Friday, August 25, 2017

New papers from the Social Science Research Network

"Welfare Implications of a Flexible Retirement Policy"

ZHENHUA FENG, Tsinghua University - Institute of Economics
JAIMIE W. LIEN, The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics
JIE ZHENG, Tsinghua University - School of Economics & Management

Facing lengthening lifespans and economic concerns, workers and governments are increasingly considering the possibility of delayed retirement ages. However, the postponement of retirement may not be universally feasible, since not all workers may be willing and able to continue working past the standard retirement age, due to health status and other factors. We model this uncertain retirement problem in an overlapping generations general equilibrium framework with flexible retirement, where members of the older generation continue working with some probability, and otherwise retire. Comparing the policies of flexible retirement and mandatory retirement, we find that the consumption and welfare consequences depend largely on the labor intensity of the production function. Higher labor intensity of production tends to yield favorable social welfare results for the flexible retirement policy compared to the mandatory policy. We discuss policy insights and possible implications in China and other demographically shifting countries.

"Funding Life Insurance Contracts with Guarantees: How Can We Optimally Respond to the Policyholder's Needs?"

AN CHEN, University of Ulm
PETER HIEBER, University of Ulm - Department of Mathematics and Economics
THAI NGUYEN, University of Ulm - Institute of Insurance Science

Due to the increasing solvency requirements for return guarantees and a general decrease in interest rate levels, the attractiveness of equity-linked life insurance contracts with guarantee has recently substantially decreased. To regain competitiveness for these products, insurance companies need to be more flexible in their contract design and think of tailor-made retirement products that still satisfy the policyholder's needs. One such possibility is to adapt the investment strategy of the premium pool according to the policyholder's preferences. In this article, we determine the investment strategy that maximizes the expected utility of the policyholder's insurance contract payoff. Taking into account that retirement products are usually tax-privileged, we find that fairly priced guarantee contracts that follow this optimal investment strategy lead to a higher expected utility than asset investments.

"What Happens When Investors Have More Choices?"

CLAIRE YURONG HONG, Hong Kong University of Science & Technology (HKUST) - Department of Finance

This paper studies pension funds' responses when investors are given more choices. Hong Kong launched the Employee Choice Arrangement in November 2012, which dramatically expanded investors' choice set. I find that funds charge lower fees, exhibit lower fee dispersion, and are less active after the reform. Further analysis suggests that a fund's decision to reduce fee or be active is driven by investors' demand – funds cater to investors by reducing fees when flows are less sensitive to activeness but more sensitive to fee. Importantly, a larger investor choice set improves investors' wealth mainly indirectly through endogenous fund responses, rather than through participants' better capital allocations.

"Human Capital, Social Security, and Asset Allocation"

GORDON IRLAM, Independent

Numerical stochastic dynamic programming is used to explore the effects of stochastic human capital and Social Security on optimal asset allocation and consumption decisions over the lifecycle for typical individuals. Optimal asset allocations are very stock heavy pre-retirement, and quite stock heavy post retirement. Individuals should adopt declining equity allocations while employed, and level to slightly rising equity allocations during a stochastic retirement. Early in the working years almost the entire income should be consumed. Consumption should typically continue to increase until late in retirement, when it will be forced to fall.

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