Posts Tagged ‘ageing’

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Rowe on retirement

Monday, February 6th, 2012

By saving, and by paying taxes to support government pensions for retirees, we smooth consumption over our lifetime. In striking contrast, we don’t smooth our ‘consumption’ of leisure, taking much of it in one large chunk (known as ‘retirement’) in the last years of life. Nick Rowe asks, Why?

If real interest rates were higher than your subjective rate of time preference, then you would choose a consumption path that is smoothly growing over time. You would consume more when old than when you were young. For all other consumption goods, some people act a bit like that, and others don’t. Some people consume a bit more when old than when young, and others consume a bit less when old than when young. But when it comes to the consumption of leisure, we don’t act at all like that. We consume roughly the same amount of leisure every year. And then we suddenly go on a massive consumption binge for the rest of our lives. Why?

As we have gotten richer over the last two centuries, we have chosen to spend a greater proportion of our lives consuming leisure rather than working. But I think I’m correct in saying that by far the biggest increase in our leisure has been in that big bunch of leisure at the end of our lives. Most people used to work until they died. Now most people stop working and then consume a decade or two of leisure before they die. Proportionately, the growth in leisure taken in retirement massively exceeds the growth of coffee breaks, lunch breaks, evenings, weekends, and holidays. The income elasticity of demand for retirement leisure massively exceeds that of all other forms of leisure. Why?

Nick Rowe, “Retirement and the non-smoothing of consumption of leisure“, Worthwhile Canadian Initiative, 4 February 2012.

Observe and participate in the discussion over at Worthwhile Canadian Initiative.

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ageing populations

Tuesday, January 3rd, 2012

Is increased life expectancy a blessing or a curse? The Financial Times discusses this, in a lead editorial in today’s paper.

Far from welcoming what is arguably one of the 20th century’s greatest triumphs, policymakers have indulged in angst-ridden hand-wringing, as the costs of supporting this ageing population soar. Falling birth rates mean fewer workers paying taxes to support growing pension costs, intensifying the burden on already stretched public finances.

But such fretting is misguided. …. No longer is a 65-year-old, or even a 70-year-old, too frail to work. …. With dwindling numbers of younger workers, older people can and should remain economically productive for longer. ….

Policymakers should look at introducing bigger tax incentives to keep older workers employed. Those who stay on after state pension age, and those who employ them, could be exempted from social security taxes, a move some countries are already making. Governments can offer cost-neutral increases in basic benefits for each year beyond retirement age that an individual elects not to draw them. Rules allowing employers to force workers into retirement should be scrapped and vigorous application of age discrimination rules should be enforced. ….

Of course, some older workers genuinely are too frail to work. Others may already be indirectly economically active, working in the “black” economy or providing care to grandchildren that increases younger female workforce participation rates. But approaching rising life expectancy as though it is an unavoidable disaster is simply foolish. A far more intelligent approach is to take steps to put all this newly found human capital to work.

“Reaping benefits of our golden years“, Financial Times, 3 January 2012.

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US pensions and healthcare for the elderly

Monday, August 15th, 2011

Timothy Taylor has a very informative post on the cost in the United States of social security pensions and health insurance for the elderly. Both programmes are financed by revenue from earmarked payroll taxes.

Social Security [public pensions] and Medicare [health insurance for the elderly] have both made promises about future benefits that their current sources of financing won’t allow them to keep. If we moved back the retirement age, would it fix these programs? Short answer: moving back the retirement age could have a large effect in addressing the financial problems of Social Security, but would have a much smaller effect in helping Medicare.

For Social Security, … [one proposal] reads: “Increase the normal retirement age (NRA) 3 months per year starting in 2017 until reaching 70 for those attaining age 62 in 2032. Then increase the NRA 1 month every 2 years thereafter.”

…. This change alone doesn’t fix Social Security completely, but it would close about 70% of the projected funding gap for the program over the next 75 years.

For Medicare, in contrast, a higher eligibility age does a lot less. ….

A key underlying issue here, of course, is that …. 25-30% of all Medicare spending is on patients in their last year of life ….

Timothy Taylor, “Can Later Retirement Ages Save Social Security and Medicare?“, Conversable Economist, 15 August 2011.

The Social Security proposal includes also an increase in the earliest eligibility age (EEA) from 62 to 64 years, but this would have almost no impact on the cost of pensions, since early retirement is possible only with a reduced pension.

