Working Papers

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.

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.

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.

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.