The Impact of Age Pension Elgibility Age on Retirementand Program Dependence:

Evidence from an Australian Experiment

Kadir Atalay, Garry Barrett

University of Sydney

July 2012

Kadir Atalay (University of Sydney) APA experiment July 2012 1 / 24

Motivation

Population ageing and sustainability of social security systems.

- Life expectancy at age 65 in OECD countries increased by 4 to 5 years.- Decrease in the number of working age individuals

Australian Seniors

77% people aged 65+ years receive public income support

- main income source for large majority

- rely on it for long periods (> 13 years on average)

Context of Population Aging: 13% population aged 65+ today;projected to be 25% by 2047

⇒Net Effect: Large fiscal gap, pressure on social security programs.⇒Governments implement different structural reforms

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Motivation

Effects of reforms on the performance of social security systems ?

— incentive effects for retirement behaviour / —program costs

Reform on the 1st Tier of the Australian Social Security System (AgePension)

- Focus on a key program parameter : Age Pension eligibility Age(APA)Recent policy experiment: Changes to APA for women by birth cohort

Research Question:

"How have changes in the APA impacted on female labour marketparticipation and the use of other government benefits?"

Results

- Increase in the eligibility age of 1 year induced a decline in retirementprobability 8% + significant "program substitution".Kadir Atalay (University of Sydney) APA experiment July 2012 3 / 24

Structure of Presentation

Outline

1 Literature

2 Outline of Australian Retirement Income System

2.1 Australian Program Reform

3 Data and Empirical Methods

3.1 Recent Trends3.2 Empirical Methods

4 Results

4.1 Labour Force Participation4.2 Government Program Substitution

5 Conclusion

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Literature

Reduced Form:

Mitchell and Field (1982), Hurd (1990)

Structural Modeling:

Gustman and Steinmeier (1998, 1986) Rust and Phelan (1997)

Option Value Approach:

Stock and Wise (1990a, 1990b): path of wealth accrual

‘Natural Experiments’:

Krueger and Pinschke (1992) ‘Notch Generation’Mastrobuoni (2009) -US ; Hanel and Riphahn (2009)- SwitzerlandStaubli and Zweimuller (2011) - Austria

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Australian System

Summary of Retirement Income SystemAustralia

Structure Schemes1st Tier Targeted Age Pension

2nd Tier Private DC SG

3rd Tier VoluntarySuper

(OECD classification.)

Distinctive features of Aust retirement income system- means-tested Age Pension (non-contributory scheme)- mandated private retirement saving

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1st Tier Structure -Age Pension

1st Tier Age Pension⇒ alleviation of poverty among the aged

Aust: Age Pension targeted (since 1909) via income and assets test

- Non-contributory scheme:The benefit levels are not tied to work history, receipt of benefitonly tied to age

- Full benefit: A$570 ($950) per fortnight for singles (couples); 25% ofaverage male earnings + indexed

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Age Pension

70% of elderly receive some benefit from Age Pension. 2/3 of themreceive the maximum

Associated Benefits : subsidies for Medical Care, Pharmaceuticals,Rent, Utilities, Transport.

Work Disincentive

Very few Australians work beyond Age Pension eligibility age

LFPR for 55 to 59 year old men is 77%; 65-69 year old men is 7%.

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The Experiment

Eligibility AgeBorn Women Men Effective on

Before 1 July 1935 60 65 Before 1 July 1995

From 1 July 1935 to 31 December 1936 60.5 65 1­Jul­97

From 1 January 1937 to 30 June 1938 61 65 1­Jul­99

From 1 July 1938 to 31 December 1939 61.5 65 1­Jul­01

From 1 January 1940 to 30 June 1941 62 65 1­Jul­03

From 1 July 1941 to 31 December 1942 62.5 65 1­Jul­05

From 1 January 1943 to 30 June 1944 63 65 1­Jul­07

From 1 July 1944 to 31 December 1945 63.5 65 1­Jul­09

From 1 January 1946 to 30 June 1947 64 65 1­Jul­11

From 1 July 1947 to 31 December 1948 64.5 65 1­Jul­13

From 1 January 1949 to 30 June 1952 65 65 1­Jul­15

Variation in APA for women and in comparison to the constant APA for men,provides an ideal natural experiment for examining the impact of the APA policyparameter on the labour force behaviour of older individuals.

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Framework

Theoretical model: LCM and wealth effectUnique feature of Age Pension- where benefits are not a function ofprior "contributory" earnings nor the accrual of additional benefitswith delayed retirement.

