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THE ECONOMICS AND POLICY RAMIFICATIONS OF AN AGING POPULATION.

When I was approached about editing a special issue of Contemporary Economic Policy, I thought at some length about a topic that would fit both the journal and the membership of the Western Economics Association International which has a large international representation. I chose the topic of the aging population because it is occurring in nearly every corner of the globe and has numerous policy issues that arise in the arenas of health, social welfare, and economic growth. Let me highlight some of the findings of a recent U.S. Census publication by He, Good-kind, and Kowal (2016) who report on the world's aging population. Across the globe, the number of older people is expected to increase by 60% between 2015 and 2030 to one billion people and grow even more over the next 20 years to 1.6 billion--totaling 16.7% of the population. Right now, a third of those aged 65 and more and half of those over age 85 are concentrated in the more developed countries. By 2050, it is projected that two-thirds of the older population will live in Asia and even Africa which is experiencing a much slower aging process is expected to see nearly four times as many people at or over age 65.

Let us not forget the good news here. Due to the rapid rate of technological innovation in many fields, for example, the environment, agriculture, transportation safety, information accessibility via the Internet, communications, and health care, we can expect to live longer. But the good news is tempered by the realities that declining fertility and increased longevity place serious pressures on economic growth, healthcare systems including families, and social programs--especially pension programs. This special issue of Contemporary Economic Policy is devoted to those social and economic issues raised by the demographic shift that we are currently experiencing.

This special issue includes ten articles that look specifically at issues related directly to the elderly. Topics include the effects of official retirement rates on suicides in the United States, labor market participation of women in urban China, and the fiscal sustainability of the social welfare state in Finland. The redistributive effects of Social Security are tackled in one article as well as a second which looks both at Social Security and Medicare Part A. Underfunded state and local government pension programs are the subject of two articles. The antipoverty benefits of life insurance for widow(er)s and the extent to which the consumer price index (CPI) over- or underestimates true living costs of the elderly are the topics of two more articles. The adequacy of veterans' health care around Medicare eligibility is the subject of another article. A more detailed summary of the articles is given below.

For individuals researching aging or assembling course materials on aging, I would like to point out two recently published Contemporary Economic Policy articles on topics that are particularly relevant. First, Kin Ming Wong and Kwok Ping Tsang's (2017) article, "Does the Right to Choose Matter for Defined Contribution Plans?" finds that Hong Kong's expansion of where workers could invest their retirement contributions improved the total asset value of the pension system by 10%. Finally, Xi Chen's (2016) article, "Old-Age Pension and Extended Families: How Is Adult Children's Internal Migration Affected?" as parents become eligible to receive a pension.

The first article by Jeffrey DeSimone, "Suicide and the Social Security Early Retirement Age," exploits a regression discontinuity design to look at the impact of the early retirement age (62) on suicide rates in the United States. Using data spanning 1990-2014, DeSimone finds an 8% reduction in suicide rates at age 62, concentrated among men--a reduction that is statistically significant and robust to estimation procedures and robustness checks. The previously undetected decline in suicide rates at age 62 reveals a potentially important unintended consequence of Social Security's early retirement age policy on mental health. The author is careful to note that this mental health benefit is a response to the Social Security early retirement age, not retirement per se, as evidence on the latter is mixed. Given that the Social Security program is the largest line item in the federal budget--approaching 25% of gross domestic product--DeSimone cautions that fiscal pressures to increase the early and normal retirement age could have deleterious effects on mental health and suicide rates.

In Denise Hare's article, "Examining the Timing of Women's Retirement in Urban China: A Discrete Time Hazard Rate Approach," the author also focuses on the importance of the official retirement ages. She explains that there is a sharp drop off in labor market participation for women in China between the ages of 40 and 51. Using data from the China Health and Nutrition Survey, she shows how official retirement ages which vary by occupation affect labor force withdrawals. It is the first study to look at the impact of changing policy parameters in the pension programs on labor force participation in China. Furthermore, it focuses on women who disproportionately withdraw from the labor market early and who are more likely shouldering an increasing burden of care work for young and elderly dependents. Additionally, state sector restructuring and economic liberalization have been typified as discouraging and/or discriminatory to women. Hare finds that increasing the official retirement ages will induce women covered by the pension system to work longer. It will not, however, change the labor market participation choices of women not covered by the pension system. To address China's concern of a declining labor supply, Hare recommends expanding the breadth of coverage of the pension system and additional government support for elder and child care. Support for elder and child care will reduce temporary withdrawals from the labor market which in conjunction with a longer work horizon should encourage additional investments in post-secondary education which is an important predictor of labor market attachment in her models.

