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Working Papers

2021Feb
Mengyi Xu
Functional disability with systematic trends and uncertainty: A comparison between China and the U.S.

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

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2021Feb
Pensions and Participation: Evidence from World War II Veterans in Australia

David Rodgers

Abstract: Older male labour force participation in Australia plummeted in the last three decades of the twentieth century. This paper investigates the extent to which this fall in participation was due to a large share of these older men having fought in World War II. Australian World War II veterans could access retirement and disability benefits that the rest of the population could not; they also had worse health than non-veterans. Sharp quasi-random variation in service across birth cohorts in Australia enables the effects of WWII service to be measured. WWII veterans had slightly lower labour force participation over prime working years (around 1 percentage point lower in their late 40s), and then much lower participation from the age of 60 onwards (around 17 percentage points lower in their early 60s). Sixty was the access age for the retirement pension given to veterans. Survey data indicate that the retirement expectations of veterans, when young, were clustered at this age. Various measurements of the health effects of WWII service indicate ill health is unlikely to explain the sharp fall in labour participation at sixty. Despite these findings, in aggregate, WWII service can explain only a modest share of the fall in older male labour participation in Australia in the late twentieth century, suggesting other factors must be responsible for most of the fall. These results contribute to the litera- ture on the labour supply effects of retirement and disability programs. In particular, they are consistent with earnings tests having large effects on participation and program parameters framing retirement decisions.

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2021Jan
Warwick McKibbin
Macroeconomic policy adjustments due to COVID- 19: Scenarios to 2025 with a focus on Asia

Roshen Fernando and Warwick J. McKibbin

Abstract: This paper updates the analysis of the global macroeconomic consequences of the COVID-19 pandemic in McKibbin and Fernando (2020c) with data as of late October 2020. It also extends the focus to Asian economies and explores four alternative policy interventions coordinated across all economies. The first three policies relate to fiscal policy: an increase in transfers to households of an additional 2% of GDP in 2020; an increase in government spending on goods and services in all economies of 2% of GDP in 2020; an increase in government infrastructure spending in all economies in 2020. The fourth policy is a public health intervention similar to the approach of Australia that successfully manages the virus (flattens the curve) through testing, contact tracing and isolating infected people, coupled with the rapid deployment of an effective vaccine by mid-2021.

The policy that is most supportive of a global economic recovery is the successfully implemented public health policy. Each of the fiscal policies assists in the economic recovery with public sector infrastructure having the most short-term stimulus and longer- term growth benefits.

Keywords: COVID-19, pandemics, infectious diseases, risk, macroeconomics, DSGE, CGE, G- Cubed

 

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2021Jan
Mike Sherris CEPAR
Portfolio Management for Insurers and Pension Funds and COVID-19: Targeting Volatility for Equity, Balanced and Target-Date Funds with Leverage Constraints

Bao Doan, Jonathan J. Reeves and Michael Sherris

Abstract: Insurers and pension funds face the challenges of historically low interest rates and volatility in equity markets, that have been accentuated due to the COVID-19 pandemic. Recent advances in equity portfolio management with a target volatility have been shown to deliver improved on average risk adjusted return, after transaction costs. This paper studies these targeted volatility portfolios in applications to equity, balanced and target-date funds with varying constraints on leverage. Conservative leverage constraints are particularly relevant to pension funds and insurance companies, with more aggressive leverage levels appropriate for alternative investments. We show substantial improvements in fund performance for differing leverage levels and that the return per unit of risk is not significantly impacted by the leverage constraint. Of most interest to insurers and pensions funds, we show that the highest return per unit of risk is in targeted volatility balanced portfolios with equity and bond allocations. Furthermore, we demonstrate the outperformance of targeted volatility portfolios during major stock market crashes, including the crash from the COVID-19 pandemic.

Keywords: COVID-19 pandemic, Equity investment, Portfolio management, Target-date funds, Volatility management JEL classification: C53, G17.

 

 

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2020Dec
Alcohol Drinking and Population Health: Evidence from China’s Older Adults

Dandan Yu, Bei Lu, and John Piggott

Abstract: Background: Results of research into the effects of alcohol drinking on population health are inconsistent. Some studies suggest that light to moderate alcohol consump- tion can have a protective effect on morbidity and mortality. But others challenge this view and claim that alcohol use could lead to health loss regardless of the amount. We contribute evidence to this debate by investigating the association between alcohol drinking and all-cause mortality among older adults in China.

Methods: We use nationally representative samples from the Chinese Longitudinal Healthy Longevity Survey and the China Health and Retirement Longitudinal Study. Cox regressions compare ever drinkers who had been exposed to alcohol at some time and lifelong abstainers. We then subdivide ever drinkers into former drinkers who had stopped drinking and current drinkers who were still consuming alcohol. Cox results are supplemented with the interpolated Markov chain approach to calculate total and disability-free life expectancy.

Results: Among older males, ever drinkers seemed to have similar mortality risks to lifelong abstainers. Compared to abstinence, mortality was elevated for former male drinkers, although the effects were generally insignificant. Current male drinkers aged between 65 and 85 had a significantly lower risk of death. With the adjustment for so- cioeconomic status, an average current male drinker at age 65 could expect to live 1.65 years longer in total and 1.84 years longer without disability than lifelong abstainers. However, we can’t reliably estimate alcohol effects on older Chinese females.