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ageing and private cars

Saturday, July 23rd, 2011

Residents of the USA – unless they happen to live in a major city – do not have access to good public transportation, so have no alternative to private cars. This creates problems as people age, and are no longer able to drive safely. Taxis are expensive, and few rules keep the aged from driving, so they drive far longer than they should. Katherine Freund, who lives in Portland, Maine, has come up with a way to get older drivers off the roads.

The idea came to Ms Freund more than 20 years ago, after her three-year-old son was knocked down by a car driven by an 84-year-old man, suffered severe injuries and fell into a coma. “My little boy was run over by an apparently nice old man, who thought he had hit a dog,” Freund told FT journalist James Crabtree, “So I began to think about how in the world that happened, and how I [could] make sure that it never happens again to another little boy, and another nice old man.”

Freund’s solution was ITNAmerica, an innovative not-for-profit organisation that brings together volunteers, vehicles and clever computer software to provide around 50,000 subsidised car rides a year to elderly people across the US. The organisation is, in effect, a cheap, community-run taxi service staffed by a mix of paid and volunteer drivers. Launched in Portland in 1995, it charges an annual $40 individual membership fee and an average of $9 a trip, much less than a regular taxi. Partially supported by charitable grants, the service has now expanded to more than 20 cities across America.

The organisation’s HQ seems low-tech, … [b]ut behind the operation lies a clever software package …. ITN’s other bit of ingenuity comes from its use of credits. Volunteer drivers build them up – most are over 60 themselves – and can then cash them in when they choose to stop driving. A volunteer in Los Angeles, meanwhile, could build up credits to donate to an elderly parent on the other side of the country.

James Crabtree, “Agnes the ageing suit“, Financial Times, 23 July 2011.

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the myth of family ‘care’ in Japan

Tuesday, July 19th, 2011

Historian Mayumi Hayashi has written a short essay that exposes the myth of a ‘golden age’ in the Japan’s past, where elderly were cared for by their families. Her description of the deficiencies of family care, and the associated problems of “care-giving hell” and “social hospitalisation”, sadly is still applicable to Japan and to many countries around the world today.

Japan currently has the world’s highest proportion of older people and the largest number of centenarians. According to the stereotype, Japan’s tradition of strong family care for older people means that dedicated and responsible children look after dependent older parents within extended family living arrangements, with very few institutionalised elderly. In reality extensive family ‘care’ sometimes featured disturbing neglect and abuse of vulnerable older people, with many ‘abandoned’ older patients effectively left resident in hospitals with little or no need of medical care. Japan’s post-2000 social care reform widened the spectrum of service delivery beyond traditional family practice, but has resolved neither ‘care-giving hell’ nor ‘social hospitalisation’. ….

Historically Japanese family care did not involve long-term constant or intensive nursing for very sick or disabled older people because of insufficient medical care and correspondingly low survival rates after acute or critical illnesses, or among survivors with severe disabilities or poor health. …. A universal health care insurance system was introduced in Japan in 1961, but this covered only half of older people’s total medical costs, leaving many without access to medicine and medical treatment.

Fully 80% of Japan’s older people [in 1961] still lived with their offspring in extended families, but many became victims of neglect or abuse from family carers too poor or too busy making ends meet. ….

Alarmingly a 1994 national survey claimed that one in two family carers had subjected frail older relatives to some form of abuse, with one in three acknowledging feelings of ‘hatred’. ….

[P]rovision of free health care for most over-70s in 1973 … [led to] a surge in elderly admissions …. [M]any such patients were seemingly ‘living’ in hospitals, requiring social care but little or no medical treatment, a situation dubbed ‘social hospitalisation’. ….

[U]nlike nursing home provision, hospital admission involved no means-testing and little needs-assessment and thus entailed no welfare stigma or lengthy and often degrading assessment procedures. ….

In 1982 … [f]ree medical care for most over-70s was abolished and small user fees introduced as disincentives [along with] [f]lat-rate monthly fees for non-acute older inpatients …., to stop hospitals profiting from unnecessary and excessive medical treatment and prescription. Meanwhile, the government retained supplementary and means-tested measures in flagship nursing home provision, still stigmatised and in scarce supply. ….

[S]ocial hospitalisation continues [today], with 250,000 hospital beds – one sixth of the total – still occupied by older patients with chronic conditions, as does the acute shortage of nursing home places. Nevertheless, the government recently announced the closure of all these 250,000 hospital beds …, producing a public outcry and fears that thousands of ‘refugees’ will be thrown out into the community without 24-hour care alternatives.

