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The economics of aging.

Members of the NBER's Program on the Economics of Aging currently are doing research on: the housing and living arrangements, health care, and financial status of the elderly; U.S. demographic trends and their economic consequences; labor market and retirement behavior, including saving for retirement; and international comparisons of these issues. Much of this research has been published in a series of University of Chicago Press volumes for the NBER, the first of which appeared in 1989. A fourth volume is scheduled for publication in 1993. Many of our current research efforts are summarized here; substantial related work on health care is now underway, and will be summarized in a future issue of the NBER Reporter.

Demographics and Housing

Daniel L. McFadden has been considering the relationship between demographics, the housing market, and the welfare of the elderly.(1) His work emphasizes the distribution of homeownership capital across past and future generations of U.S. households. This issue has particular importance for older people, because a large percentage of the wealth of the majority of elderly households is in the form of housing, and because much of the value of this housing traditionally has resulted from capital appreciation. McFadden's results suggest that people born between 1880 and 1910 achieved a real rate of return on their housing investment of about 3 percent per year. He projects that real housing returns will decline to about 1 percent per year for people born around 1915, zero for people born about 1930, negative 1 percent for people born around 1945, and negative 3 percent for people born between 1960 and 1990. Despite the significant variation in capital appreciation across generations, it turns out that real income growth over time has a far larger effect on the welfare of different generations than does housing appreciation.

A related paper by Louise M. Sheiner and David N. Weil examines the degree to which the elderly reduce homeownership as they age.(2) This study finds that average levels of homeownership and housing wealth decline significantly in the last few years of life. In addition, the value of houses sold by elderly people tends not to remain in their portfolios after the house is sold. About 42 percent of households leave behind a house when the last member dies, and the average value of houses left is about $38,000.

Nursing Home Utilization

Alan M. Garber and Thomas E. MaCurdy have been studying the long-term care of the elderly. In a recent paper on nursing home utilization, they find that the risk of a 65-year-old entering a nursing home at some time during the remainder of his or her life is 35 percent.(3) Ten percent of the elderly will have more than one admission, and 0.5 percent will have more than four admissions. The median age of a first nursing home ad-

Of the individuals with some nursing home utilization, almost 25 percent spend a total of one month or less; about half spend less than six months total in a nursing home. However, about 10 percent of men admitted to nursing homes will stay there for six or more years; about 10 percent of women admitted to nursing homes will stay for eight or more years.

While two-thirds of 65-year-olds will never enter a nursing home, and a large part of the remaining one-third will experience only a short stay in a nursing home, a substantial minority of older people can expect to have a very lengthy nursing home stay. This minority accounts for a large fraction of total nursing home utilization. The small risk of very long stays suggests that there may be a substantial role for insurance of nursing home care.

Pension Plan Provisions and Retirement

In a series of papers with Robin L. Lumsdaine and James H. Stock, I have demonstrated the dramatic effect of pension plan provisions on retirement behavior. Our work was based on the personnel records of large Fortune 500 companies. At most companies with defined-benefit pension plans, the value of the plan to employees varies significantly by age and years of service.(4) There are large financial incentives to continue working at some ages and to retire at other ages. Using a statistical approach tailored to account for these financial incentives in pension plans, we can predict employee retirement rates by age with considerable accuracy mission is 81 for men and 84 for women.

In one study, we consider how retirement behavior changed under a temporary retirement bonus program called a "window plan," and find essentially no difference in the retirement behavior of men and women. Because firm pension plans typically contain financial incentives to retire even before Social Security eligibility, these plans likely influence the overall labor force participation rates of older people.

A paper by Alan J. Auerbach, Laurence J. Kotlikoff, and David N. Weil explores how much of the economic well-being of older people is provided through income payments (annuities) as compared with asset holdings.(5) They find that income annuities have increased in importance between 1962 and 1983, particularly among those over age 75, and among women. The increasing annuitization of the elderly may have contributed to lower levels of saving and smaller bequests, they suggest.

Tax-Advantaged Retirement Savings Plans

Savings can be a major source of support in retirement, and incentives to save for retirement are an important component of government policy. In one paper, Steven F. Venti and I document the basic patterns of saving behavior over the past decade and find little evidence of substitution between IRA for non-IRA saving.(6) However, we observe that IRA contributions fell approximately 75 percent after the 1986 tax legislation.

In new research, Poterba, Venti, and I focus on 401(k) plans, which offer tax advantages similar to IRAs but are provided through employers.(7) Approximately one-third of employees currently are eligible for these plans, and the employee participation rate of those who are eligible is roughly 75 percent. Contributions to 401(k) plans reached $45 billion in 1989 and probably exceed $60 billion today.

Our study finds little evidence for a saving offset between 401(k)s and other financial assets, but rather shows that households with and without 401(k) plans have very similar patterns of non-401(k) asset accumulation. These findings suggest that households view targeted retirement saving as different from other types of financial saving, and that there is little apparent substitution between the two.

