Xiaodong Fan, Ananth Seshadri, Christopher Taber  

We developed and estimated a Ben-Porath human capital model in which individuals make decisions on consumption, human capital investment, labor supply, and retirement. The model allows both an endogenous wage process (which is typically assumed exogenous in the retirement literature) and an endogenous retirement decision (which is typically assumed exogenous in the human capital literature).

This integration is important to obtain unbiased estimates, which are critical for most counterfactual analysis. For instance, when evaluating the effect of increasing the Social Security Normal Retirement Age (NRA) on workers' labor supply and retirement decisions, not only does one have to consider how the policy change affects the retirement decision directly, one also needs to consider how it affects the wage process and therefore affects retirement indirectly. We estimate the model using the Method of Simulated Moments to match the life-cycle profiles of wages and hours from the PSID data. Counterfactuals of delaying NRA and removing Social Security earnings test are conducted. We find significant increases in one individual's human capital investment at old ages, which leads to over 20% increase in the wage profile near retirement.

Commencement:  2012

Completion:

George Kudrna, Chung Tran, Alan Woodland

The goal of this project is to develop a general equilibrium model with overlapping generations (OLG) that will be used to study the economic impacts of population ageing in Australia. The model will mesh a detailed demographic model for Australia with an inter-temporal general equilibrium economics model. The non-stationary demographic structure of the model will be taken from Productivity Commission's MoDem 2.0 demographic model. Previous analyses of the economic effects of ageing for Australia have mainly used micro-simulation models with limited behavioral responses of individuals and firms. This project aims to remove this shortcoming by providing Australia with an alternative economic tool to assess the economic impacts of population ageing. 

Commencement: 2011

Completion:

Hal Kendig, Colette Browning, Kate O'Loughlin, Karla Heese, Merril Silverstein

We will determine the influence of attitudes specific to the different life situations of older workers, recent retirees, and those in advanced old age. This will include Societal attitudes to ageing, intergenerational justice, and related policies: A national view and will begin by analyzing data from the 2009 and 2013 planned Australian Survey of Social Attitudes (AuSSA), on age-related attitudes, social and economic influences on them, and how they relate to political and social views important for older people (for example, support (or not) for raising the pension age eligibility to 67 years).

Commencement: 2011

Completion:  

Meimanat Hosseini-Chavoshi, Peter McDonald, Jeromey Temple

This project aims to determine the demographic patterns of a range of socio-economic characteristics: ethnic background and citizenship; location, housing circumstances and living arrangements; extended family situation; education levels and command of English; health and disability status; income level and sources of income; wealth; work histories; labour force participation; expenditure patterns; engagement in volunteering and community activity; leisure and recreational activities; and values and attitudes. The aged population will be projected over a 20-year period, taking into account the most important characteristics.

Commencement: 2011

Completion: 

Erik Hernaes, John Piggott, Simen Markussen, Ola Vestad (Statistics Norway)

Is there a causal link from retirement age to mortality? Leaving employment may involve reduced stress and greater enjoyment of life, suggesting that early retirement enhances longevity. However, it may also lead to reduced mental and physical activity, loss of social networks, and health-adverse habits, suggesting that later retirement may extend expected lifespan. Increasing life expectancy, especially at older ages, is imparting a new urgency to this question. While early retirement may influence longevity, poor health may both induce a worker to retire and lead to an earlier death. Controlling for the ensuing selection bias is difficult, and until recently, attempts to do so have been unconvincing.

This paper combines such a research design with a unique administrative data set covering the entire population of Norway from 1992 to 2008. The data include highly reliable information on earnings, pension and labour market status as well as demographic information, such as birth and mortality dates, gender, education, and marital status. Instrumental variables estimation results show no effect on mortality or retirement age; neither do estimation results for a hazard rate model. This research has been published in the Journal of Health Economics.

Commencement:  2012

Completion: 2013

George Kudrna, Alan Woodland

Australia, like other developed countries, has been experiencing ageing of its population, with mortality and fertility rates falling over the past three decades. Furthermore, population ageing in Australia is expected to accelerate in the next few decades, reducing population growth and having vast implications for people's economic behaviour and for the economy as a whole. This project documents past and future demographic trends in Australia and presents some preliminary long-run macroeconomic and fiscal results for the effects of ageing in Australia using a computable dynamic model. We show that population ageing will reduce per capita labour supply and increase asset accumulation by households, while per capita age pension government expenditures will rise substantially. This research was published in 'A "Sustainable" Population? - Key Policy Issues', Productivity Commission.

