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Working Papers

Elderly couple enjoying life

Katja Hanewald, Ruo Jia and Zining Liu

Abstract: This paper studies income inequality in old age and its development over the life cycle. We develop a theoretical framework and a new empirical method to show that income is more unequally distributed in old age than in working age. We combine the regression-based inequality decomposition method and the three-step mediating effect test to analyze the transmission of income inequality from initial socioeconomic differences to income inequality in old age. Our study is based on a panel of over 4,000 old households from the China Health and Nutrition Survey
during 1991-2015. We find that the urban-rural gap and educational inequality are the primary causes of old-age income inequality. The effect of the urban-rural gap is partially mediated by educational inequality. Inequality accumulates with age and is reinforced in old age by the Chinese public pension system, which is fragmented by occupational sector.

Keywords: Inequality; Decomposition; Urban-rural gap; Pensions; China


Joanne Kaa Earl, Mydair Hunter and Hazel Bateman


Objectives: Downsizing is the term used to describe the move to a smaller dwelling and the decumulation of possessions, often taking place at older age. Two psychological theories: Selection, Optimisation and Compensation (SOC) and Time Perspective (TP); were applied to explain post-downsizing perspectives.

Method: Participants were community dwelling older adults (N = 352) aged 55 years and over who downsized during the preceding five years. An online survey was used to collect data about factors determining decision-making as well as psychological aspects of the downsizing experience including regret, retirement adjustment, satisfaction with life, stress, and distress.

Results: In general only a small proportion (17.6%) of participants indicated regret about moving. Consistent with the SOC theory younger people were more highly represented in the group expressing regret. Lower levels of satisfaction with the move were associated with a Past Negative Time Perspective, lower levels of life satisfaction and higher levels of stress and psychological distress. The top five factors for downsizing included: house was too big; to be closer to family; lifestyle preferences; yard too hard to manage; and alleviation of financial strain.

Conclusion: Whilst most people do not express regret with the move, it can be a stressful process. Some factors associated with lower levels of satisfaction such as Past Negative Time Perspective may be more difficult to change than others. Understanding the post-downsizing experience of others can help better prepare people before they move to anticipate responses and possibly contribute to better retirement adjustment.

Keywords: Downsizing, Time Perspective, Regret, Older adults


Mengyi Xu, Michael Sherris and Adam W. Shao

The transition from defined benefit to defined contribution (DC) pension schemes has increased the interest in target annuitization funds that aim to fund a minimum level of retirement income. Prior literature has studied the optimal investment strategies for DC funds that provide minimum guarantees, but far less attention has been given to portfolio insurance strategies, especially for target annuitization funds. We evaluate the performance of option-based and constant proportion portfolio insurance strategies for a DC fund that targets a minimum level of inflation-protected annuity income at retirement. We show how the portfolio allocation to an equity fund varies depending on the member’s age upon joining the fund, displaying a downward trend through time for members joining the fund before ages in the mid-30s. We demonstrate how both portfolio insurance strategies provide strong protection against downside equity risk in financing a minimum level of retirement income. The option-based strategy often leads to higher accumulated savings at retirement and is also shown to provide a more robust level of protection when equity markets are more volatile and when contributions to the pension fund are lower. 

Keywords: portfolio insurance strategies, defined contribution, pension risk management, target annuitization fund


Anca-Stefania Jijiie, Jennifer Alonso-García and Séverine Arnold (-Gaille)

Many OECD countries have addressed the issue of increased longevity by mainly increasing the retirement age. However, this kind of reforms may lead to substantial transfers from those with shorter lifespans to those that will live longer than the average, as they do not necessarily take into account the socio-economic differences in mortality. The contribution of our paper is therefore twofold. Firstly, we illustrate how both a Defined Benefit and a Notional Defined Contribution Pay-As-You-Go scheme can put the lower social economic classes at a disadvantage, when compared to the actuarially fair pensions. In contrast to that, higher classes experience a gain. This is due to the fact that mortality rates per socio-economic class are not considered by either scheme. Consequently, we propose a model that determines the parameters for each scheme and class which would render the pensions fairer even when no socio-economic mortality differences are considered.

Keywords: retirement age, pay-as-you-go, public pensions, adequacy, fairness, class-specific parameters


Yuanyuan Deng and Hugo Benítez-Silva

Using survey and administrative data from the Medicare Current Beneficiary Survey, we analyze the effect of labor supply, health insurance coverage, and delays in Medicare enrollment on Medicare costs. We use our empirical findings to compute the average aggregate yearly savings linked to individuals working and insurance coverage that translates into Medicare being a secondary payer, at around $5.37 billion per year in the 1999-2010 period. We also quantify average aggregate yearly savings of another $10.17 billion per year, in the same time period, resulting from the delays in enrollment into the Medicare system.