Jukka Lassila and Tarmo Valkonen, in "Longevity, Working Lives, and Public Finances," focus on the implications of longer lifetimes on public finances in Finland's welfare state. While increased longevity is a welfare improvement, they argue that retaining the same, fixed official retirement age when people are living longer creates financial stress. The balance between individual contributions and withdrawals from pension programs shifts as the population ages, reducing the sustainability of the pension program. Both working careers and use of health and long-term care benefits are tied to life expectancies in their economic model. The authors' simulations show that a modest increase in the effective retirement age by 1.25 years over the next 50 years (when life expectancy is expected to increase by 7.5 years) would seriously improve the fiscal sustainability.

Jing Guo and Marilyn Moon wrote "Lifetime Taxpayer Contributions and Benefits of Medicare and Social Security." These authors simulate lifetime contributions to Social Security and Medicare Part A (Medicare Parts B and D are funded by premiums and the general fund) as well as lifetime benefits. It is an article that stresses that measurement matters. The authors conclude that, as intended, Medicare Part A and Social Security are progressive from a lifetime perspective. Higher-wage workers subsidize low- and average-wage workers. The authors explain that their results differ from earlier authors because: (1) they restrict Medicare to Part A only (given that the funding for Parts B and D are different) and (2) they use the medical CPI to adjust Medicare benefits which are only used for medical purposes--not the CPI-U. They estimate that lifetime benefits are nearly triple when using the CPI-U and including Medicare Parts B and D. The results as to whether taxpayers can expect more in benefits than paid-in contributions to these programs is very sensitive to these assumptions as well as others including inflation and the real rate of return. For younger generations, total lifetime contributions exceed lifetime benefits, suggesting that Medicare and Social Security are not nearly as generous as is sometimes argued--a point the authors stress as these are the individuals most likely to be impacted by many Social Security reform proposals.

The fifth article in this special issue by Robert M. Costrell is "The 80% Pension Funding Target, High Assumed Returns, and Generational Inequity." In this article, Costrell notes that state and local pension contributions rose from 7.7% of payroll in 2004 to 15.4% in 2015 and that this increase was largely dedicated to unfunded liabilities which fell 18 percentage points over roughly the same time interval. Shortfalls in state and local government pension funds are argued to be a consequence of the failure of governments to make actuarially required contributions as well as overly optimistic assumptions about investment returns. Generational inequality results from such pension financing approaches as contributions by and for the current workers must be made up by future workers. Using difference equations and a simple analytical model, Costrell shows that in the steady state, a funding ratio below 100% is sustainable although it introduces intergenerational inequality. However, in a steady state, 80% funding target actually requires funding much closer to 100% to allow for amortization. Essentially, even small deviations from the goal of full funding and small deviations between the true and assumed rates of return result in substantial inequality in pension contributions across generations.

Jeffrey Diebold, Vincent Reitano, and Bruce McDonald authored "Sweat the Small Stuff: Strategic Selection of Pension Policies Used to Defer Required Contributions." These authors also note the shortfall in public pension funds--totaling only 72% of future liabilities in 2014. Many states fail to make their annual required contribution (ARC)--contributions sufficient to amortize pension liabilities in the current year plus unfunded liabilities from prior years. Using fixed effects regressions and data from the Public Pensions Database, these authors investigate the relationships between states' pension plans' cost methods and amortization schedules and the plans' normal costs and unfunded liabilities. Essentially, the authors find that states choose strategies that reduce the required contributions in the short run and artificially make it appear that there is a more robust funding effort and more secure system. States with higher normal costs are less likely to adopt more prudent entry age cost approach. Plans with higher amortization payments lengthen the amortization period to "refinance" their unfunded liabilities.