Commencement: 2011

Completion: June 2011

George Kudrna, Chung Tran, Alan Woodland

Economic analyses of population ageing in Australia have so far relied on deterministic population forecasts. Future demographic developments are, in fact, highly uncertain. Hence, the variability in economic variables such as government's age-related expenditures could be much larger than anticipated using deterministic forecasts. The aim of this project is to incorporate stochastic population forecasts into a large-scale overlapping generations model stylized to the Australian economy. We will use the model to assess the effects of these uncertain demographic transitions on the government's budgetary situation as well as on broader macroeconomic outcomes. We also examine the effects of recently adopted pension reforms.    

Commencement: 2013

Completion:

Joelle Fong, Olivia Mitchell, Jun Feng

This paper examines how disabilities in activities of daily living relate to the risk of nursing home admission over the life course of older adults. Using longitudinal data from the Health and Retirement Study, we find that aging a year increases the probability of having two or more disabilities by 9.0-12.3 percent in a multivariate logistic model. In addition, a 65-year old male retiree has approximately 60 percent chance of experiencing disability levels that potentially trigger nursing home use over his remaining lifetime. Results from our analysis also suggest that certain disability types are more important than others in explaining nursing home admittance and use, which has implications for the design of benefit triggers used in long-term care insurance programs. This research has been written up as a CEPAR Working Paper.

Commencement: 2012

Completion: December 2012  

John Piggott, Alan Woodland, contributing authors include other CEPAR personnel

It is important that the economics profession be provided with a handbook that critically reviews the existing literature and economic ideas about the population ageing. It is timely for at least two reasons. First, there is already a significant body of literature on the topic. Second, given the projected increasing ageing of the population, the interest in economic research on the topic and the urgency of sound policy responses will only increase. A handbook will therefore be a platform that will potentially inform future research. The handbook would be directed to academic and professional economists working in the area of the economics of population ageing, as well as graduate students. Like other handbooks in the series, it would provide a comprehensive and critical review and exposition of the essential aspects of the economics of population ageing. Each chapter would aim to review and synthesize the topic at hand, extend knowledge and suggest future research directions.

Commencement: 2011

Completion:

Adam Wenqiang Shao, Michael Sherris, Katja Hanewald

We estimate the developed microeconometric model of two overlapping generation on SHARE data using simulation based estimation.

Commencement: 2012

Completion:    

Katja Hanewald, Michael Sherris

The recent international credit crisis has highlighted the significant exposure that banks and insurers, especially mono-line credit insurers, have to residential house price risk. Actuaries use time series models and, increasingly, longitudinal or panel data models to quantify risk. The aim of the paper is to develop and compare risk models for residential property that are required for applications in banking and insurance including pricing, risk management, and portfolio management. The paper uses postcode-level for house prices in the major capital city of Sydney, Australia, over the period 01-1979 to 03-2011, show the importance of heterogeneity in house price volatility. Market-wide house price indices, that are often used by actuaries in pricing and assessing products such as reverse mortgages and mortgage insurance, can be improved using the models in this paper that allow for cross sectional variation and explanatory factors. Time series models of market price indices show the importance of temporal risks of house prices, whereas panel data models with random effects and variable slopes are required to model cross-sectional heterogeneity and the risk of postcode-level house prices compared to the market price index. Macroeconomic and financial variables, as well as geographic and socio-demographic postcode characteristics are confirmed as important house price risk factors for pricing and risk management of products exposed to house price risk. This project was presented at international academic conferences and at a conference for industry practitioners in Australia. A final paper will be submitted for journal publication in 2013.

Commencement: 2011

Completion: May 2011 

Adam Wenqiang Shao, Michael Sherris, Katja Hanewald

This paper develops a pooled hedonic model and a hybrid model that quantify individual house price returns and risks, allowing for time-changing implicit prices of house characteristics by including interactions of attributes and time dummy variables. Using data on the Sydney residential property market, the paper finds that the hybrid model has substantial improvements over the hedonic model. The models have direct implications for banks and insurance companies that hold portfolios of houses in their mortgage businesses, as well as for investors that have direct property investments or hold financial derivatives that are linked to house market performances. Based on the results from the two individual house price models, indices for the whole Sydney market and portfolios with certain characteristics are constructed and compared with indices constructed using other methods. It is found that the stratified median index accumulates at a relatively slow pace in early years and exhibits higher growth rates in later years. The repeat-sales index, on the contrary, overestimates house prices in the early years and underestimates house prices in later years. The hybrid index is slightly lower than the hedonic index and exhibits a similar growth path with the strati ed median index in later years.

