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10
Research Recommendations
In the coming decades the United States will undergo a demographic
change as important as any in its history. This change will have significant
economic and fiscal effects, many of which have been investigated in the
preceding pages. This report confirms what other analyses have posited
with regard to the nation's fiscal situation: The fiscal effects of population
aging will be very large and will be mediated by how and how quickly
our society responds. With regard to macroeconomic effects, the report
concludes that while the overall macroeconomic effects of aging may be
modest for the economy as a whole, the risks could be large for particular
age groups and generations if the burden of adjustment is borne by public
programs such as Social Security, Medicare, and Medicaid or if the costs
are borne largely by subgroups such as workers or retirees.
Throughout its deliberations, the committee was aware that trends in
some of the topics under discussion were, by their nature, speculative. There
was a tension between suggesting potential pathways of future change and,
at the same time, remaining grounded in empirical knowledge. There were
many questions concerning the macroeconomic effects of population aging
that the committee thought were important but could not address fully be-
cause of a lack of data and/or research. Part of the committee's charge, in
response to a request from the Division of Behavioral and Social Research,
U.S. National Institute on Aging (NIA), was to identify and recommend
major research needs related to the macroeconomics of aging.
This chapter presents the committee's thinking about which additional
analyses and lines of inquiry would be most useful, taking into account the
feasibility of research on a given topic. Topics have been grouped into four
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RESEARCH RECOMMENDATIONS 195
categories: (1) demographic and health measurement and projections; (2)
capacity to work and longer working life; (3) changes in consumption and
saving; and (4) modeling efforts and data needs. The request from the NIA
did not extend to prioritizing a research agenda, and the committee did not
attempt to do so. The NIA and other research organizations dealing with
questions about an aging society have many competing inputs and priori-
ties, and since the committee did not evaluate them all, the committee felt it
was inappropriate to be prescriptive about research priorities. Rather, these
recommendations are designed to broadly inform NIA's strategic research
direction on the consequences of an aging society and to enable a more
complete understanding of the relationship between population aging and
the economy in the future.
DEMOGRAPHIC AND HEALTH MEASURES AND PROJECTIONS
1a.Improve methods of projecting mortality by age, sex, and socioeco-
nomic characteristics. Projections of future life expectancy and mortality
made by government agencies and demographers differ significantly, in
part because projection methods and assumptions differ. The committee
believes that increases in life expectancy will likely be more rapid than
currently assumed in many projections. Research should consider whether
(1) projections could be improved by explicitly taking into account trends
in mortality related to smoking, obesity, and other behavioral factors, (2)
projections could be improved by taking into account mortality differences
by race/ethnicity and educational level (these are particularly important in
light of current discussions about increasing the early and full retirement
ages, which would have a larger proportional effect on expected years of
retired life for groups with lower life expectancy and education), and (3)
there is room for further improvement in projections based on formal de-
mographic analysis of past trends and on trends within groups of countries.
1b. Investigate distributional aspects of the relationships between life ex-
pectancy, capacity to work, and income. Although the rising disparity in
life expectancy across the income distribution has been documented, little
is known about the causes of this widening. Similarly, little is known about
trends in the capacity to work by income. Understanding the relationship
between income distribution, capacity to work, and life expectancy--and
having some basis for projecting these trends forward--is important to
evaluating the distributional effects of proposals related to raising the eli-
gibility ages for Social Security and Medicare.
1c. Better understand specific risk factors that are precedents of disability,
including personal characteristics such as obesity and occupational hazards.
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196 AGING AND THE MACROECONOMY
While disability rates among the older U.S. population have been constant
over the past decade, disability rates among the working-age population
have increased. Rising rates of disability with respect to mobility and
related functions, combined with such secular changes as the dramatic
increase in overweight and obesity among nonelderly and the tendency
for underprivileged populations to drop out of school, suggest that future
generations may fare less well than their predecessors. This may affect both
the capacity of these future generations to participate in the workforce as
they pass through middle age and beyond and also their need for personal
care services as they get older.
1d. Quantify the effects of demographic change on state and local govern-
ment budgets. The fiscal discussion in this report surveyed work to date on
the effects of demographic change on state and local government budgets,
but much remains to be done. In particular, future research should focus
on the impact of demographic change on state and local expenditures for
education and health services and on state and local tax revenues, as well
as on accurate measurements of the future liabilities for pensions and health
benefits for state and local workers (considerable work has been done on
the pension side but not on retiree health benefits). Further, an analysis
of the potential interactions between federal tax and entitlement policies
and state budgets could be important to understanding the total impact of
policy reforms: For example, would a delay in the full Social Security or
Medicare retirement age have implications for state and local governments?
1e. Evaluate and extend measures and projections of disability/functional
status described in this report and elsewhere. U.S. survey data suggest that
declines in disability among older persons seen in the 1980s and 1990s have
ceased during the past decade. These data generally focus on activities of
daily living. Alternative conceptions of functional status sometimes suggest
different results. Some researchers are questioning the use of chronological
age as a basis for understanding health expectancy and people's views of
their own life prospects and have developed alternative measures that ad-
dress concepts of old-age dependency and work potential. The committee
believes the time is ripe for a broad evaluation of different approaches, with
an eye to building on work described in this report.
WORK CAPACITY AND INCENTIVES FOR
A LONGER WORKING LIFE
2a. Examine what past relationships between health status, age, and eco-
nomic incentives for continued work suggest about the likely path of labor
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RESEARCH RECOMMENDATIONS 197
force participation rates for older (60-75) workers over the next 30 years.
Labor force participation rates have already reversed their long-term decline
for men. The average retirement age has risen for women as well, and it
appears that the older population is not becoming any less healthy. In view
of these and other trends, can we better project labor market activity? There
are several elements to this question: (1) What fraction of the older popu-
lation will have health limitations that prevent them from earning much
income at age 62, 65, 68, or even 70? (2) How responsive is labor supply
to financial incentives to work? (3) Will the labor market deliver opportuni-
ties for older workers that will enable the labor force participation rate to
rise significantly? and (4) How might changing labor force patterns among
women contribute to the overall labor force participation rate? Part of the
research challenge in this area is to distill and synthesize the large quantity
of empirical evidence on labor supply response to various factors.
2b. Assess the development and adoption of technologies that enhance the
capacity of individuals with specific disabilities to participate in the work-
force. There are a number of ways in which policy can affect health and
disability in the population. One way in particular would be to encourage
the development of technologies, including person-based biomedical ad-
vances as well as workplace-based devices, that can help improve the health
and capacity of individuals with various types of disabilities to perform
job-related functions.
2c. Undertake specific analyses of how work at older ages has been and
could be facilitated, including demand-side factors. The analyses within
this report strongly suggest that more people will be working to older ages
than has been the case in past decades. How long people work will depend
not only on health trends and pension incentives, but also on the demand
for older workers, opportunities for training, retraining, and continuing
education, and the flexibility of work at older ages. As our society moves
toward later retirement ages, it will be important to (1) assemble disparate
information on the types of arrangements that older workers would prefer;
(2) understand the arrangements that firms have created or are willing to
think about; and (3) evaluate the effect of any trials.
2d. Study the effects of the health reforms enacted in 2010 (known col-
lectively as the Affordable Care Act, or ACA) on labor force participation.
The ACA could have important effects on the retirement decision of older
workers and on labor force participation decisions more generally. On the
one hand, the ACA will make it easier and less expensive for workers who
retire early to purchase health insurance on their own and might thereby
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198 AGING AND THE MACROECONOMY
encourage more early retirement. On the other hand, it is possible that
some potential workers currently remain out of the labor force in order to
be eligible for Medicaid or Medicare (through the Social Security disability
program). The increased affordability and availability of health insurance
under the ACA could raise the labor force participation of these workers.
Understanding the magnitude of each of these effects will contribute im-
portantly to our ability to gauge the likely macroeconomic effects of demo-
graphic change and to evaluate the likely impacts of various policy reforms.
CHANGES IN CONSUMPTION AND SAVING
3a. Rethink how consumption "needs" change at retirement and how they
evolve over the course of the retirement period. One of the most difficult
challenges in evaluating the findings on retirement resource adequacy is
deciding what the benchmark should be for postretirement consumption. Is
an 80 percent replacement rate of income sufficient? Is there a substantial
opportunity to substitute home production for market purchases, and do
job-related costs represent a substantial share of preretirement consumption
spending? How do these factors vary with age and duration of retirements
that may last 30 years or more? There have been some studies directed at
these issues, but further refinement would contribute to a better under-
standing of saving adequacy for future cohorts of retirees.
3b.Elucidate the interactions between private saving and government
policy. The macroeconomic effects of policy changes depend on how in-
dividuals respond to them. In particular, How would households respond
to reductions in Social Security or Medicare benefits? A wide empirical
literature exists on how the retirement decision is affected by the eligibility
age for public pensions, but much less is known about saving behavior and
retirement age, or saving behavior and Medicare generosity. Of particular
interest, given the likelihood that it will occur, would be the effect on pri-
vate saving decisions of increased means-testing of benefits.
3c. Evaluate how sensitive retirement preparedness results are to scenarios
for financial market returns and changes in health care cost growth. If
house prices remain flat in real terms for 10 years, for instance, how would
this affect retirement readiness results in 2025? What about a low real re-
turn on equities for a decade--a repeat of the 2000-2012 experience, for
example? This should be a relatively straightforward set of calculations
using extant data from national surveys (e.g., the Health and Retirement
Study and the Survey of Consumer Finances) in tandem with projections
of asset market movements.
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RESEARCH RECOMMENDATIONS 199
3d. Explore whether and for whom personal saving and labor market at-
tachment will increase with longer lifetimes. If people work longer as their
lives are extended, society might be able to pay for old-age income and
health care programs targeted at those who cannot self-finance. If people
also save more privately, this could reduce their need to draw on public
safety-net public programs in old age. But the extent to which various sub-
groups in the population can and will save more and work longer, as the
life cycle lengthens, requires additional research.
MODELING AND DATA
4a.Promote modeling efforts to simulate how demographic aging may
interact with changing patterns of health status, labor force participation,
saving behavior, and capital market movements. New models of the macro-
economic effects of population aging would allow us to better characterize
the sensitivities of projections and the interactions between macroeconomic
variables. Resulting simulations would help identify the most important
policy levers available now and in the future to influence the adequacy of
retirement income. Such analyses can also suggest where coordinated policy
actions across several domains can be most productive (e.g., improvements
in health and functional status can impact labor force participation and
productivity) and reduce the costs of adjustment to demographic aging.
4b.Improve existing models of life-cycle saving and decumulation, and
test them with data that link individuals with administrative information
on saving, investments, and retirement drawdowns. Longitudinal data col-
lection efforts are critically important for tracking and modeling how older
households prepare for, and move into, retirement. Better use of the full
range of longitudinal data could provide a real-time means to study policies
that influence retirement security. Research also is needed on (1) under-
standing how improving financial literacy can improve retirement security,
including how economic and noneconomic (psychological and sociologi-
cal) factors interact to affect retirement security, and (2) the effectiveness
of financial products and related innovations (e.g., longevity risk pooling,
inflation and survivor bonds, and long-term care insurance) that have been
and might be developed to help people better manage key risks.
4c. Support and broaden ongoing multidisciplinary survey research. The
committee strongly endorses the need for continuing longitudinal surveys
that include in a single comprehensive instrument questions on health, func-
tional status, retirement behavior, income, pensions, savings, well-being,
planning, and related matters. The Health and Retirement Study (HRS)
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200 AGING AND THE MACROECONOMY
does exactly this and has been enormously valuable for research on the
economics of aging. The availability of comparable longitudinal surveys
in many developed and developing nations has greatly enhanced the value
of the HRS.
4d.Improve the development and use of macro data. While data at the
individual and household level are extremely valuable, it also is useful to
have macro-level data on many aspects of economic behavior, disaggregated
at least by age and preferably by other variables as well. Data of this sort
often can be constructed from existing administrative and survey sources
such that no new data collection efforts are needed.
