Longevity and the challenge for public policy
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Transcript of Longevity and the challenge for public policy
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Longevity and the challenge for public policy
An application to housing policy
Andrew ColemanMotu Economic and Public Policy Research
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The challenge
• Increasing longevity raises issues about the funding of pensions and healthcare in “old age.”
• It also has major implications for young and working age people as they fund their own or others’ old age expenditure.
• If we maintain our defined benefit pension policy, we will have higher taxes on working age people. This may have unforseen implications.
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The challenge
• Our current institutions were designed for one age structure and may not work well for a different age structure.
• As longevity increases, we may need to rethink and redesign our political and social institutions (Diamond).
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One path forward: computer based modelling
• Agent- based modelling provides a means of exploring how different policies will simultaneously affect people who differ by age, income and wealth……..and who expect to age themselves.
• The basic framework is the Modigliani-Brumberg lifecycle model (1953), aggregating agents with many different characteristics and attitudes.
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Example: longevity, pensions, and housing
• In recent work, I have explored how pension design may affect housing choices (and welfare) as longevity increases.
• Increasing longevity is likely to increase demand for big houses as old people live for longer in the big houses they lived in when they were 60
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Increasing
Longevity
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more
people
Increasing
Longevity
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more
people
Increasing
Longevity
more
pensions
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more
people
Increasing
Longevity
more
pensions
more
medical
expenses
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more
people
Increasing
Longevity
more
pensions
more
medical
expenses
Higher taxes
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How does increasing longevity affect younger people?
Higher house prices
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people
Increasing
Longevity
more
pensions
more
medical
expenses
Higher taxes
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How does increasing longevity affect younger people?
• There is likely to be a squeeze on young people as they face higher house prices and have lower take home pay…..
…..offset by the need to save more
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Modelling technique
• Design an overlapping generation lifecycle model with four cohorts, each with 400 forward looking agents differing by income and wealth
• Careful modelling of housing market (rental, ownership, different sized houses), borrowing constraints, and tax system.
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Modelling technique
• Analyse how the effect of pension design and housing supply affect housing choices and welfare when longevity increases by 8 years.
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Perfectly elastic supply(Prices constant)
Elastic Supply
(Prices rise 20%)
No increase in total pensionsNo new taxes
Young owning: +2%Young large: +1%Old large +29%% new houses large 90%
Young owning: -6%Young large: -4%Old large +32%% new houses large 100%
Pension spending risesNew labour taxes
Young owning: -6%Young large: -7%Old large +30%% new houses large 80%
Young owning: -16%Young large: -9%Old large +28%% new houses large 88%
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Summary: in the model increasing longevity
• reduces the fraction of young (25-45) households owning by 16 %
• reduces the fraction of young households in large houses by 9%
• increases the fraction of older households in large houses by 30%
• requires 80- 90% of new houses to be large
• Approximately half of the effect comes from taxes increase, and half from prices
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A few NZ facts
• In NZ data: fraction 65+ living in 3brm houses increased 9% between 1996 and 2006
• Homeownership rates for 30 yr olds have declined by 20% since 1991
• Most new houses are “big”
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Most new houses are big houses
Floor size of new residential construction in NZ 1991 - 2007
0%
10%
20%
30%
40%
50%
60%
70%
1991 1993 1995 1997 1999 2001 2003 2005 2007
<200m2
<100m2
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Conclusion
• Our current institutions were designed for one age structure and may not work well for a different age structure.
• Models suggest increasing longevity, in conjunction with the current pension system, may lead to increasing housing pressure on young people
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Summary Haiku“The young pay taxes
So the old live in mansionsThey wanted when young”.