Commencement: 2011

Completion: October 2012 

Chung Tran, Alan Woodland

Healthcare costs have been growing faster than the rest of the economy for the past few decades and are bound to increase further as population ageing accelerates in all OECD countries. This project aims to develop a dynamic general equilibrium life-cycle framework with healthcare sector to assess the capacity of a health insurance system to absorb the growth in healthcare costs. The project will examine various designs of health insurance systems.   We also apply our model to identify a set of optimal cost-sharing strategies in response to growing medical needs while maintaining the quality, affordability and accessibility of health care for Australian families.

Commencement: 2011

Completion:

John Piggott, Ed Whitehouse

The idea of intergenerational solidarity is that birth cohorts separated by a generational span or more will be prepared to provide mutual support, a form of exchange between groups with different skills and resources. In particular, cohorts separated by more than a working lifetime can potentially benefit from such exchange, since needs and resources vary dramatically across a life cycle.  This can be seen as an example of gains from trade.  Intergenerational solidarity can be seen as referring to the social relationships which make such exchanges viable. This project combines an extensive attitudinal survey focused on intergenerational solidarity, with data on important indices of intergenerational transfer, to analyse the relationship between economic practice and policy, and social attitude. 

Commencement: 2011

Completion: December 2012 

Chung Tran, Juergen Jung (Towson University)

Health is a key component of an individual's wellbeing for a number of reasons. First, it is an important determinant of economic status, directly influencing the ability and time available to work, which in turn determines income and consumption levels. On the other hand, income may directly affect health since it determines the ability to pay for health care services. Knowledge of the dynamics between health and income over the course of the life-cycle is important to understanding individual behaviour with respect to retirement, saving, health insurance and the utilisation of health care. It is also important to the formation of public policy concerning pensions, health financing, and health and social care. This paper documents the joint distribution of health and income over the life-cycle in Australia and the US, using household survey data.

Commencement: 2012 

Completion:

Michael Sherris, Daniel Alai

Using the U.S. health and retirement study, we investigate the principle drivers of older age mortality.  We consider two distinct representations of the data that preserve both the cross-sectional as well as the temporal nature of the data. We refer to the first form as survival data and the second as panel data. We fit the data using proportional hazard and marginal models, respectively. The resulting estimated hazard and odds ratios are comparable and agree with one another, where applicable. The strength of the marginal model is its ability to include external, systematic, explanatory variables but its weakness lies in its inability to properly account for the dependency in the panel data.

Commencement: 2011

Completion: December 2011

George Kudrna, Alan Woodland

In the 2010-11 federal budget, the Australian Government announced major reforms to mandatory superannuation, including gradual increases in the mandatory contributions from 9% to 12% of earnings and a policy that effectively removes the concessional 15% tax on mandatory contributions for low income workers. This project examines these reforms, using a computable overlapping generations model that incorporates main aspects of mandatory superannuation, the means tested age pension and progressive personal income taxation. The preliminary results indicated that the reform increases self-funding in retirement, with the pension expenditures to the government falling significantly, and that there are positive impacts on household long run welfare and on aggregate efficiency. This research has been written up as a CEPAR Working Paper and was presented at 18^th International Conference on Computing in Economics and Finance in Prague. It is also soon to be published in the Australian economic journal the Economic Record.

Commencement: 2011

Completion: February 2012

Heather Booth

Community-based aged care places considerable responsibility on the family. This study uses demographic microsimulation to model detailed family structures to examine the availability of carers for older individuals by kin-relationship. The aim is to understand how changing marriage, fertility and longevity affect kinship structure and hence determine both the supply of and demand for aged care within families. The model will be extended into the future, and used to examine hypothetical situations, with a view to informing future informal care practice and policy. Input data will be drawn from ABS and other sources. Census and other data will be used in calibration. There is considerable scope to expand this work (for example, by introducing division into groups and by international comparison) and to use it as the basis for further collaboration with CEPAR and other researchers.

Commencement:  2012

Completion:

Daniel Alai, Severine Gaille, Michael Sherris

This project will provide framework for discussion of the importance of family transfers and social cohesion in retirement, the role of social security system and formal health insurance, the degree of substitution between formal and informal care, and provide better understanding of the influence of these factors on savings patterns of the elderly and the process of intergenerational transfer of wealth.

