Archive for the ‘Demographics/Pension’ Category

Chameleons: The misuse of theoretical models in finance and economics

September 23, 2016

Well Paul Romer’s paper scathing state of macro has been much talked about. Romer even defended the paper.

However, there are others as well who have been questioning state of economics who are not as well known. Here is a 2014 paper by Paul Pfleiderer of Stanford (what is it with Profs named Paul!?) who says we have a new problem. There are certain models which are full of assumptions yet are played at a policy/real world level. These models obviously don’s meet the filter of real world once assumptions are done away with. Still they remain the main ideas.

He calls such models as chameleons:


Chile’s Pension System: Once eulogised and a case for emulation is now under a crisis…

September 8, 2016

These stories are so common in economics. The moment you think certain economic policy or system or economy has become the gold standard, it just goes the other way. This is both beauty and frustrating part of the subject.

This is the case with Chilean pension system as well. It was once eulogised but is under a crisis. It moved to a defined contribution plan much earlier than other economies which continue to be burdened by defined benefit plans.

But it is these very DC plans which are biting now. Reasons are not political but labor markets, as Prof. Andrés Velasco suggests:

Defined-benefit pension plans are under pressure. Changing demographics spell trouble for so-called pay-as-you-go (PAYG) systems, in which contributions from current workers finance pensions. And record-low interest rates are putting pressure on funded systems, in which the return from earlier investments pays for retirement benefits. TheFinancial Times recently called this pensions crunch a “creeping social and political crisis.”

Defined-contribution, fully-funded systems are often lauded as the feasible alternative. Chile, which since 1981 has required citizens to save for retirement in individual accounts, managed by private administrators, is supposed to be the poster child in this regard. Yet hundreds of thousands of Chileans have taken to the streets to protest against low pensions. (The average monthly benefit paid by Chile’s private system is around $300, less than Chile’s minimum wage.)

Chile’s government, feeling the heat, has vowed to change the system that countries like Peru, Colombia, and Mexico have imitated, and that George W. Bush once described as a “great example” for Social Security reform in the United States. What is going on?

The blame lies partially with the labor market. Chile’s is more formal than that of its neighbors, but many people – especially women and the young – either have no job or work without a contract. High job rotation makes it difficult to contribute regularly. And it has proven difficult to enforce regulations requiring self-employed workers to put money aside in their own accounts.

Moreover, the legally mandated savings rate is only 10% of the monthly wage, and men and women can retire at 65 and 60, respectively – figures that are much lower than the OECD average. The result is that Chileans save too little for retirement. No wonder pensions are low.

But that is not the end of the story. Some of the same problems plaguing defined-benefit systems are also troubling defined-contribution, private-account systems like Chile’s. Take changes in life expectancy. A woman retiring at age 60 today can expect to reach 90. So a fund accumulated over 15 years of contributions (the average for Chilean women) must finance pensions for an expected 30 years. That combination could yield decent pensions only if the returns on savings were astronomical.

They are not. On the contrary, since the 2008-2009 global financial crisis, interest rates have been collapsing worldwide. Chile is no exception. This affects all funded pension systems, regardless of whether they are defined-benefit or defined-contribution schemes.

We just keep going in circles.

The crucial lesson is both policy pushers and public should take policies with a pinch of salt. The unintended or hidden consequences eventually take-over and the initial successes become cases for future problems..

How quickly did 30 million migrants to the US assimilate culturally?

July 7, 2016

Immigrants are the easiest targets in any political campaign. Most leaders use this to come to limelight.

But what about immigrants themselves? Do they assimilate in the different culture or maintain their own identity? If they maintain their own, then obviously they invite even more attacks.

Ran Abramitzky and Leah Boustan try and understand this question of cultural assimilation. They look at mass migration of 30 million Europeans to US during 1850-1913.


Russia’s demographic puzzle – falling birth rates and rising death rates…

March 8, 2016

A note by Guillaume Vandenbroucke on Russia;’s demographic profile. 

Russia is one of those countries whose death rates has been rising for quite some time now:


‘Children of the Wall’: Outcomes for kids born in a crisis

November 11, 2014

Timely piece by Arnaud Chevalier and Olivier Marie. Anything on Berlin Wall is likely to be read at this hour.

In this article, authirs show how children born during the fall are facing several issues:

Children born in crises face different initial conditions. Data on children born in East Germany just after the Berlin Wall came down confirms that this corresponds to worse adult outcomes. ‘Children of the Wall’ have 40% higher arrest rates, are 33% more likely to have repeated a grade by age 12, and are 9% more likely to have been put into a lower educational track. This column argues that these negative outcomes can be explained by the lower average parenting skills of those who decided to have children during a period of high economic uncertainty.