Keywords: Medicare Costs, Labor Supply, Medicare Secondary Payer Effect, Delays in Medicare Enrollment


Sarah Kaakai, Héloïse Labit Hardy, Séverine Arnold (-Gaille) and Nicole El Karoui

A growing number of studies indicate a widening of socioeconomic inequalities in mortality over the past decades. It has therefore become crucially important to understand the impact of heterogeneity and its evolution on the future mortality of heterogeneous populations. In particular, recent developments in multi-population mortality have raised a number of questions, among which is the issue of evaluating cause-of-death reduction targets set by national and international institutions in the presence of heterogeneity. The aim of this paper is to show how the study of the population data and the population dynamics framework contribute to addressing these issues, by providing a new viewpoint on the evolution of aggregate mortality indicators in the presence of heterogeneity. Our findings rely on two unique datasets on the English population and cause-specific number of deaths by socioeconomic circumstances, over the period 1981-2015. The analysis of the data first highlights the complexity of recent demographic developments, characterized by significant composition changes in the population, with considerable variations according to the age class or cohort, along with a widening of socioeconomic inequalities. We then introduce a dynamic framework for studying the impact of composition changes on the mortality of the global population. In particular, we are interested in quantifying the impacts of cause-of-death mortality reduction in comparison with changes of composition in a heterogeneous population. We show how a cause of death reduction could be compensated for in the presence of heterogeneity, which could lead to misinterpretations when assessing public policies impacts and/or for the forecasting of future trends.

Keywords: Population Dynamics, Deprivation, Heterogeneity, Cause-of-Death Mortality, Cohort Effect

Researchers examining data online

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

This paper studies the effect on the labor supply decisions of senior workers of reducing the eligibility age of retirement combined with actuarial neutrality, based on one particular group of private sector workers. In the 2011 Norwegian pension reform they had a fixed pension access age of 67 replaced by a flexible access age from 62 with constant present value of benefits. In a non-linear difference-in-difference approach, exploiting the absence of earnings tests, we find no effect on labor force participation. Aggregate earnings fell, mostly driven by high earners reducing their earnings. The increased liquidity seems to facilitate phased retirement.


Keywords: Retirement; Pension; Flexibility

Elderly couple researching pension options

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp

We examine stated preferences for long-term care insurance that pays extra income instead of reimbursing care costs. Our results show that long-term care income insurance is likely to provide two important benefits to aging societies. First, it can facilitate flexible, informal, long-term care – seniors who plan to rely on family members for extensive care find income insurance particularly attractive. Second, it can enhance risk-pooling – if long-term care income insurance were available, many seniors would release funds set aside to self-insure against the risk of needing long-term care to purchase additional longevity insurance. Our results also rule out adverse selection into the long-term care income insurance product on objective risk factors. However, participants who subjectively rate themselves at higher risk of needing long-term care will select into insurance, indicating either adverse selection that is based on private information or subjective mismeasurement of future care costs.

Keywords: Long-term care insurance; aged care; informal care; retirement incomes; annuity experiment


Chung Tran and Nabeeh Zakariyya

We study the progressivity of Australia's personal income tax system after the introduction of a New Tax System (Goods and Services Tax) Act 1999. We use two data sets: administrative data from Australian Tax Office (ATO) 2004-16 and survey data from the Household Income and Labour Dynamics in Australia (HILDA) survey 2001-16. We first document the distributions of income and tax liabilities, properties of the joint distributions of taxes paid and income, and discuss how taxes are varied across households and over time. We next provide estimates of tax progressivity using two approaches: one based on tax liability progression and one based on tax liability distribution relative to income distribution. The result based on the tax progression approach implies a significant decline in the average level of tax progressivity since 2004. Meanwhile, the result based on the tax distribution approach indicates a tax progressivity cycle with a modest decline up to 2006, then a sharp increase until 2010, and a slight decline thereafter. The personal income tax cuts for all taxpayers in the early 2000s and the introduction of tax offset for low income earners (LITO) are main driving forces. Moreover, the evolution of income distribution and interactions between income distribution and bracket creep strongly affect the overall progressivitiy level of Australia's income tax system. Hence, our findings provide insights into the dynamics of income adn tax progressivity, and a new reference for public debated on tax reform in Australia. 
Keywords: Taxation, progressiveness, income dynamics, inequality, parametric tax function, Suits index, Kakwani index.