Commencement: 2012

Completion:

Michael Sherris, Maria Govorun (Université Libre de Bruxelles), Stephane Loisel (University of Lyon)

This project aims to develop a model for health status and survival using Phase-type distributions. The model is implemented in a stochastic Markov-ageing framework. These models have the advantage that they provide analytical solutions for survival distributions and for the values of health and mortality state dependent cash flows. By defining health states appropriately and calibrating the model to health and mortality data, the model is applied to value life annuities and long term care contracts. Capital requirements for providers of these products are also assessed for a portfolio of life annuity and long term care contracts using the model.

Commencement: 2011

Completion:  

Chung Tran, Alan Woodland

Australia and very few other countries have a means-tested age pension program, where means-testing is universally used to direct the pension benefits towards low income retirees. The presence of means-testing provides more flexibility for governments in controlling the participation rate (extensive margin) and the benefit level (intensive margin). This research program investigates trade-offs between in design a redistributive means-tested pension program when both the extensive and intensive margin effects are at work, compared to a universal Pay-As-You-Go (PAYG) pension program in which there is only the intensive margin effect in play. This research resulted in a CEPAR Working Paper - Trade-Offs in Means Tested Pension Design.

Commencement: 2011

Completions: August 2011

Cagri Kumru, John Piggott

This project is concerned with the interaction between capital taxation and a means tested age-pension in the context of an overlapping generations model. Recent literature has suggested a rehabilitation of capital income taxation (Conesa et al. (2009)), predicated on the idea that capital is a complement with retirement leisure. This leads naturally to the conjecture that a publicly funded age pension contingent upon holdings of capital or capital income may have a similar effect. We formalize this using a stochastic OLG model with multiple individuals differentiated by labour productivity and pension entitlement. Our preliminary findings suggest that a means tested pension has effects similar to personal income taxation in a life-cycle context. An early version of the paper was presented at the Second LeeX International Conference on Theoretical and Experimental Macroeconomics in 2011. Feedback from this led to changes and a revised draft was presented at a number of international conferences and seminars including the Dynamics, Economic Growth, and International Trade (DEGIT) 2012 Conference in Milan. A final version was presented at two international conferences in Taiwan. Submission of the paper to a high quality journal will be completed in 2013. This research has also been written up as a CEPAR Working Paper.

Commencement: 2011

Completion: 2012  

Katja Hanewald, Michael Sherris

This project develops a complete markets discrete state and discrete time model allowing for stochastic and systematic mortality and risky assets. The role of life annuities, GSA's and longevity bonds in an individual portfolio is assessed. The risk neutral computation approach is used to determine optimal portfolios in a single period and a multi-period setting with finite horizon and finite states modelled with a Markov-chain. The impact of an incomplete market for longevity risk is assessed using a fictitious security and convex optimization. Results are illustrated under different utility assumptions and the impact of systematic mortality risk is formally assessed.

Commencement: 2011

Completion: December 2012 

Joelle Fong

Difficulty in performing activities of daily living has been found to be a significant predictor of long-term care use. In this paper we apply several techiniques to evaluate the hierarchical structure of disability, including ordering by (i) age of disabilty onset estimated using a discrete time hazards model, (ii) compatibility rate of the various permutations of disability sequencing, and (iii) hierarchical scaling methods that are widely adopted in prior studies. To investigate whether the ordering of ability in activities inform subsequent care needs, we then quantify the impact of individual activities on subsequent home care (community-based) or nursing home (instituitional) use in a competing risk regression framework.

Commencement: 2013

Completion:

Michael Sherris, Severine Gaille (University of Lausanne), Stephane Loisel (University of Lyon)

Trends and volatility in mortality rates are closely linked to changes in the major causes of death over time. Different causes of death have shown different trends and volatilities.  Causes of death also have close links with cohort effects observed in population mortality rates. The aim of this project is to use forecasting techniques that allow for relationships between causes of death in order to provide improved forecasts of population trends and uncertainty in future mortality. These techniques are compared with other commonly used population mortality forecasting approaches. From this research we have produced working papers including Forecasting Mortality trends Allowing for Cause-of-Death Mortality Dependence which was presented at the Eighth International Longevity Risk and Capital Markets Solutions Conference in Canada in 2012.

Commencement: 2011

Completion: December 2012

Pradeep Ray

Increasing costs and workforce shortages are major problems for aged care in Australia.  The Australian Government interim report on Clinical IT in Aged Care (2003) suggests that information technology helps in improving the delivery of care in residential aged care facilities. A survey of residential care managers conducted by KPMG and church resources (2009) indicated that the lack of integrated IT solutions and the lack of the appreciation of the needs of this sector are the major barriers for IT implementation and use in aged care. The recent report by the Productivity Commission (2011) suggests major changes in this sector and hence many managers in residential care feel that this is the right time to plan and implement information technology solutions in this sector. This project aims to understand the major factors involved in the readiness and adoption of IT in this sector through a major case study involving Hammondcare,. This involves a qualitative study consisting of in-depth interviews with stakeholders in the management and service delivery of residential care. The project directly addresses the issue of what efficiencies might be realised in the aged care sector, both residential and community based, through the more extensive use of IT.