Mayumi Hayashi, “The care of older people in Japan: myths and realities of family ‘care’“, History & Policy Papers, June 2011.

Mayumi Hayashi is a Research Fellow in the School of History, University of East Anglia. She moved from Japan to England in 2005 to study for a PhD. which she obtained in 2009. Her current projects include “Japan’s voluntary time-banking schemes in elderly care” and “Community programmes for frail older people in Britain”,

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government taxes and spending

Tuesday, June 21st, 2011

Economics journalist David Leonhardt has posted an interesting interview with British economist Diane Coyle. He asked:

In the context of the huge long-term deficits facing rich countries, you say that recent generations have been living beyond their means. What do you think is the one kind of tax increase that would best help us live within our means? And, similarly, the one kind of spending cut?

[Ms. Coyle answered:]

The current system of taxes and government spending encourages consumption and the over-use of resources today and creates too little incentive to save and invest. The one tax to increase now is a carbon tax. You don’t even have to worry about climate change to accept it has many benefits. In particular, it will encourage innovation in noncarbon-based energy supplies from renewables to nuclear. This is a field in which the U.S. and other Western economies could build on their strong science base to build an area of technological strength for the future, and at the same time reduce dependence on oil and gas imports from overseas. There are multiple good reasons for introducing a carbon tax.

Government spending needs to be redirected away from massive corporate subsidies — including to the financial sector but also big companies in health care and agribusiness — and instead towards infrastructure investment and education (which is infrastructure of a different kind for the digital economy). But the really painful cut in expenditure needs to be in government support for older people. Across the Western economies, retirement ages and the age threshold for benefits from the government will have to increase. If not, healthy and active over-60s benefiting from the taxes of a declining proportion of working people in the population are going to bankrupt the government and undermine the arrangement of mutual benefit that keeps any society stable. And, yes, I’m fully planning on working until I’m 70.

David Leonhardt, “Making Choices ‘as if the Future Matters’“, Economix, 17 June 2011.

I like Ms. Coyle’s response, up to the point where she recommends that government reduce its support for older people. Those who work with their minds can continue to be productive to age 70, or even longer. But those whose jobs require physical effort will find it difficult to delay retirement to such an advanced age.

One of the benefits of economic growth is the possibility of increased leisure time. Just as residents of wealthy countries no longer have to work 12 hours a day, six days a week, they are no longer forced to keep working until they drop dead. Retirement is a luxury, but it is an affordable luxury for those of us fortunate enough to live in advanced economies.

Ms. Coyle would be on firmer ground if she simply stated that governments should not penalize those who continue working beyond the state retirement age. Government support for the elderly, in other words, should not be conditional on retirement, or should at least compensate pensioners fairly for delaying retirement. But this is not what she says.

British economist Diane Coyle (born 1961) is author of The Economics of Enough: How to Run the Economy as If the Future Matters (Princeton University Press, 2011). A copy is on my desk, and I hope to read it soon.

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the shameful state of UK nursing homes

Wednesday, June 1st, 2011

The Financial Times, in an editorial, argues that, without strong regulation, the model of private, for-profit nursing homes is fundamentally flawed.

The poor performance of some for-profit care homes stems in part from a series of miscalculations by their owners. …. Increased competition among care providers cut occupancy rates. The financial crisis sent property prices tumbling; its aftermath forced governments to squeeze local council budgets, which, in turn, cut care homes’ incomes. These errors left indebted companies running private care homes with little option but to cut back on investment in order to remain solvent. The human cost of this failure is a disgrace. ….

[There is a] fundamental flaw in the private model. Private care providers seeking to maximise profits are tempted to cut back on the spending needed to provide the best possible care for those vulnerable people in their charge.

Given this temptation, a strong regulator, capable of improving standards and protecting the public, is essential.

“The shameful state of UK care homes“, Financial Times, 1 June 2011.

A brief comment on American and British use of English words. A ‘care home’ in the UK refers to what, in North America, is known as a ‘nursing home’, i.e. an “establishment where maintenance and personal or nursing care are provided for persons (as the aged or the chronically ill) who are unable to care for themselves properly” (Merriam-Webster’s Medical Dictionary, 2007). To add to the confusion, in the UK a ‘nursing home’ is a small private hospital. This is why it is sometimes said that the British and Americans are ‘divided by a common language’.

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ageing and healthcare costs

Sunday, May 15th, 2011

Life expectancy has increased dramatically since the mid-20th century, along with healthcare bills. So how much of the increased healthcare costs are due to population ageing? Surprisingly little, researchers conclude.

