_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 5, No. 24: December 17, 2004
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Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
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Editor: PAMELA PERUN
Urban Institute
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Copyright: SSEP, Inc. 2004. All rights reserved.
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Topic of This Issue:
Aging and Saving
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"Population Ageing and Health Care Expenditure: New Evidence on
the 'Red Herring'"
Geneva Papers on Risk and Insurance: Issues and Practice,
Vol. 29, No. 4, pp. 652-666, October 2004
PETER ZWEIFEL
University of Zurich
STEFAN FELDER
Otto von Guericke Universitaet Magdeburg
ANDREAS WERBLOW
University of Magdeburg - Institute of Social
Medicine and Health Economics (ISMHE)
WORKING PAPERS
"Disentangling the Importance of the Precautionary Saving Motive"
ARTHUR B. KENNICKELL
Federal Reserve Board - Department of Research &
Statistics
ANNAMARIA LUSARDI
Dartmouth College
Department of Economics
National Bureau of Economic Research (NBER)
"The Effect of Improvements in Health and Longevity on Optimal
Retirement and Saving"
DAVID E. BLOOM
Harvard University
Harvard School of Public Health
National Bureau of Economic Research (NBER)
DAVID CANNING
Harvard University
Harvard School of Public Health
MICHAEL JOHN MOORE
Queen's University Belfast
School of Management and Economics
"Stochastic Infinite Horizon Forecasts for Social Security and
Related Studies"
RONALD D. LEE
University of California, Berkeley
Department of Demography
TIMOTHY MILLER
University of California, Berkeley
Department of Demography
MICHAEL ANDERSON
University of California, Berkeley
Department of Demography
"Shifting Perspectives in Pensions"
MAREK GORA
Warsaw School of Economics (SGH)
Institute for the Study of Labor (IZA)
EDWARD PALMER
Uppsala University
"Pension Funds and National Saving"
PABLO LOPEZ MURPHY
World Bank
ALBERTO R. MUSALEM
World Bank
"The Impact of Population Aging on Financial Markets"
JAMES M. POTERBA
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
S S R N I N F O R M A T I O N
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Population Ageing and Health Care Expenditure: New Evidence on
the 'Red Herring'"
Geneva Papers on Risk and Insurance: Issues and Practice,
Vol. 29, No. 4, pp. 652-666, October 2004
BY: PETER ZWEIFEL
University of Zurich
STEFAN FELDER
Otto von Guericke Universitaet Magdeburg
ANDREAS WERBLOW
University of Magdeburg - Institute of Social
Medicine and Health Economics (ISMHE)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=605153
Contact: STEFAN FELDER
Email: Mailto:STEFAN.FELDER@MEDIZIN.UNI-MAGDEBURG.DE
Postal: Otto von Guericke Universitaet Magdeburg
Institute fur Sozialmedizin
Universitaetsplatz 2
39106 Magdeburg, GERMANY
Co-Auth: PETER ZWEIFEL
Email: Mailto:pzweifel@soi.unizh.ch
Postal: University of Zurich
Zurich 8032, SWITZERLAND
Co-Auth: ANDREAS WERBLOW
Email: Mailto:Andreas.Werblow@medizin.uni-magdeburg.de
Postal: University of Magdeburg - Institute of Social Medicine and
Health Economics (ISMHE)
Universitaetsplatz 2
39106 Magdeburg, GERMANY
ABSTRACT:
The observation that average health care expenditure rises with
age generally leads experts and laymen alike to conclude that
population ageing is the main driver of health care costs. In
recently published studies we challenged this view (Zweifel et
al., 1999; Felder et al., 2000). Analysing health care
expenditure of deceased persons, we showed that age is
insignificant if proximity to death is controlled for. Thus, we
argued that population ageing per se will not have a significant
impact on future health care expenditure. Several authors (Salas
and Raftery, 2001; Dow and Norton, 2002; Seshamani and Gray,
2004a) disputed the robustness of these findings, pointing to
potential weaknesses in the econometric methodology. This paper
revisits the debate and provides new empirical evidence, taking
into account the methodological concerns that have been raised.
We also include surviving individuals to test for the
possibility that the relative importance of proximity to death
and age differs between the deceased and survivors. The results
vindicate our earlier findings of no significant age effect on
health care expenditure of the deceased. However, with respect
to the survivors, we find that age may matter. Still, a naive
estimation that does not control for proximity to death will
grossly overestimate the effect of population ageing on
aggregate health care expenditure. Following Stearns and Norton
(2004), we conclude that "it is time for time to death" in
projections of future health care costs.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Disentangling the Importance of the Precautionary Saving Motive"
BY: ARTHUR B. KENNICKELL
Federal Reserve Board - Department of Research &
Statistics
ANNAMARIA LUSARDI
Dartmouth College
Department of Economics
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=618570
Paper ID: NBER Working Paper No. W10888
Date: November 2004
Contact: ANNAMARIA LUSARDI
Email: Mailto:annamaria.lusardi@dartmouth.edu
Postal: Dartmouth College
Department of Economics
6106 Rockefeller Hall
Room 328
Hanover, NH 03755 UNITED STATES
Phone: 603-646-2099
Fax: 603-646-2122
Co-Auth: ARTHUR B. KENNICKELL
Email: Mailto:arthur.kennickell@frb.gov
Postal: Federal Reserve Board - Department of Research & Statistics
20th & C. St., N.W.