⇒ Pure wealth effect ( no accrual effect)

+ Norms, "Target Retirement Age"

+Side effects (Program Substitution)

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Data

ABS Income and Housing Costs Surveys: 1994/95-2009/10

- 11 pooled cross-sections, 17 calender years

Sample:

- Age 60-64 years (age available in single years)- gender, marital status, LF Status, education, income sources, cohortmeans for experience / LF attachment, home ownership

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Summary Stats

Summary Stats

ALL HOUSEHOLDS

Birth Cohort All 1929­35 1936­40 1941­45 1946­49

Male Female Male Female Male Female Male Female Male Female

Age (years) 61.94 61.93 62.36 62.38 62.11 62.08 61.91 61.97 61.3 61.29

Bachelor Degree + 0.19 0.17 0.17 0.12 0.13 0.1 0.23 0.21 0.25 0.24

Single 0.19 0.29 0.19 0.3 0.19 0.29 0.17 0.3 0.23 0.29

Household Size 1.90 1.73 1.87 1.71 1.89 1.73 1.91 1.72 1.74 1.87

Home Owner 0.85 0.85 0.84 0.85 0.87 0.86 0.86 0.85 0.83 0.86

Observations 5,600 5,838 1,256 1,269 1,420 1,392 1,721 1,798 1,190 1,392

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Data Properties

Men

Women

10

20

30

40

50

60

70

1980 1985 1990 1995 2000 2005 2010Year

Income and Housing Cost Surveys

Aggregate Series

Labour Market Participation

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Data Properties

Cohort Participation Rates, for Men and Women

Age53 55 57 59 61 63 65

Men

Women

1936­40 1929­35

1929­35

1941­45

1946­50

1946­50

1936­40

1941­45

0.8

0.6

0.4

0.2

0

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Data Properties

Single Men Single Women

Married

Age

Men

Women

1936­40

1936­401929­35

1929­35

1936­40

1936­40

1929­35

1929­351941­45

1941­45

1941­451941­45

1946­50

1946­50

1946­50

56 58 60 62 64 56 58 60 62 64

53 55 57 59 61 63 65

1929­35

1929­35

1929­35

1929­35

1936­40

1936­40

1936­40

1936­40

1941­45

1941­45

1946­50

1946­50

1946­50

1946­50

1946­50

1946­50

0 0

0

.2 .2

.2

.4 .4

.4

.6 .6

.6

.8 .8

.8

Cohort Participation Rates, for Singles /Married

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Empirics

Empirics: ‘natural experiment’method

- transparent source of variation in benefit eligibility

Model Specification:

Difference-in-Difference framework

Born Before01/07/1935

Born After01/07/1935

Control Group(MEN)

Lcb Lca

Treatment Group(WOMEN)

Ltb Lta

APA reform effect = (Lta − Ltb)− (Lca − Lcb)

LFPi = βxi + α0Femalei + α1Cohorti + δ (Femalei × Cohorti )Kadir Atalay (University of Sydney) APA experiment July 2012 16 / 24

Results (1)

Regression Adjusted Difference in Difference Estimate of APA Reform Impact , Single TreatmentFull Sample Full Sample  Aged 55­64

(1) (2) (3) (4)After Cohort 0.03** ­0.06* 0.03 0.03*

(Born After July 1935) [0.02] [0.03] [0.03] [0.02]Treatment Group ­0.29*** ­0.29*** ­0.05 ­0.29***

(Females) [0.01] [0.02] [0.08] [0.02]Treatment Effect 0.08*** 0.08*** 0.03* 0.09***

(Treatment ­ After Cohort Interaction) [0.02] [0.02] [0.02] [0.02]Observations 11,438

Single Sample Single Sample  Aged 55­64(5) (6) (7) (8)

After Cohort ­0.01 ­0.15 ­0.09 ­0.01(Born After July 1935) [0.04] [0.08] [0.06] [0.04]

Treatment Group ­0.22*** ­0.15*** 0.09 ­0.22***(Females) [0.04] [0.06] [0.11] [0.04]

Treatment Effect 0.14*** 0.12*** 0.06* 0.14***(Treatment ­ After Cohort Interaction) [.05] [.05] [0.03] [0.04]

2,813 6,504Constructed  Variable (Average CohortParticipation Rates betwen age 40 to 45 years)

ü

Year Effects ü üNotes:1. All regressions include controls for age, educational attainment, marital status, state of residence and household size, home ownership.2­Construcred Variable is the avarage cohort participation rates between 40 to 45 years (ABS 6202)

Note: Less educated, older individuals are less likely to participate.Kadir Atalay (University of Sydney) APA experiment July 2012 17 / 24

Results (2)

Additional Experiments

Multiple Treatments (5 Treatment Dummies)- bigger response in younger cohorts.- response is common to all ages (not peak on thresholds).Liquidity constraintHome ownersHigh educatedRobustnessSimple Pre/Post cohort differences (Mastrobuoni 2010)

⇒ Increase in the eligibility age of 1 year induced a decline in retirementprobability 8% (Smaller in magnitude than the recent US studies)

