Topics in the Economics of Aging.
Robin Lumsdaine, James Stock and David Wise examine three models of retirement to see if increased computational complexity will add predictive validity. The models use data from a Fortune 500 firm to examine the effects of current wages and future retirement benefits on the decision to retire. The most computationally complex model, dynamic programming, predicts better than the most simple probit model, but no better than the model of intermediate complexity, the option value model. As pointed out by Sylvester Schieber in his discussion of the paper, the models are not of retirement, but rather of voluntary exit from the firm, i.e., the employee may go on to work for another firm and not actually retire from the labor force. Hence the model has limited use in predicting retirement, per se. Further, from the firm's perspective, they would probably wish to know which employees will leave, not just the total number of exits.
The paper that should produce the most discussion is by Thomas MaCurdy and John Shoven. They show that over periods of 25 years or longer, common stocks have outperformed bonds. Although the result has been shown elsewhere, the authors present data to show that currently fewer than five percent of faculty allocate all of their retirement funds to CREF, the common stock fund. Further, less than one in ten faculty members allocate at least 75 percent of their retirement funds to CREF rather than the alternative bond fund, TIAA. These rates do not change even when controlling for age. There is a follow-up study for someone to determine if faculty are very highly risk-averse or just lack information.(1)
Axel Borsch-Supan, Vassilis Hajivassilou, Laurence Kotlikoff and John Morris use a new simulation method to examine the effects of health, functional ability and demographic factors on the living arrangements of the elderly. Their methods produce a better fit of the data and reconfirm that increased age and decreased functional ability as measured by an activity-of-daily living scale result in an increased probability of an elderly person residing in a nursing home. Borsch-Supan, Kotlikoff and Morris along with Jagadeesh Gokhale estimated a model of the provision of time to the elderly by their children. Male children and younger children tend to spend less time, as do children with poor health. Older parents tend to receive more time as do parents in poor health. The study, however, does not control for the distance between the residence of the parent and the child, a factor that might be of great importance in light of our mobil society.
Michael Hurd tests the life-cycle hypothesis. Consistent with the hypothesis, he finds that wealth declines with age, although perhaps only marginally more so for those with children. This is evidence of a weak bequest motive. He shows that consumption declines with age, as predicted by the life-cycle hypothesis, but the results are tempered by the fact that consumption data are confined to only a few categories, excluding health care, in the Retirement History Survey used in the study.
Two of the papers focus on other nations. Angus Deaton and Christina Paxson look at the elderly in Thailand and Cote d'Ivoire. The paper is descriptive rather than analytical. Their work reminds us that the economic model of the family may be viewed differently in less developed nations. For example, the larger and intergenerational households of these nations should cause us to examine intrahousehold allocation decisions to a larger extent when studying wealth accumulation, income, consumption, saving and labor supply. Tatsuo Hatta and Noriyoshi Oguchi develop a theoretical model of the Japanese social security system. The system is currently funded on a pay-as-you-go basis, which will result in a severe burden on the post-baby boom generation when their parents retire. Their model shows that under certain assumptions the switch to a fully-funded pension will shift the burden to the baby-boom generation and that shifting to an actuarially fair system will eliminate microeconomic distortions. I would caution, however, that most likely in Japan as in the United States, people will accept additional burdens in social security taxes or reduced benefits with the greatest of difficulty.
The final two papers focus on nursing homes. Alan Garber and Thomas MaCurdy explore how the source of payment for nursing home care, Medicare, Medicaid or other (usually private pay) affect the duration of the stay and how the patient exits. Using a hazard model, they find that Medicare patients have shorter stays, which would be expected given the limits on length of payment under the program. Private pay patients are more likely to return to their homes than Medicaid patients. The results are of interest, but as the authors note, the source of payment might be endogenous with the assets of the patient and their health upon admission. Edward Norton rigorously tests the applicability of a Markov model in an experimental reimbursement program. Earlier studies had demonstrated that people in nursing homes tended to go home sooner and were less likely to die when nursing homes were given incentive payments based on the condition of the patient at the time of admission as well as improvement in their condition. Norton's contribution is to confirm that the Markov model is a reasonable, if imperfect, model of the process and to validate its applicability.
The volume provides us with an interesting range of models and techniques in exploring the economics of aging. Overall, it adds substantially to our understanding of the field.
1. For those that are curious, at the recommendation of my friend and senior colleague, Norman Leonard, I have been 100 percent CREF since very early in my career.
Robert J. Gitter Ohio Wesleyan University
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|Author:||Gitter, Robert J.|
|Publication:||Southern Economic Journal|
|Article Type:||Book Review|
|Date:||Jan 1, 1994|
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