[A]geing seems to explain only 0.5%-0.7% of annual health expenditure growth. On the whole, technological progress in medicine is the most important factor in explaining the growth of healthcare expenditure, although we also find that the rise in longevity leads to further demand for life-prolonging medical care. Moreover, as ever more people reach a very high age (beyond 85), the percentage requiring long-term care in their last years of life increases. On the whole, there is thus a small positive effect of ageing on per-capita health expenditure, which several studies estimate to be in the order of an annual growth rate of 1.5%. [Click on chart for a clearer view.]

The fixation of policymakers on ageing seems to suggest that higher healthcare expenditure is inevitable, in fact diverting attention from the real causes of growth of the healthcare sector. These include failures in insurance markets, technological progress in medicine combined with a secular rise in income, and distorted incentives in reimbursing both patients and doctors. Blaming population ageing distracts from the decisions that really ought to be made, such as devising appropriate incentives for curbing excessive provision of publicly financed healthcare and evaluating the social value of new medical technologies.

Joan Costa-i-Font, Stefan Felder and Andrew Felton, “Does ageing really affect health expenditures? If so, why?“, VoxEU, 14 May 2011.

The authors of this column are economists. Joan Costa-i-Font teaches at LSE and Stefan Felder at the University of Basle. Andrew Felton is a PhD student at the University of Maryland.

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stimulating demand in Japan

Friday, March 4th, 2011

Mr [Kosuke] Motani … is fed up with the elderly hoarding their money. He says they do this because of a “King Lear” complex: they feel they will be deserted if they give too much away. And he favours tax reform to encourage them to bequeath their money to their grandchildren, rather than their children. One of the flipsides of longevity, he points out, is that the average age of those who inherit is a grand old 67.

“Ending deflation in Japan: An old problem“, The Economist, 12 February 2011.

Mr Montani, an economist with the Development Bank of Japan, is author of “Defure no Shotai” (The real face of deflation).

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inflation-adjusted annuities

Saturday, February 26th, 2011

University of Texas law professor Henry Hu and Berkeley finance professor Terrance Odean would like to see the US government sell indexed annuities, just as it now sells indexed bonds. Workers with tax-subsidized retirement savings plans, such as a 401(k) plan, “could choose this annuity option instead of, or in addition to, investments in stocks, bonds or mutual funds”.

The insurance industry sells an inflation-adjusted annuity that goes part of the way toward helping people cope with the possibility of outliving their savings. ….

[But] annuities aren’t federally guaranteed. …. If an insurance company goes under, the retiree may end up with nothing close to what was promised.

The federal government can offer a product that solves that problem. Individuals would face no more risk of default than that associated with Treasury bills and other obligations backed by the United States. ….

How much the payouts would be could be based on a variety of factors, including interest rates on government bonds; mortality tables that, among other things, take into account that healthier people are more likely to buy annuities; and administrative costs. This new product … is only an incremental move beyond issuing inflation-adjusted bonds, which the Treasury already does.

Henry T. C. Hu And Terrance Odean, “Paying for Old Age“, New York Times, 26 February 2011.

Hu and Odean overlook two important facts. First, private, indexed annuities are not only risky; they are also poor value. Second, the US government already sells an inflation-adjusted annuity, and compels workers to purchase it. The annuity is known as a Social Security pension. Another way to provide the same option –secure savings for old age with good value for money– is to allow workers to make additional, voluntary contributions to their Social Security accounts.

Update: The Canadian government sold nominal annuities, with no indexing (i.e., no adjustment for price inflation), from 1908 until 1979.

At the turn of the 20th century, social reformers began pressuring the Canadian government to create an old age pension system for all citizens. The government resisted and, instead, passed, in 1908, the Canadian Government Annuities Act, making it possible to offer annuities to working men and women to help them save for retirement. Though this was a significant breakthrough, the truth of the matter was that very few Canadians could afford to save for or to buy these annuities. Nonetheless, some of the few who could did, and even some employers began to purchase annuities for their employees. These were the earliest examples of pension plans in Canada.

With the advent of [noncontributory pensions with] the Old Age Security Act in 1952, then the Canada Pension Plan [with mandated contributions] in 1966, the optional government annuities sold under the Canadian Government Annuities Act of 1908 became somewhat superfluous, and the sale of these annuities was stopped in 1975. …. Employers were allowed to register their employees up until 1979 ….

“Canadian Government Annuities“, Annuity Museum, accessed 27 February 2011.

HT Warren McGillivray.

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