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Program Substitution

Female Government Program Substitution

Any Government Program Excluding Age Pension

Age PensionDisability Support Pension

1929­351936­40

1941­45

53 55 57 59 61 63 65Age

1941­45

53 55 57 59 61 63 65Age

53 55 57 59 61 63 65Age

53 55 57 59 61 63 65Age

.1

.3

.5

.7 .7

.5

.3

.1

.1

.3

.5

.7.3

.2

.1

0

1929­351936­40

1941­451936­40

1929­35

1929­35

1936­40

1941­45

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Program Substitution

GovPPi = βxi + α1(CohortT ∗i = 1) + δAgeiCohorti [(CohortT∗i = 1)× agei ]

δAgeiCohorti measures the change in the program participation rate betweenthe treated cohorts and non-treated cohorts at a specific age.- Examine men and women separatelyResults

-Cohort differences for women-Younger cohorts more likely to benefit from gov programs other thanAge Pension-Effects are more pronounced at the ages which the APA reformdirectly affected.-Average treatment effect of the APA reform on disability supportparticipation is approximately 10 percentage points

-No cohort differences for menKadir Atalay (University of Sydney) APA experiment July 2012 20 / 24

Conclusions

APA increase for women provides an exogenous source of variation inbenefit eligibility

Results

- impact on women’s own LFS (smaller in magnitude than recent USresults)

- impact on program participation

Currently considering:

Range of additional outcomes (partner’s LFS)- Male Participation as Function of Partner’s Retirement Status

(Wealth & Shared Leisure Effects)- Preliminary results- Older men are responding to the higher likelihood of older wives toparticipation in the labour forceEmbedding in structural model: simulate future changes(+ different policy scenarios)

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Preliminary Results

Couples: Male Participation as Function of Partner’s Retirement Status

Income v Shared Leisure Effects

Empirical Model:

RHi = αHRWi + XHi βH1 + XWi βH2 + e

Hi

RWi = ZWi γW + XWi βW1 + XHi βW2 + e

Wi

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Preliminary Results

Estimates: Male LFPProbit Bivariate Probit

Partner Participates 1.08 0.80[Marginal Effect] [0.29] [0.20]Age -0.11 -0.12Educ: BA+ 0.35 0.37Educ: Vocational 0.23 0.23Dependent Kids 0.06 0.05n 6633

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Results (2)Regression Adjusted  Difference  in Difference  Treatment Effects by Age

(1) ­Full Sample (2)­ Single (3) ­Full Sample

AC1 (eligibility age 60.5 to 61) ­0.006 ­0.057 0.013[0.024] [0.059] [0.022]

AC2 (eligibility age 61.5 to 62) 0.016 0.017 0.033*[0.023] [0.047] [0.019]

AC3(eligibility age 62.5 to 63) 0.04* ­0.033 0.057***[0.021] [0.049] [0.02]

AC4(eligibility age 63.5 to 64) 0.059*** 0.012 0.078***[0.021] [0.045] [0.017]

AC5 (eligibility age 64.5 to 65) 0.046* ­0.022 0.085***[0.024] [0.052] [0.02]

Female (TG) ­0.289*** ­0.218*** ­0.254***[0.02] [0.051] [0.015]

Treatment EffectsAC1 x TG 0.037** 0.071* AC1 x TG x (Age 60) ­0.011

[0.018] [0.042] [0.045]AC1 x TG x (Age 61) 0.081*

[0.48]AC1 x TG x (Age 62) 0.036

[0.52]AC1 x TG x (Age 63) 0.005

[0.046]AC1 x TG x (Age 64) 0.060

[0.053]AC2 x TG 0.071** 0.104 AC2 x TG x (Age 60) 0.016

[0.029] [0.061] [0.021]AC2 x TG x (Age 61) 0.04

[0.043]AC2 x TG x (Age 62) 0.061*

[0.034]AC2 x TG x (Age 63) ­0.016

[0.029]AC2 x TG x (Age 64) 0.092**

[0.041]AC3 x TG 0.032* 0.131** AC3 x TG x (Age 60) 0.005

[0.019] [0.062] [0.012]AC3 x TG x (Age 61) 0.082**

[0.032]AC3 x TG x (Age 62) 0.034

[0.023]AC3 x TG x (Age 63) 0.056

[0.041]AC3 x TG x (Age 64) 0.123**

[0.034]AC4 x TG 0.109*** 0.190*** AC4 x TG x (Age 60) 0.136**

[0.028] [0.057] [0.058]AC4 x TG x (Age 61) 0.11**

[0.045]AC4 x TG x (Age 62) 0.17**

[0.056]AC4 x TG x (Age 63) 0.12**

[0.34]AC5 x TG 0.133*** 0.169*** AC5x TG x ( Age 60) 0.075

[0.033] [0.05] [0.034]AC5x TG x ( Age 61) 0.108*

[0.076]AC5x TG x ( Age 62) 0.098*

[0.056]Observations 11438 2813 11438Notes:1. All regressions include controls for age, educational attainment, marital status, state of residence and household  size.

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