The authors get hold of a survey to tease these relationships:

To explore if these negative outcomes are driven by negative parental characteristics, we make use of very detailed survey data from the German Socio Economic Panel (SOEP) and the Deutsches JungedInstitut survey (DJI). Women who gave birth in East Germany just after the end of the communist regime were on average younger, less educated, less likely to be in a relationship, and less economically active.

Importantly, they also provided less educational input to their children even if they were not poorer. The Children of the Wall also rated their relationships with their mothers and the quality of parental support they received by age 17 much less favourably than their peers. Both these children and their mothers were also far more risky individuals compared with individuals who did not give birth (or were not born) in East Germany between August 1990 and December 1993.

While these results are in line with negative parental selection, they could also be driven by timing-of-birth effects. Due to the economic turmoil prevalent at the time, these children may have experienced higher levels of maternal stress in utero and during early childhood, which may have shaped their future behaviour.

To assess this hypothesis, we examine the same set of outcomes for the older siblings of the Children of the Wall who were born in the non-uncertain times of East German communism. They also similarly report having a poor relationship with their mothers, lower educational attainment, and are more risk-taking individuals. We thus reject the possibility that the Children of the Wall have worse outcomes due to being born in ‘bad times’ and instead conclude that the negative outcomes observed for this cohort can be explained by the lower average parenting skills of those who decided to have children during a period of high economic uncertainty.

A possible reason for this negative parental selection is that the fertility decision of these women did not react as strongly to changes in the economic environment. Indeed, further analysis of the SOEP reveals that less educated mothers were far less likely than more educated ones to reduce their fertility when they perceived a bad economic environment.

🙂 Importance of parenting..

On a demographic consequence of the First World War

August 24, 2012

Super column by Guillaume Vandenbroucke. It is connected to the work on linking institutions with supply of labor by Elena Nikolova . In that work, Nikolova  showed inclusive instis are more likely to emerge when we have shortage of labour. One of the example was world wars where economies like US allowed voting for women to incentivise women as supply of men has decreased post World Wars.

This column by Vandenbroucke goes a step back and shows how labor force has declined post WWI. This was because of decline in fertility. The fertility in turn declines because of expectations over loss in income and productivity. He actually makes a model factoring these expectations and shows it resembles the actual trend fairly closely.


Demographic Changes and Macroeconomic Performance: Japanese Experiences

June 1, 2012

Bank of Japan officials have been strongly emphasizing on the role of demographics in Japanese economy and recovery from the crisis. As per them, ageing Japanese population played a string role in slow recovery from the 1990s crisis. And many developed econs are in a similar Japanese position — Ageing population and deep financial crisis. hence, their recovery paths could also be slow and tardy like Japs.

This blog has continuously covered papers/speeches on demographic issues. I also wrote a paper on the topic.

BoJ goes a step further and has organised a conference on the topic. Its annual IMES conference is based on the demographic theme and its impact on macroeconomics. The papers are not still online so one has to wait.

The inaugural speech by BoJ Governor, Shirakawa is on the website. As always very interesting and more detailed than previous speeches on the topic.


Divorce rates help explain why Americans work more than Europeans..

May 21, 2012

A very longish paper by the trio explained in voxeu.

Why Americans work more than Europeans? This Europe vs US issue has always been a hot topic.

The authors say apart from higher tax rates in Europe, it is higher divorce rates in US which explain part of the problem:


How to ensure Demographic Dividend does not become a Demographic Bomb?

January 9, 2012

WB’s chief economist Justin Lin writes a post on the topic.

He says the population bomb is ticking in some countries esp Africa. It is upto them what they want to do with it. Do they want to cash on the dividend or let it become a bomb?


Civil Service and Military Pensions in India

October 31, 2011

This blog is really interested in research work on pensions as it connects so many areas of economics – microeconomics, behavioral economics, macro, financial economics etc.

In this superb paper Ajay Shah and Renuka Sane, review the pensions in India’s civil and military sectors. The paper tells you the pension system in each of these two areas and how the system is being moved to New Pension System. The transition has been easier in civil services compared to military services.


Why savings rate increased in China despite falling real rates?

September 29, 2011

Malhar Nabar of IMF looks at this interesting puzzle on Chinese household behavior.

