CEPAR | Centre for Population Ageing Research | University of New South Wales (UNSW Sydney)

You are here

Working Papers

2024Sep
China

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

2024Sep

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

2024Aug
Elderly friends enjoying life

Daniel Wheadon, Gonzalo Castex, George Kudrna and Alan Woodland

Abstract: We investigate the effects of self-control preferences on household life cycle decisions, macroeconomic outcomes, and the roles they play in determining optimal means testing of public old-age pensions. To that end, we develop a stochastic overlapping generations model with heterogeneous households that have Gul-Pesendorfer self-control preferences. First, we show that in economies with higher self-control costs lifetime savings diminish, while labor supply and retirement are postponed to later ages. Hence, the fiscal burden to fund the public pension system increases. Second, we examine the effects of increasing self-control costs in the context of age pension means testing with alternative taper rates at which the pension benefit is withdrawn. We show that there is a negative relationship between self-control costs and taper rates, i.e., populations with higher self-control costs prefer lower taper rates. We find that if self-control costs are sufficiently high, a universal pension with a zero taper rate may be optimal.

Keywords: Self-control preferences, Public pensions, Progressivity, Labor supply, Life-cycle, Stochastic OLG model

 

2024Aug

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

2024Aug

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

2024Aug

Rudolfs Bems, Luciana Juvenal, Weifeng Larry Liu and Warwick J. McKibbin

Abstract: This paper assesses the economic effects of climate policies on different regions and countries with a focus on external adjustment. The paper finds that various climate policies could have substantially different impacts on external balances over the next decade. A credible and globally coordinated carbon tax would decrease current account balances in greener advanced economies and increase current accounts in more fossil-fuel-dependent regions, reflecting a disproportionate decline in investment for the latter group. Green supply-side policies—green subsidy and infrastructure investment—would increase investment and saving but would have a more muted external sector impact because of the constrained pace of expansion for renewables or the symmetry of the infrastructure boost. Country characteristics, such as initial carbon intensity and net fossil fuel exports, ultimately determine the current account responses. For the global economy, a coordinated climate change mitigation policy package would shift capital towards advanced economies. Following an initial rise, the global interest rates would fall over time with increases in the carbon tax. These external sector effects, however, depend crucially on the degree of international policy coordination and credibility.

Keywords: Global climate policies; carbon taxes; net-zero emissions; current account balances; international capital flows; dynamic general equilibrium modelling; G-Cubed

 

2024Aug
insurance

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.

2024Aug
Mengyi Xu

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

2024Jun
Jennifer Garcia

Jennifer Alonso-García, M. Carmen Boado-Penas, and Julia Eisenberg

Abstract: Pay-as-you-go (PAYG) pension schemes are heavily affected by demographic risks. To mitigate the financial burden, mixed pension schemes that combine elements of funding and PAYG have been proposed. In this paper, we introduce a mixed scheme framework designed for a shrinking working-age population given a specific level of pension expenditure. We evaluate its performance using both the one-year ruin probability and the Value at Risk of the accumulated deficits over time. We also examine the implications of guaranteeing a return of zero on the investments within the funding scheme. Furthermore, we explore the creation of a buffer fund that invests part of the capital in the financial markets, thereby alleviating the financial pressures of the PAYG part. Our findings indicate that, although the proposed mixed framework does not hedge against demographic risk, it enhances the financial health of the system, delaying the need for pension reforms as a result.

Keywords: public pensions, demographic risks, investment, sustainability, ruin probability, value-at-risk, investment