Washington, DC 20551 UNITED STATES
Paper Requests:
Full-Text downloads are free to persons at institutions that
subscribe to the NBER Working Paper Series. Other persons can
download the paper from SSRN for a $5 charge.
ABSTRACT:
We assess the importance of the precautionary saving motive by
relying on a direct question about precautionary wealth from the
1995 and 1998 waves of the Survey of Consumer Finances. In this
survey, a new question has been designed to elicit the amount of
desired precautionary wealth. This allows us to bound the amount
of precautionary accumulation and to overcome many of the
problems of previous works on this topic. We find that a
precautionary saving motive exists and affects virtually every
type of household. Even though this motive does not give rise to
large amounts of wealth for young and middle-age households, it
is particularly important for two groups: older households and
business owners. Overall, we provide strong evidence that we
need to take the precautionary saving motive into account when
modeling saving behavior.
JEL Classification: D91, E21, C21
______________________________
"The Effect of Improvements in Health and Longevity on Optimal
Retirement and Saving"
BY: DAVID E. BLOOM
Harvard University
Harvard School of Public Health
National Bureau of Economic Research (NBER)
DAVID CANNING
Harvard University
Harvard School of Public Health
MICHAEL JOHN MOORE
Queen's University Belfast
School of Management and Economics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=622633
Paper ID: NBER Working Paper No. W10919
Date: November 2004
Contact: DAVID E. BLOOM
Email: Mailto:dbloom@hsph.harvard.edu
Postal: Harvard University
Harvard School of Public Health
677 Huntington Avenue
Boston, MA 02115 UNITED STATES
Phone: 617-432-0654
Co-Auth: DAVID CANNING
Email: Mailto:dcanning@hsph.harvard.edu
Postal: Harvard University
Harvard School of Public Health
677 Huntington Avenue
Boston, MA 02115 UNITED STATES
Co-Auth: MICHAEL JOHN MOORE
Email: Mailto:m.moore@qub.ac.uk
Postal: Queen's University Belfast
School of Management and Economics
Belfast BT7 1JP, IRELAND
Paper Requests:
Full-Text downloads are free to persons at institutions that
subscribe to the NBER Working Paper Series. Other persons can
download the paper from SSRN for a $5 charge.
ABSTRACT:
We develop a life-cycle model of optimal retirement and savings
behavior under complete markets where retirement is caused by
worsening health in old age. Our model explains the long-run
decline in the age of retirement as an income level effect. We
show that improvements in health and longevity tend to increase
the desired retirement age, though less than proportionately,
while, contrary to conventional views, reducing savings rates.
The retirement age is not simply proportional to healthy life
span because compound interest creates a wealth effect when
lifespan increases, leading to more leisure (early retirement)
and higher consumption (lower savings).
JEL Classification: J26, D91
______________________________
"Stochastic Infinite Horizon Forecasts for Social Security and
Related Studies"
BY: RONALD D. LEE
University of California, Berkeley
Department of Demography
TIMOTHY MILLER
University of California, Berkeley
Department of Demography
MICHAEL ANDERSON
University of California, Berkeley
Department of Demography
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=622631
Paper ID: NBER Working Paper No. W10917
Date: November 2004
Contact: RONALD D. LEE
Email: Mailto:rlee@demog.berkeley.edu
Postal: University of California, Berkeley
Department of Demography
2232 Piedmont Avenue
Berkeley, CA 94720-2120 UNITED STATES
Co-Auth: TIMOTHY MILLER
Email: Mailto:tmiller@demog.berkeley.edu
Postal: University of California, Berkeley
Department of Demography
2232 Piedmont Avenue
Berkeley, CA 94720-2120 UNITED STATES
Co-Auth: MICHAEL ANDERSON
Email: Mailto:mikeand1@pacbell.net
Postal: University of California, Berkeley
Department of Demography
2232 Piedmont Avenue
Berkeley, CA 94720-2120 UNITED STATES
Paper Requests:
Full-Text downloads are free to persons at institutions that
subscribe to the NBER Working Paper Series. Other persons can
download the paper from SSRN for a $5 charge.
ABSTRACT:
This paper consists of three reports on stochastic forecasting
for Social Security, on infinite horizons, immigration, and
structural time series models. 1) In our preferred stochastic
immigration forecast, total net immigration drops from current
levels down to about one million by 2020, then slowly rises to
1.2 million at the end of the century, with 95% probability
bounds of 800,000 to 1.8 million at the century's end. Adding
stochastic immigration makes little difference to the
probability distribution of the old age dependency ratio. 2) We
incorporate parameter uncertainty, stochastic trends, and
uncertain ultimate levels in stochastic models of wage growth
and fertility. These changes sometimes substantially affect the
probability distributions of the individual input forecasts, but
they make relatively little difference when embedded in the more
fully stochastic Social Security projection. 3) Using a 500-year
stochastic projection, we estimate an infinite horizon balance
of -5.15% of payroll, compared to the -3.5% of the 2004 Trustees
Report, probably reflecting different mortality projections. Our
95% probability interval bounds are -10.5 and -1.3%. Such
forecasts, which reflect only "routine" uncertainty, have many
problems but nonetheless seem worthwhile.