Conclusions: Since there is little doubt that heavy drinking is detrimental to health, our results provide evidence supporting an association between light to moderate alcohol consumption and reduced mortality. The recommendation of zero alcohol consump- tion might not be well-justified in the contemporary Chinese context. The importance of alcohol intake in evaluating population health should be taken into account when predicting future health care burdens.

Keywords: Alcohol drinking; All-cause mortality; IMaCh; Life expectancy

 

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2020Dec
Age-Dependent Risk Aversion: Re-evaluating Fiscal Policy Impacts of Population Ageing

Phitawat Poonpolkul

Abstract: Background: Results of research into the effects of alcohol drinking on population health are inconsistent. Some studies suggest that light to moderate alcohol consump- tion can have a protective effect on morbidity and mortality. But others challenge this view and claim that alcohol use could lead to health loss regardless of the amount. We contribute evidence to this debate by investigating the association between alcohol drinking and all-cause mortality among older adults in China.

Methods: We use nationally representative samples from the Chinese Longitudinal Healthy Longevity Survey and the China Health and Retirement Longitudinal Study. Cox regressions compare ever drinkers who had been exposed to alcohol at some time and lifelong abstainers. We then subdivide ever drinkers into former drinkers who had stopped drinking and current drinkers who were still consuming alcohol. Cox results are supplemented with the interpolated Markov chain approach to calculate total and disability-free life expectancy.

Results: Among older males, ever drinkers seemed to have similar mortality risks to lifelong abstainers. Compared to abstinence, mortality was elevated for former male drinkers, although the effects were generally insignificant. Current male drinkers aged between 65 and 85 had a significantly lower risk of death. With the adjustment for so- cioeconomic status, an average current male drinker at age 65 could expect to live 1.65 years longer in total and 1.84 years longer without disability than lifelong abstainers. However, we can’t reliably estimate alcohol effects on older Chinese females.

Conclusions: Since there is little doubt that heavy drinking is detrimental to health, our results provide evidence supporting an association between light to moderate alcohol consumption and reduced mortality. The recommendation of zero alcohol consump- tion might not be well-justified in the contemporary Chinese context. The importance of alcohol intake in evaluating population health should be taken into account when predicting future health care burdens.

Keywords: Alcohol drinking; All-cause mortality; IMaCh; Life expectancy

 

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2020Dec
Incidence of Capital Income Taxation in a Lifecycle Economy with Firm Heterogeneity

Chung Tran and Sebastian Wende

Abstract: We study the incidence of capital income taxation in a dynamic general equilibrium model with heterogeneous firms and lifecycle households. In this incomplete market setting, marginal excess burdens of three capital taxes, namely corporate income, dividend and capital gains taxes, are vastly different due to heterogeneous responses of firms and households, and heterogeneous effects of general equilibrium adjustments. It is indeed important to account for firm heterogeneity in productivity and investment financing as well as household heterogeneity in age and skill. Overall, taxing capital with a corporate income tax at the firm level results in higher excess burden than taxing capital with dividend and capital gains taxes at the household level. Given the existing U.S. tax treatment for capital income, reforms that shift tax burden from the firm to household side potentially result in efficiency gains and overall welfare improving. However, the welfare benefits of the tax reforms are quite different across households and generations over transition time, depending on skill, age-cohort and budget balancing tax instruments. In particular, majority of currently alive households, especially retirees, experience welfare gains under moderate corporate income tax cuts, but suffer from welfare losses under more radical tax cuts.

Keywords: Excess burden; Tax incidence; Distributional effects; Overlapping generations; Dynamic general equilibrium

 

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2020Dec
Dr Miguel Olivo-Villabrille
The Marital Earnings Premium: An IV Approach

Miguel Olivo-Villabrille 

Abstract:  Numerous studies find that married men earn more than single men. However, identifying whether and why marriage a↵ects earnings is complicated by the fact that marriage market outcomes are jointly determined with potential earnings. As such, I exploit exogenous variation in marriage induced by the introduction of no-fault divorce laws in the US. I find a 38% causal increase of marriage on earnings of husbands. This increase in earnings is explained by a large increase in labor market work after marriage. My findings are robust to the possibility of unobserved heterogeneity in the effect of marriage on earnings across individuals.

Keywords: Marital earnings premium, marriage, divorce laws, local average treatment effects.

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2020Nov
Mortality Improvement Rates: Modeling, Parameter Uncertainty and Robustness

Andrew Hunt and Andrés M. Villegas

Abstract: Rather than looking at the mortality rates directly, a number of recent academic studies have looked at modeling rates of improvement in mortality when making mortality projections. Although relatively new in the academic literature, the use of mortality improvement rates has a long-standing tradition in actuarial practice when allowing for improvements in mortality from standard motality tables. However, mortality improvement rates are dificult to estimate robustly and models of them are subject to high levels of parameter uncertainty, since they are derived by dividing one uncertain quantity by another. Despite this, the studies of mortality improvement rates to date have not investigated parameter uncertainty due to the ad hoc methods used to fit the models to historical data. In this study, we adapt the Poisson model for the numbers of deaths at each age and year, proposed in Brouhns et al. [Insurance: Mathematics and Economics 3 (2002) 31] to model mortality improvement rates. This enables models of improvement rates to be fitted using standard maximum likelihood techniques and allows parameter uncetainty to be investigated using a standard bootstrapping approach. We illustrate the proposed modeling approach using data for the England and Wales population.

Keywords: Mortality Improvements; Mortality forecasting; Parameter uncertainty; Robustness

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