” policies in the early 1970s. We find that the policies greatly reduced the number of children born to each couple by 0.85. Parents also receive less support from children in terms of living arrangements, inter vivos transfers, and emotional support. Finally, we find that family planning has drastically different effects on elderly parent's physical and mental well-being. Whereas parents who are more exposed to the family planning policies consume more and enjoy slightly better physical health status, they report more severe depression symptoms. Our study calls for greater attention to the mental health status of the Chinese elderly.

Monetary growth

Jennifer Alonso Garcia, Hazel Bateman, Johan Bonekamp, Arthur van Soest and Ralph Stevens

We investigate the importance of alternative motives for choosing a saving and consumption trajectory after retirement. Using an online experimental survey, we elicit the impact on advised spending patterns and underlying saving motives of alternative retirement drawdown designs, comprising different combinations of annuity income and wealth, and of major life events such as becoming frail or losing a spouse. We find that individuals' saving motives are revised in anticipation of major life events. They are less responsive to variation in `experimental' retirement drawdown arrangements, remaining aligned to prevailing institutional arrangements. Our results suggest that the main explanations for the widespread behaviour of retirees to hold onto their wealth are the desire to hold precautionary savings for health and other unforeseen expenses, facilitating an intra-household bequest, and making it possible to enjoy life now as well as later.

Keywords: consumption smoothing, asset decumulation, saving motives, pension design

George Kudrna

George Kudrna, Chung Tran and Alan Woodland

A means-tested pension system has a distinct feature that tailors the level of pension benefits according to individual economic status. In the context of population aging with widening gaps in life expectancies, this feature generates an automatic adjustment mechanism that (i) mitigates the pressing fiscal cost of an old-age public pension program (fiscal stabilization device) and (ii) redistributes pension benefits to those in need with shorter life expectancies (redistributive device). To evaluate this automatic adjustment mechanism, we employ an overlapping generations model with population aging. Our results indicate that this novel mechanism plays an important role in containing the adverse effects of population aging on the fiscal costs and progressivity of a pension system. More pronounced aging scenarios further strengthen the role of this mechanism. A well-designed means test rule can create a sufficiently strong automatic mechanism to keep public pensions sustainable and equitable. Importantly, it is feasible to devise a pension reform that better adapts a means-tested pension system to more pronounced demographic trends, but does not lower the welfare of current and future individuals of all ages and income. Keywords: Population Aging, Sustainability, Social Security, Means Testing, Redistribution, Automatic Stabilizer, Overlapping Generations, Dynamic General Equilibrium.

Aged care support

Marijan Jukic

Aged care residents, residential care developers and government policy-makers need accurate information on likelihood of main events in residential care (i.e. residents’ functional decline and death). Since 20 March 2008 Australian government subsidies for residential care have been based on detailed assessments of individual care needs, and this generated 1.5 million assessment records by 30 June 2015. Four levels are assessed for three types of need - aids to daily living, behavioural needs, and complex health care. Logistic regression models are used to derive mortality and transition probabilities from these data. Backwards derivation was used to estimate mean life expectancies from these models, and microsimulation used to model distributions around means. As there has been continuing drift in assessed care needs, the mortality and transition assumptions estimates are based on the most recent year of experience. A microsimulation model of aged care residents, with all residents at 30 June 2015 as the initial population, has been constructed.

Content elderly couple enjoying life

Bei Lu, John Piggott, and Bingwen Zheng

This chapter discusses the potential expansion of the role of the notional defined contribution (NDC) paradigm in the ongoing reforms of retirement provision in China. China has remarkably high nominal retirement coverage of its population, but issues of sustainability, equity, and governance are challenging and real. Further, while many broad policy guidelines are set by the central government, jurisdictions at provincial, city, and sometimes even district level have major control over implementation, covering administration, benefit rates, and other important retirement policy features.