JEL Classification: H0, H5
______________________________
"Shifting Perspectives in Pensions"
BY: MAREK GORA
Warsaw School of Economics (SGH)
Institute for the Study of Labor (IZA)
EDWARD PALMER
Uppsala University
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=612224
Paper ID: IZA Discussion Paper No. 1369
Date: October 2004
Contact: MAREK GORA
Email: Mailto:MGORA@SGH.WAW.PL
Postal: Warsaw School of Economics (SGH)
Niepodleglosci 162
PL-Warsaw, 02-554 POLAND
Co-Auth: EDWARD PALMER
Email: Mailto:edward.palmer@rfv.sfa.se
Postal: Uppsala University
SE-751 20 Uppsala, SWEDEN
ABSTRACT:
This paper addresses the questions of what is an economically
efficient pension system, what are the externalities and what
are the risks of the four alternative pension systems: financial
defined contribution (FDC), notional or non-financial defined
contribution (NDC), financial defined benefit (FDB) and
non-financial defined benefit (NDB). A main contribution of the
paper is the development of the concept of NDC, itself a new
construction in pension economics. An important conclusion is
that NDC is neutral in terms of externalities. It manages the
risks and eliminates the negative externalities associated with
traditional public NDB schemes, and in a manner similar to FDC
schemes.
JEL Classification: D6, D8, D91, G23, H23, H55, J26
______________________________
"Pension Funds and National Saving"
BY: PABLO LOPEZ MURPHY
World Bank
ALBERTO R. MUSALEM
World Bank
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=625287
Paper ID: World Bank Policy Research Working Paper No. 3410
Date: August 24, 2004
Contact: PABLO LOPEZ MURPHY
Email: Mailto:pmurphy1@worldbank.org
Postal: World Bank
1818 H Street, N.W.
Washington, DC 20433 UNITED STATES
Co-Auth: ALBERTO R. MUSALEM
Email: Mailto:amusalem@worldbank.org
Postal: World Bank
1818 H Street, N.W.
Washington, DC 20433 UNITED STATES
ABSTRACT:
Murphy and Musalem conduct an empirical study of the effect of
the accumulation of pension fund financial assets on national
saving using a panel of 43 industrial and developing countries.
The authors find evidence suggesting that the accumulation of
pension fund financial assets might increase national saving
when these funds are the result of a mandatory pension program.
By contrast, national saving might be unaffected when pension
funds are the result of a public program implemented to foster
voluntary pension saving.
This paper is a product of the Human Development Group, Middle
East and North Africa Region. The study was funded by the Bank's
Research Support Budget under the research project "Contractual
Savings Institutions and National Saving."
JEL Classification: E21, G23, H55
______________________________
"The Impact of Population Aging on Financial Markets"
BY: JAMES M. POTERBA
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=609226
Paper ID: NBER Working Paper No. W10851
Date: October 2004
Contact: JAMES M. POTERBA
Email: Mailto:poterba@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
E52-350
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Phone: 617-253-6673
Fax: 617-253-1330
Paper Requests:
Full-Text downloads are free to persons at institutions that
subscribe to the NBER Working Paper Series. Other persons can
download the paper from SSRN for a $5 charge.
ABSTRACT:
A number of financial market analysts have argued that the aging
of the "Baby Boom" cohort contributed to the rise U.S. asset
values during the 1990s, and that asset prices will decline when
this group reaches retirement age and begins to draw down its
wealth. This paper explores the importance of changing
demographic structure for asset returns, asset prices, and the
composition of household balance sheets in the United States.
Standard models suggest that equilibrium returns on financial
assets will vary in response to changes in population age
structure. While the direction of the effect of demographic
changes is not controversial, the quantitative importance of
such changes for financial markets is open to debate. The paper
presents several strands of empirical evidence that bear on this
issue. First, it describes current age-specific patterns of
asset holding in the United States, and finds that asset
holdings rise sharply when households are in their 30s and 40s.
Aside from the automatic decline in the value of defined benefit
pension assets as households age, however, other financial
assets decline only gradually during retirement. When these data
are used to project asset demands in light of the future age
structure of the U.S. population, they do not show a sharp
decline in asset demand between 2020 and 2050. This finding
calls into question the "asset market meltdown" view. Second,
the paper considers the historical association between
population age structure and real returns on Treasury bills,
long-term government bonds, and corporate stock. The evidence
suggests only modest effects, if any, of a changing demographic
mix. Statistical tests based on the few effective degrees of
freedom in the historical record of age structure and asset
returns have limited power to detect such effects. There is a
stronger historical correlation between asset levels, as
measured for example by the price-dividend ratio, and summary
measures of the population age structure. Once again, however,
the results are sensitive to choices about econometric
specification. These empirical findings provide modest support,
at best, for the view that asset prices could decline as the
share of households over the age of 65 increases.