Demographic change, social security systems, and savings

Abstract

In theory, improvements in healthy life expectancy should generate increases in the average age of retirement, with little effect on savings rates. In many countries, however, retirement incentives in social security programs prevent retirement ages from keeping pace with changes in life expectancy, leading to an increased need for life-cycle savings. Analyzing a cross-country panel of macroeconomic data, we find that increased longevity raises aggregate savings rates in countries with universal pension coverage and retirement incentives, though the effect disappears in countries with pay-as-you-go systems and high replacement rates. AbstractIn theory, improvements in healthy life expectancy should generate increases in the average age of retirement, with little effect on savings rates. In many countries, however, retirement incentives in social security programs prevent retirement ages from keeping pace with changes in life expectancy, leading to an increased need for life-cycle savings. Analyzing a cross-country panel of macroeconomic data, we find that increased longevity raises aggregate savings rates in countries with universal pension coverage and retirement incentives, though the effect disappears in countries with pay-as-you-go systems and high replacement rates.

Do public pensions crowd out private transfers to the elderly?: evidence from South Korea

“…That is, private contributions to public pensions may have crowded out personal retirement savings. There is support for this explanation from previous research on this subject although this research was conducted mostly in the context of developed countries (Feldstein, 1974(Feldstein, , 1982Samwick, 2000;Attanasio and Brugiavini, 2003;Attanasio and Rohwedder, 2003;Bloom et al, 2007). Recently, taking advantage of the 1999 South Korean pension reforms used in this study, Hong (2012) showed that individuals who enrolled in public pensions reduced their asset holdings by a range from 5% for older cohorts to 10% for younger cohorts in his analysis sample (age 25-54 in 2002).…”

Mortality transition and differential incentives for early retirement

“…For example, the important role of the generous benefits provided by the social security system has been analyzed by Gruber and Wise [10,11], and the wealth effect associated with sustained economic growth has been examined by Costa [8]. To complement these well-known explanations, several researchers (such as Bloom et al [3], Kalemli-Ozcan and Weil [17]) examine the relatively neglected question of how mortality decline affects retirement age. In particular, Kalemli-Ozcan and Weil [17] show that people may retire earlier if the decrease in the variability of age at death associated with mortality decline is very significant.…”

“…3 In the earlier stage of mortality transition, a decline in mortality pertains mainly to younger people, particularly infants 1 The data, which are based on the life tables constructed by the Office of the Actuary of the Social Security Administration, can be downloaded from the Berkeley Mortality Database (http://www.demog.berkeley.edu/~bmd/). Obviously, some figures for these cohort life tables reflect projected mortality.…”

“…1]). 3 Another feature of observed mortality decline, one that is emphasized by KalemliOzcan and Weil [17, p. 66], is that "as life expectancy has risen, uncertainty regarding the date of death has fallen." Both features have been mentioned in Wilmoth and Horiuchi [23].…”

“…One characteristic of this approach is that a change in the survival parameter usually affects mortality rates at different ages simultaneously. For example, in an article examining whether an individual's saving level or retirement age adjusts more substantially when there is a mortality decline, Bloom et al [3] show in a model with age-invariant mortality rates (as in Blanchard [2]) that the optimal response to a mortality decline is to delay retirement, with zero (or possibly negative) effect on saving rates. However, a change in the parameter of an age-invariant mortality process affects mortality rates at all ages to the same extent.…”