In a related paper Poterba, along with Andrea Kusko and David W. Wilcox, analyzes three years of records of contributions to the 401(k) plan at a large U.S. manufacturing firm.(8) They find a weak positive correlation between the employer match rate for 401(k) contributions and both the participation and contribution rates in the plan. This conclusion is based on year-to-year variation in employer match rates. These correlations are weak because there is substantial persistence of individual behavior with respect to the 401(k) plan: that is, most participants contribute the same share of salary, year after year. The paper also provides important new evidence on the importance of federal limits on 401(k) contributions in affecting contributor behavior. Roughly 20 percent of the plan participants were making the maximum possible contribution, although only 1.5 percent were constrained by the IRS limit on the dollar value of contributions.

A study by Leslie E. Papke explores related issues.(9) Using data that companies provide to the IRS about their 401(k) plans, Papke finds that a 0.05 increase in the employer matching rate is associated with an increase in employee contributions of between 1 and 5 percent. She also finds that the Tax Reform Act of 1986 reduced employee contributions to 401(k) plans by 4 percent, because of more restrictive contribution limits, new nondiscrimination requirements, and lower marginal tax rates.

Finally, B. Douglas Bernheim and John K. Scholz explore the effects of public opinion on private saving.(10) Their study suggests that lower-income households may not respond significantly to tax incentives (such as IRAs), so that encouraging the creation and expansion of firm pension plans is more effective in increasing the savings of those households. For higher-income households, however, firm pensions appear to displace private saving, so that tax incentives may be more effective in increasing their savings.

International Comparisons

Axel Borsch-Supan compares the housing, saving, and retirement decisions made by older people in Germany and the United States.(11) Germany faces a particularly pronounced aging process: the dependency ratio in Germany is already at a level that will not be reached in the United States until 2015, and is projected to exceed 43 percent at its peak in 2030. In this respect, changes that are occurring now in Germany foreshadow changes to come in the United States.

Borsch-Supan shows that both countries' pension systems are powerful instruments for influencing retirement decisions. Even after the recent Social Security reforms, pension policies may distort employee decisions in favor of early retirement, particularly in Germany. His results also suggest that an aging-induced reduction in individual savings may be small, or may not occur at all. Further, he finds that entitlement to future Social Security benefits leads to a reduction in savings.

Finally, Borsch-Supan suggests that, under current policies, an aging population may distort the housing market. Policies reducing the mobility of older people inhibit the natural transfer of homes to younger generations; new construction is biased toward too few and too large houses; and there are economic disincentives for family care and multigenerational living arrangements.

1 D. L McFadden, "Demographics, the Housing Market, and the Welfare of the Elderly," paper presented at the NBER Conference on the Economics of Aging, May 7-10, 1992, and in a conference volume by the University of Chicago Press, forthcoming.

2 L. M. Sheiner and D. N. Weil, "The Housing Wealth of the Aged," NBER Working Paper No. 4115, July 1992.

3 A. Dick, A. M. Garber, and T. E. MaCurdy, "Forecasting Nursing Home Utilization of Elderly Americans," NBER Working Paper No. 4107, June 1992; also summarized in NBER Digest, September 1992.

4 R. L. Lumsdaine, J. H. Stock, and D. A. Wise, "Pension Plan Provisions and Retirement: Men and Women, Medicare, and Models," NBER Working Paper No. 4201, October 1992.

5 A. J. Auerbach, L. J. Kotlikoff, and D. N. Weil, "The Increasing Annuitization of the Elderly--Estimates and Implications for Intergenerational Transfers, Inequality, and National Saving," NBER Working Paper No. 4182, October 1992.

6 S. F. Venti and D. A. Wise, "Government Policy and Personal Retirement Saving," NBER Reprint No. 1752, September 1992, and in Tax Policy and the Economy, J. M. Poterba, ed. Cambridge, MA: MIT Press, 1992, pp. 1-41.

7 J. M. Poterba, S. F. Venti, and D. A. Wise, "401(k) Plans and Tax-Deferred Saving," NBER Working Paper No. 4181, October 1992; also summarized in NBER Digest, December 1992.

8 J. M. Poterba, A. Kusko, and D. W. Wilcox, "Participation in and Contributions to 401(k) Plans: Evidence from Firm Records," paper presented at the NBER Summer Institute, 1992, Cambridge, MA.

9 L. E. Papke, "Participation in and Contributions to 401(k) Pension Plans: Evidence from Plan Data," NBER Working Paper No. 4199, October 1992.

10 B. D. Bernheim and J. K. Scholz, "Private Saving and Public Policy," NBER Working Paper No. 4215, November 1992, and in a volume by the MIT Press, forthcoming.

11 A. Borsch-Supan, "Aging in Germany and the United States: International Comparisons," paper presented at the NBER Conference on Aging, May 7-10, 1992, and in a conference volume by University of Chicago Press, forthcoming.
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Author:Wise, David A.
Publication:NBER Reporter
Date:Dec 22, 1992
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