Real interest rates have declined in China during 1996-09 but household savings (HH) as a % of GDP has risen from 19% in 1996 to 30% on 2009. This is a puzzle as one would assume as rates decline savings decline and consumption rises. This is the reason for rate cuts during the 2007 crisis (and previous crisis). In China you get a different behavior of savings rate actually rising.



Do women political leaders help women?

May 13, 2011

This is a timely paper given today’s election results. We have seen two women emerge as leaders in the state elections results – Mamta Banerjee in West Bengal and Jayalalitha in Tamil Nadu. Both have clean sweeped. It is not new for Jayalalitha as she has been the CM before but completely a change for West Bengal which has lived in communist rule for 34 years.

So what would one expect from a women leader? One of the first thing would be improvement in women security. As a woman it is a shame to live freely in this country. You have fear lurking in most corners of the country. As a woman you would ideally want to improve things somewhat for woman. Reduce crime rates against women, punish the culprits severely, make the police more sensitive and severe in case of women related crimes etc.

This paper by Lakshmi Iyer, Anandi Mani (University of Warwick), and Prachi Mishra and Petia Topalova (IMF) looks at these issues at a village level which has a female council head. Here is a nice discussion of the paper.


Transition from High Growth to Stable Growth: Japan’s Experience

May 12, 2011

A nice speech from Masaaki Shirakawa, Governor of the Bank of Japan. The speech is given on account of Central bank of Finland’s 200th anniversary. So there are some nice anecdotes linking Japanese economy with Finnish:

I felt it would be best to compare the experience of the Japanese economy from its high-growth period onward, with that of the emerging economies which are currently growing at a very rapid pace. Although it is not well-known, Japan’s automobile  industry  first ventured into the European markets through Finland back in 1962. At that time,Japanese automakers had little name recognition, and one firm, in order to prove the safety of its car to Finnish consumers, had the car driven off a ski-jumping hill. I have been informed that the car landed safely and the driver was not harmed. The 1960s, when such episodes of Japanese firms were born, was the heyday of the Japanese economic miracle.


He then discusses the Japan’s high growth phase:


How immigration works for US?

March 14, 2011

Dallas Fed annual report has a nice chapter on this topic.

It says immigrants form almost 17% of the Us workforce. Foucs is on low skill immigrants but high skill ones have risen sharply bas well. They help fill critical jobs in science and IT sectors leading to overall gains for the economy.

It has some interesting stats. It comapres US workforce and immigrants since 1910:


Demographics: a game changer in global economic growth prospects

March 1, 2011

This is the title of my new paper. Comments/suggestions are welcome.

Indian Banks should nudge to improve pensions planning for employees

February 10, 2011

RBI in this notice points  that there has been a change in Payment of Gratuity Act 1972. Under the act, people are eligible for pensions. However, as it happens in most pension cases, people did not choose to opt for the pensions. I am guessing a large% did not choose the pension plan just based on previous such studies.


Michael Lewis reviews Ireland’s economic situation

February 7, 2011

Michael Lewis (of Liar Poker fame) writes this superb account (as always) of Ireland’s economic situation.


Demographics problem – not just limited to developed economies

January 27, 2011

It was a matter of time before demographics again come to mainstream economics discussions. It was such an important area and then came the global financial crisis. Now, slowly people are again beginning to look at this issue.  

I posted on this superb speech from BoJ chief who shows why this recession could be different because of demographics.

World Bank has done two studies which point to a different idea. The two studies are – Some Consequences of Global Aging,  and case studies on in New EU Member States and Croatia: Challenges and Opportunities.

The studies say ageing problem is not limited to developed economies but is going to strike developing and middle income economies as well. What is worse is that unlike developed economies who are rich and some have buffers (though crisis has done a lot of damage), developing economies do not have any such things. They are likely to fall in this trap before reaching prosperity levels.


Balance Sheet Adjustment under Population Ageing

January 12, 2011

This is a very interesting and thoughtful speech from Kiyohiko Nishimura of Bank of Japan.

He links the demographics with the current crisis and Japan’s crisis in 1990s. Interestingly, both these crisis have happened at a time when demographics are worsening for  the economies.

For demographics, he uses a variable called Inverse Dependency Ratio (IDR). IDR indicates how many people of working age it takes to provide for one dependent person. He shows via various graphs how this IDR peaks for Japan just at the time of its crisis in 1990s. And same trend we  see for US, Spain and Greece as well.


Japan’s lost decade myth

January 10, 2011

Gulzar points to this superb article from Daniel Gros.

Gros says Japan’s lost decade is a myth as it grew faster than US in that period of 1990s. He says much of this talk of Japan’s lost decade is based on GDP growth. But it is not the right measure: