Currently, I am participating in an massive online open course (MOOC) from the University of Melbourne on the topic of Re-thinking aging: are we prepared to live longer?
The free course is offered through Coursera; it started the last week in April and runs for 5 weeks. You can read more about the course and sign up for future offerings at: https://www.coursera.org/learn/ageing/home/welcome
We were encouraged to keep a journal or blog about our journey through the course, particularly to note where our opinions and ideas have changed from the beginning of the course to the end. I thought this would be a great opportunity to share the course information and my opinions with you – a little something different than my usual posts 🙂 As such, this will be a work in progress over the next 5 weeks.
Week 4: Economics of ageing
Week 4 of the course explored private and public support for older people with examples from Australia and other parts of the world. It coveres the major sources of risk that make decision-making and planning for our later years difficult, including financial, longevity and health risks as well as suggests ways to manage these risks. Economic planning for the future is complex, with significant uncertainty around productivity, employment, health, technology and pension projections.
Q. What are some specific examples of support that you are aware of for yourself or friends and family?
A. In Denmark, the State offers a range of support services, form help in the home (such as house cleaning if you are unable to do so yourself) to skilled care (nurses or doctor’s visits to the home), unemployment assistance (to search for new employment, educational courses, financial assistance), medical care, borrowing assistive devices and technology, psychological counseling, free education or seminars, meal delivery, social activities, and probably a few others that I cannot think of at the moment. While we have high taxes here, we also see the benefits of these taxes.
Q 1. What is the economic challenge of aging?
A. How to support a reasonable level of consumption for people during their older years
‘How to support a reasonable level of consumption for people during their older years’ is the central theme of the first lecture video in Module 4, Economics of Ageing.
Q 2. What is the main source of support consumption by older people?
A. Savings from their previous working lives
Q 3. Which of the following statements is true?
A. The economic challenge of aging is increasing because of increasing life expectancy
‘The economic challenge of ageing is increasing because of increasing life expectancy’ is correct because, assuming, as is reasonable, that retirement age increases by less than life expectancy, then increasing life expectancy requires a longer period of time over which people have to consume without receiving income from work.
The remaining three options are incorrect because consuming more during one’s working life implies less consumption when old, the government outlays financed by tax revenues go to the benefit of the recipients of those outlays such as pensioners, not government, and expenditures per person on health are increasing, not decreasing.
Q 4. Which of the following should be taken into account in planning for old age?
A. Assets with high expected rates of return are usually more risky
‘Assets with high expected rates of return are usually more risky’ is a financial fact of life, and thus is the correct answer.
‘Because of increased life expectancy, we should only invest in assets promising a high return’ is a poor strategy. Although risky assets have a high expected return, that is they are expected to do well ‘on average’, so to speak, they also have a high probability of doing badly.
Many people read the financial press and so the information in the financial press will be reflected in the prices of shares before one gets to buy the shares.
Financial institutions need government regulations to protect them from bank runs and also to protect them from taking on excessive risks, that is to protect them from themselves, which the evidence shows is necessary.
Q 5. The major sources of risk that make decision-making for old age difficult are:
A. All of the above: financial, longevity, and health risks
Q 6. With regard to rules of thumb in making financial decisions, according to an academic study which of the following rules has performed almost as well as the optimal decision-making rule:
A. Place a proportion of 100 minus your age in government bonds
The correct version of ‘Place a proportion of 100 minus your age in government bonds’ is to place a proportion of 100 minus your age in shares, not government bonds – that is move to a less risky portfolio of assets as you age.
Saving 10% of pre-tax income was found to be too low, so 10% of post-tax income would be even further from the optimal rate of saving.
There seems to be a tendency for some retired people to draw down their assets too slowly so ‘Withdraw 4% of assets per year during retirement’ (the correct answer) emphasises the importance of drawing down assets.
Q 7. The problem with annuities is:
A. People’s perception of their value is influenced by how annuities are framed
Annuities provide an automatic stream of income and thus consumption and so do not require the annuity holder to manage her assets. Also the stream of income is a guide to the sustainable stream of consumption that can be financed, and so the annuity holder does not have to keep revisiting her life expectancy forecast. Thus annuities are not a poor way to prepare for the possibility of cognitive impairment when very old and so ‘They are a poor way to prepare for the possibility of cognitive impairment when very old’ is incorrect. ‘Someone who buys a lifetime annuity at age 65 and then dies at age 66 has made a silly decision’ is also incorrect. An annuity insures one against living long – this insurance is valuable in reducing anxiety while one lives, even if one dies early. Unfortunately, ‘People’s perception of their value is influenced by how annuities are framed’ is correct – if annuities are framed as an investment rather than as a stream of consumption then studies show that people find them less attractive. ‘All of the above’ is incorrect – as noted above, annuities are a good guide to how much to consume.
Q 8. For the two ways in which economists characterise human beings, which of the following is true?
A. Homo behaviourus can be influenced to save more by the Save More Tomorrow plan
‘Homo behaviourus dies with just enough money to pay for her funeral’ is wrong because it is homo economicus that would die with just enough to pay for her funeral, ignoring bequests – homo behaviourus could not be relied to have such foresight and so the statement is incorrect. And ‘Homo economicus needs to be protected against his own silly decisions’ is wrong because it is the wise homo economicus who does not need protection against her own silliness –the, sometimes, unwise homo behaviourus may benefit from protection. ‘Home behaviourus can be induced to save more by the Save More Tomorrow plan’ is supported by studies that show that the Save More Tomorrow plan works in inducing people to save more. This plan is based on the homo behaviourus characterisation of individuals, by exploiting the homo behaviourus traits of present bias, loss aversion and status quo bias. Homo economicus does not have these traits and so would not be influenced by the Save More Tomorrow plan. ‘Homo economicus knows exactly what she will wish to spend on health services during the rest of her life’ is wrong – even homo economicus is not assumed to know exactly what she will wish to spend on health services in the future. The homo economicus model allows for uncertainty and contains a theory of insurance to reduce the costs of uncertainty.
Q 9. Projections of the economic impact of the ageing population
A. Suggest that there will be pressure in the future on maintaining the quality and quantity of government services
Projections of the economic impact of an ageing population are uncertain but not completely unreliable. Health expenditures are much greater than outlays on pensions. Projections suggest that current policy settings with regard to pensions and government-provided health services will require increasing tax rates to pay for these policies. Future changes in economic policy, such as changes in the rate of the old age pension, are easily incorporated into projections of the economic impact of the ageing population.
Q 10. In dealing with the economic challenge of ageing as it will probably develop in the future
A. The appropriate balance between government and individual decision-making may be threatened by resistance to higher rates of tax
Financial markets are important in facilitating the use of savings for investment and in providing savers with a range of assets from which a wealth portfolio can be constructed. Because there is resistance to increases in taxation, there will be pressure on maintaining the quantity and quality of government services and thus ‘the appropriate balance’ may be threatened. However, even with no increases in the general rate of tax, there can be a considerable amount of support by younger people of older people through government activity and so the social contract can continue. In health, as in other areas of economic decision-making, individuals have knowledge of their own circumstances and so individual decision-making can improve outcomes by allowing this private knowledge to play a role.
That wraps up Week 4 of the course. Now, I would really enjoy your opinions and insights in the comments, please share what you think!