The economics of aging.

• Author: Wise, David
• Position: Program Report

The NBER's Program on the Economics of Aging began in 1986, when the baby boom generation was between the ages of 22 and 40, and when life expectancy at age 62 (the age of eligibility for Social Security) was nearly three years shorter than it is today. The program at its outset was created with a forward-thinking orientation, drawing together economists from multiple subfields of the profession to consider jointly what would become one of the most important demographic, social, and economic transitions of the twenty-first century. The underlying focus of the program is the study of the health and financial well-being of people as they age, and the larger implications of a population that is increasingly composed of older people.

Today, the substantive importance of research on aging has never been greater. The long-anticipated aging of the baby boom generation across the threshold of eligibility for Social Security and Medicare has arrived. Baby boomers are now between the ages of 50 and 68, and their initiation of retirement benefits is accelerating. The societal impact of aging baby boomers is compounded by increasing longevity. In just the next 20 years, the U.S. population aged 65 and older is projected to increase from 43 million to 76 million people.

The implications of these demographic trends are extensive, yet they are just one part of a complex dynamic of changing factors affecting people's well-being as they age. One such factor is a marked shift in employment-based retirement policy, away from traditional defined benefit (DB) pension plans and retiree health benefits, and toward 401(k)-type plans in which individuals manage their own retirement assets. Another factor is the implicit continuing changes in the public programs that benefit older people, most notably Social Security, Medicare, and Medicaid, as financial pressures from the current provisions of these programs intensify. A third factor is the substantial and ongoing effects of the Great Recession, many of which are still being assessed.

The landscape of health and health care is changing rapidly as well, with lower disability rates by age, continuing advances in medical technology and disease management, increases in health care costs, and significant reforms in health policy. Health affects one's ability to work at older ages, and is strongly associated with financial well-being. Our aim through program research is to advance our understanding of well-being in all its dimensions and to determine what can be done to improve well-being in this rapidly changing environment.

Over the last 28 years, the NBER's Program on the Economics of Aging has helped to transform this field from an exploratory new research area into a well-recognized and influential subfield of the economics profession. Throughout its history, the program has benefited from a substantial base of financial support from the National Institute on Aging (NIA), and from the leadership of a visionary program officer at NIA, Richard Suzman. NIA's recognition of the analytic value of economic research in aging and its support for a highly integrated program of investigators working collaboratively on aging issues was path-breaking. This support has been critical to development of the NBER program, the research subfield, and our understanding more generally of people's well-being as they age. The NBER's Aging Program continues to be anchored by NIA Center and Program Project grants, and by multiple NIA-funded research projects that are administered under the coordinating umbrella of the program. NIA support has been supplemented in recent years by Retirement Research Center and Disability Research Center grants from the Social Security Administration (SSA).

The program has thrived through its history by simultaneously recruiting and inspiring some of the most prominent, established economics scholars along with more emerging scholars to develop a research agenda on economic issues related to aging. This has had a magnetic effect on the size, scope, and productivity of the program as new researchers have been drawn into the field by the prominent senior scholars already working on aging issues. The program has also been leveraged by substantial research development support provided by NIA, including an NIA-funded training program on the economics of aging and NIA funding for pilot projects. The training program alone has supported about 150 investigators, the large majority of whom have developed a long-term research agenda on the economics of aging. Nearly 100 pilot awards have also been supported by NIA, most of which have laid a foundation for larger-scale subsequent research projects. Both the training and research development opportunities in aging have expanded even further in recent years through the SSA-funded research centers.

One measure of the success of these training and development initiatives is that three of the five most recent recipients of the John Bates Clark Medal (awarded annually to the best economist under age 40) are active program affiliates who have been part of the program for most of their careers: Esther Duflo (2010 recipient), Amy Finkelstein (2012 recipient), and Raj Chetty (2013 recipient). Two Nobel Prize winners, Daniel McFadden and the late Robert Fogel, played an important role in building the program, as did several past officers of the American Economic Association (AEA) and some of the intellectual leaders in public economics, health economics, labor economics, financial economics, behavioral economics, and econometrics. What has emerged from this long-term commitment to training and recruitment is a multigenerational consortium of accomplished researchers who work together on important issues and create training opportunities for each new cohort of economists who become involved with the program over time.

Many of the studies taking place through the NBER's Aging Program are distributed initially as NBER Working Papers, examples of which are noted below. Some are also published in a continuing series of NBER research volumes on the economics of aging, the most recent of which are Research Findings in the Economics of Aging (2010), (1) Explorations in the Economics of Aging (2011), (2) Investigations in the Economics of Aging (2012), (3) and Discoveries in the Economics of Aging (2014). (4)

The research composition of the NBER's Program on Aging has evolved as the economics of aging field has matured. The overarching goal is to understand the health and financial well-being of people as they age, how well-being is affected by the changing environment in which people live, and what interventions might be effective in improving health and financial well-being. What is most apparent from the research carried out by program affiliates is the integral relationship between the multiple dimensions of people's well-being.

As we confront the demographic challenges of a substantially larger population of older people, opportunity lies in three sets of trends, all of which are a focus of continuing research. First, saving in 401(k) and similar plans is now a mainstream aspect of retirement preparation. Though large parts of the population appear to save too little, and access to employment-based saving programs is far from universal, a policy foundation for the accumulation of personal retirement resources is in place, and financial preparation can be improved through saving-related interventions. Second, many though not all measures of health are improving, and these improvements can be accelerated through health-related interventions. Third, it may be possible to allocate some of the bounty of longer and healthier lives to prolonging the labor force participation of some older workers, thereby helping to pay for higher Social Security and health care costs, and moderating the macroeconomic challenges we collectively face. But whether people work or retire at one age or another depends significantly on how we structure our public policies and work environments. Each of these issues is being considered in ongoing program research. The summary below describes examples of NBER publications and working papers that have been distributed in the last two years, and that bear on each of these issues.

Financial Well-Being

Among the resources that are potentially available to support people in their later years are Social Security, employer-provided pension benefits, financial asset savings, housing wealth, and earnings. In his 2014 Richard T. Ely Lecture to the AEA, (5) James Poterba presents an overview of changing retirement security, the increasing importance of individual decisions about saving, and the varying composition of financial resources available in retirement across different segments of the population. Among the research reviewed in that lecture is a series of studies co-authored with Steven Venti and me on the financial status of people as they age, the most recent of which demonstrates the strong lifelong relationships between health, education, Social Security income, financial assets, and depletion of financial assets in later life. (6)

As noted, a major trend of the last two decades is away from traditional employer-provided pensions and toward savings-based retirement programs, most notably 401(k) plans. John Beshears, James Choi, David Laibson, Brigitte Madrian, and others have an extensive research agenda on what motivates saving. The consistent finding of their research is that people tend to "follow the path of least resistance," participating more often when enrollment is automatic, and often following the default provisions of their employers' programs. People are also affected by other behavioral factors such as simplification, planning aids, (7) reminders, and commitment features. (8) Their most recent studies have looked at how small cues in plan descriptions can alter behavior, (9) the availability and...