Timothy F. Harris and Aaron Yelowitz look at the importance to spousal well-being of lumpsum insurance benefits when a spouse dies soon after their peak earnings years. In their article, "Life Insurance Holdings and Well-Being of Surviving Spouses," the authors use 20 years of data from the Health and Retirement Study to determine that the receipt of life insurance benefits greater than $10,000 do not reduce poverty or improve financial well-being in the long run for surviving spouses after controlling for socioeconomic variables. Even payouts as high as $50,000 do not improve the well-being of surviving in the long run. They reference other literature that suggests that lump-sum payments are often used for immediate consumption and thus, do not translate into longer-run benefits. This is suggestive that life insurance may be better at promoting financial well-being if the payouts are annuitized, although the authors caution that the amount of the payout would likely need to be substantial.

James Gorry and Dean Scrimgeour study the living standards of the elderly in the United States to ascertain how accurately the CPI reflects their cost of living. Their article, "Using Engel Curves to Estimate Consumer Price Index Bias for the Elderly," has implications for the well-being of the elderly as well as the federal budget. Social Security payments--the largest line item in the federal budget--are indexed by the CPI. Over-or underestimation of the CPI for the elderly has potentially huge ramifications for the federal budget and the elderly. Even the Bureau of Labor Statistics has published an experimental CPI-E for the elderly--estimating costs-of-living for the elderly that are slightly higher than those in the general population. The authors use data from the Consumer Expenditure Survey (1988-2012) to construct Engel curves for food to determine if these curves shift over time--such movement representing a bias in the CPI. They use a variety of estimation methods including instrumental variables and fixed effects estimated, quadratic Engel curves and re-estimate using different definitions of expenditures, and definitions of elderly. Based on drifts in food Engel curves, the authors conclude that the rate of increase in the CPI has been slower for elderly households.

In Amanda Stype's article, "An Examination of Veteran Health Access around the Medicare Eligibility Age," the author compares the adequacy of health care for veterans and nonveterans. She assumes that a disproportionate increase in preventative health care shortly after reaching Medicare eligibility is because there is a previously unmet health care need. She focuses on preventative care as it is less confounded by health status compared with hospitalizations or the number of doctors' visits. The author uses data on men ages 56-75 from the 1995-2010 waves of the Health and Retirement study. She finds that veterans are more likely to consume preventative care than nonveterans, doctor visits and cholesterol tests are more likely to be consumed after Medicare eligibility irrespective of veteran status, and veterans have slightly less change in the consumption of preventative care than nonveterans upon reaching age Medicare eligibility.

Sergio Nistico and Mirko Bevilacqua's article, "Some Notes on the Redistribution Inherent in the U.S. Public Pension System," compares the U.S. Social Security Defined Benefit (DB) plan with the "Notional" or "Non-Financial" Defined Contribution (NDC) plan. In the NDC approach, workers and pensioners are informed each year of the retirement accounts and the rate of return on their pension wealth which is uniform for all contributors. The authors' simulation approach suggests that the current DB pension is not as progressive as thought after the lower life expectancy of lower income recipients is taken into account. Furthermore, the authors suggest that the contribution rate to the DB plan would need to increase between 4.5 and 7 percentage points to achieve fiscal sustainability over the next 50 years. Furthermore, the authors argue that if there are necessary increases to the rates of contributions to personal accounts in the NDC plans, there would be less opposition by citizens who would likely view this as an increase in their compulsory savings, needed to provide workers for their retirement in a changing economic and demographic environment.

Maureen A. Pirog, Guest Editor School of Public & Environmental Affairs

Indiana University, Bloomington, IN 47405

Phone 812-855-0732, Fax 812-855-7802

E-mail pirog@indiana.edu

doi.10.1111/coep.12389

REFERENCES

Chen, X. "Old Age Pension and Extended Families: How Is Adult Children's Internal Migration Affected?" Contemporary Economic Policy, 34(4), 2016, 646-59.

He. W., D. Goodkind, and P. Kowal. "An Ageing World: 2015." 2016. United States Census Bureau. Accessed February 11, 2018. https://www.census.gov/content/dam/Census/library/publications/2016/demo/p95-16-1.pdf.

Wong, K. M., and K. P. Tsang. "Does the Right to Choose Matter for Defined Contribution Plans?" Contemporary Economic Policy, 35(2), 2017, 278-91.
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Author:Pirog, Maureen A.
Publication:Contemporary Economic Policy
Date:Jul 1, 2018
Words:2491
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