Program report: the economics of aging.

• Author: Wise, David A.

The central goal of the NBER's Program on the Economics of Aging is to develop a better understanding of the issues that are of particular importance to individuals as they age and to a society that is composed increasingly of older people. Over the past several years, we have focused on three areas: 1) the financial well-being of the elderly, with special emphasis on saving for retirement; 2) the labor force participation of older Americans, with substantial analysis of the role of employer-provided pension plans and Social Security provisions in encouraging early retirement; and 3) the role of housing, both as a potential source of financial support after retirement and in the determination of living arrangements as people age. More recently, we have sought to understand the reasons for the rapid growth in the cost of medical care, as well as the benefits of that care. (The economics of aging program and the health care program have been coordinated closely under the "Aging and Health Care Programs" that I oversee. Details of work in the health care program were reported by Alan M. Garber in the Winter 1995/6 issue of the Reporter.)

The NBER's Program on the Economics of Aging began in 1986. Since that time, it has included a large number of research projects, many of them integrated as part of coordinated investigations. Indeed, the program has developed primarily around these large coordinated research projects that are structured to address simultaneously several interrelated issues in the economics of aging. Central infrastructure for the program now is provided through a National Institute on Aging (NIA) "Center for Aging and Health Research" at the NBER. The Center has been instrumental in maintaining and expanding data files that support a broad array of ongoing research projects. There has been a particular focus on acquiring health care data that are used to support health care research within our program.

The Center also promotes research abroad on the economics of aging and facilitates coordinated international projects. One ongoing project on international social security, coordinated by Jonathan Gruber and me, evaluates the effects of government-directed social security programs around the world on the labor force participation of older workers. The Center supports an emerging project, coordinated by David E. Bloom, on the implications of the government retirement program in South Africa. Further, we have an ongoing joint project with the Japan Center for Economic Research, which has focused on issues that are of common concern in Japan and the United States. Individual projects under this program have directed attention to saving and labor force issues in Canada, Germany, Taiwan, and several other countries.

Much effort also has been directed to attracting young researchers to the economics of aging. To this end, our NIA Fellowship Program each year provides fellowships to two or three graduate students who are engaging in research on the economics of aging. In addition, it provides two or three postdoctoral fellowships each year to young professors, enabling them to spend a year at the NBER to do research on issues in the economics of aging and health care. The postdoctoral fellows in the past two years were: Dora L. Costa, MIT; Hilary W. Hoynes, University of California, Berkeley; Brigitte C. Madrian, University of Chicago; Kathleen M. McGarry, University of California, Los Angeles; David O. Meltzer, University of Chicago; and Douglas O. Staiger, Harvard. The effort to attract young researchers to our program also is reflected in four recent NIH First Independent Research Support and Transition (FIRST) awards granted to young members of the economics of aging research group: David M. Cutler, Mark B. McClellan, Gruber, and Madrian.

Much of our recent research on the health care of the aged is based on unique and very extensive Medicare claims files, and on employer-provided medical insurance claims fries that have been amassed under the infrastructure of the aging program, including the Center for Aging and Health Research. McClellan has played the key role in developing the Medicare files, and he and I have put together the employer files. Current and future research also will rely heavily on the new Health and Retirement Survey (HRS) and the new Survey of Asset and Health Dynamics Among the Oldest Old (AHEAD). These longitudinal surveys are sponsored by the NIA, and are structured to support research on individuals over age 50, as they age through retirement and other life transitions. As new waves of these surveys are collected every two years, these data will provide a comprehensive picture of issues affecting the health and well-being of older Americans, and will be an important source of information for our research. Although research under our program has been funded through a wide range of sources, we have been aided especially by the broad support we received from the NIA.

Participants in the aging program have written over 200 papers. Some of these appear in a series of books published by the University of Chicago Press, including: The Economics of Aging (1989), Issues in the Economics of Aging (1990), Topics in the Economics of Aging (1992), Studies in the Economics of Aging (1994), Aging in the United States and Japan: Economic Trends (1994), Advances in the Economics of Aging (1996), and The Economic Effects of Aging in the United States and Japan (forthcoming). I will now discuss a sample of our work.

Pension Plans, Health Insurance, and the Labor Market

The American population is aging rapidly, and individuals are living longer. Yet Americans are saving little, and older workers are leaving the labor force at younger and younger ages. The prospect is for a shrinking proportion of labor force participants supporting a growing fraction of retired persons. The trend is unlikely to be sustainable and will have to be addressed if the federal budget is to be brought into balance. It now seems dear that much of the decline in labor force participation can be attributed to the provisions of employer-provided pension plans, as well as to the provisions of Social Security. The goal of pension plans is to provide a means of support in retirement. Indeed, the plans have allowed employees to retire at earlier ages. But pension plans not only provide a means of support in retirement. Plan provisions that determine how prospective benefits increase or decrease with age (the "accrual" of benefits) can provide enormous incentives to work until a certain age and to take early retirement thereafter. As the cost of health insurance has increased, the availability of retiree health insurance also may have played an important role in retirement decisions.

Employer-Provided Pension Plans and Early Retirement

A series of studies that I did with Robin L. Lumsdaine and James H. Stock demonstrated the dramatic effect of defined-benefit pension plan provisions on retirement behavior. The accrual of benefits under these plans typically provides large financial incentives to continue working at some ages and to retire at other ages. These incentives generally encourage early retirement and penalize continuation in the labor force at older ages. For example, firm pension plans commonly provide a large increase in benefits at the early retirement age, which is often 55. Although employees become eligible for larger pension payments by continuing to work, the increase is rarely large enough to compensate for the delay in receiving benefits. This induces substantially younger retirement than would occur without the plans. The substantial effect of pension plan incentives on retirement behavior has been confirmed with data from several companies, as well as option value and dynamic programming models of retirement.(1) This series of studies also has shown that among workers covered by both Social Security and a typical employer pension plan, the effect of pension plan provisions on retirement age is far more significant than the effect of Social Security provisions. Indeed, the retirement of most employees covered by typical defined-benefit pension plans would be unaffected by planned changes in Social Security provisions, because a large fraction of these employees already have retired by the age at which those provisions become important. Those without employer plans would be affected; an increase in the Social Security early retirement age would have the greatest effect on employees without firm pension plans.

A study that I did with John Ausink(2) examines the effects of compensation and pension arrangements on the decisions of Air Force pilots to retire from the military. The option value model of retirement used in this study predicts retirement rates far more accurately than the "annualized cost of leaving model" that has been used by the military. For example, to encourage people to leave the military, the Air Force has instituted at least two incentive programs since 1992. Fewer officers than expected applied to either program. Applying the option value model, however, Ausink and I find that the effects of temporary annual retirement bonuses, such as Aviator Continuation Pay, are small. Indeed, the bonus amounts must be extremely large to induce departure rates that come close to Air Force objectives.

An apparent anomaly in the pattern of retirement ages is the high retirement rate at age 65. Lumsdaine, Stock, and I(3) conclude that the high rate at this age cannot be explained entirely by the financial incentives inherent in pension plan and Social Security provisions. Nor can it be explained entirely by the availability of Medicare at age 65. We conclude that much of the high rate at age 65 must be attributed to a Social Security "age 65 normal retirement effect." To the extent that this is true, it implies that changing the normal retirement age could...