Commencement:  2012

Completion:

Michael Sherris, Daniel Alai

Longevity risk from uncertain mortality improvement has been recognized as the major risk facing annuity providers and pension funds. In this paper we apply trend models from non-life claims reserving to model mortality trends, providing a new perspective on estimating mortality improvements and quantifying its respective uncertainty. The approach is developed in a generalized linear models setting. We find that age and cohort trends are sufficient to capture the mortality behaviour, effectively removing the need for a period trend. The modelling approach in the paper is proposed as a consistent methodology for estimating trends in mortality rates. This research has been written up in a CEPAR Working Paper.

Commencement: 2011

Completion: December 2011

Heather Booth, Rob Hyndman (Monash University), Leonie Tickle (Macquarie University)

This ongoing research uses Principal Components models of age-sex-time-specific mortality rates and time series models to forecast mortality. The ten-year program has produced the Booth-Maindonald-Smith variant of the Lee-Carter method, and undertaken extensive comparison of competing methods. Current research adopts a functional data approach, and focuses on new methods for coherently forecasting mortality for related populations. Stochastic population forecasts encompass forecasts of mortality, fertility and migration. Applications include population ageing.

Commencement:  2011

Completion:

Ralph Stevens

Life expectancy has been steadily increasing in most of the western world over the past century. For example, the (population) life expectancy at birth in the USA has increased from 47.3 years in 1900 to 68.2 years in 1950; 72.6 years in 1975; 76.8 years in 2000; and 77.7 years in 2006. The increase in life expectancy at retirement is placing increased pressure on the sustainability of pension systems around the world. In this project we propose policies to increase the mandatory retirement age and investigate their effects on the actual retirement age, expected remaining lifetime at retirement and pension liabilities. We investigate the effect of policy reforms to make the retirement age dependent on the evolution of survival probabilities. We also investigate the effect on the distribution of the full retirement age, and on longevity risk in the discounted future payments of both individuals and a fund as a whole.

Commencement:  2012

Completion:

Michael Sherris, Andy Wong

Natural hedging provides life insurers, and reisnurers, with an approach to managing longevity risk that does not rely on external counterparties, such as reinsurers, or on and capital markets. Natural hedging strategies include immunisation based on mortality risk, risk minimisation based on mean variance to determine optimal portfolios of life annuities and life insurance contracts for insurers to hedge their exposure to longevity risk. This research considers the impact of product pricing and profitability of life insurance and annuity policies on natural hedging strategies and their economic value. In order to implement a natural hedging strategy, life insurers need to consider the pricing and profitability of the different contracts and this has not been considered in current research on the electiveness of natural hedging.

Commencement: 2012

Completion:

Henry Jin, John Evans, John Piggott

There are a variety of views regarding how long people might live in the future, and how long the recent rapid improvements in mortality rates will continue. The Lee Carter approach has become the gold standard among those advocating extrapolative techniques for estimating future longevity trends. Yet by its nature, an extrapolative approach cannot take into account a structural change in behaviour, technology, or environment impacting on future longevity. Perhaps the most important behavioural change affecting longevity is smoking behaviour. In the UK, the percentage of smokers halved between 1980 and 2008. This project examines this impact by modifying the Lee Carter method to take account of this structural change.

Commencement: 2011

Completion: January 2012  

Kate O'Loughlin, Vanessa Loh, Hal Kendig

Workforce participation and informal caregiving are central to global capacities to respond constructively to rapid population ageing yet they are inadequately researched and understood.  Policymakers need to better understand how the societal and policy context influences paid work and caregiving, transitions between them, and impacts on ageing individuals, families, and the broader economy.

The Work and Care project has two key objectives: to build international comparative knowledge on older workers and caregiving to inform global initiatives in socio-economic policies; and to establish an international collaborative network to work towards sustainability in policy-relevant population ageing research.

The specific aims of the project are to determine how individual circumstances and social and economic policy can impact the interplay between work and caregiving and its relationships with health, wealth and wellbeing. This will be achieved through cross-sectional analyses of Australian data on work and caregiving as well as comparative analyses with the English Longitudinal Study of Ageing and other national data where available.

Commencement:  2012

Completion: