Effects of OldAge Pension and Disability Pension on Labor Supply Dynamics of Old Male Workers

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Effects of Old-Age Pension and Disability Pension
on Labor Supply Dynamics of Old Male Workers

• Final Oral Examination
• Heedon Kang
• Monday, June 14th, 2004

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Average Gap 4.14 (age 4554), 3.834 (age
4561), 2.903 (age 4572)
Source Economically Active Population Survey
(2001) Current Population Survey
(March 2001)
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Questions
1. How various social insurance programs provide
incentives to exit from the labor force?
How are the disabled affected by social insurance
system when they make different labor supply
decisions from healthy agents?
How do old males respond to reforms in Disability
Pension and Old-Age Pension policies?
Disability Pension - Benefit Level and
Screening Stringency
Old-Age Pension - Benefit Level and Penalty
Rate for Early Retirement
2. How much the difference between LFPR of Korean
old males and of U.S. old males can be explained
by the differences in
A. Social Insurance System? Old-Age
Pension Program Disability Pension Program
B. Preference?
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Outline

• Social Insurance Programs in Korea and U.S.A.

• 2. Model
• Dynamic Discrete Choice Model with Three Options
• Explicitly modeled Social Insurance Programs

• 3. Estimation
• Method Method of Simulated Moments (MSM)
• Results

• 4. Policy Experiments
• Disability Pension
• Benefit Level and Screening Stringency
• Old-Age Pension
• Benefit Level and Penal Rate for Early Retirement

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Social Insurance System
Old-Age Pension Program
Age Restriction
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Disability Pension Program
Rejection Rate

• Korea 84.3 (1999)
• Source Annual Report of National Pension in
  1999, National Pension Corporation, Seoul
• U.S.A. 68 (1994)
• Source Bound and Burkhauser (1999) in Handbook
  of Labor Economics

Benefits

• 100 of each individuals Pension

Unemployment Insurance
Replacement Rate

• Korea 50 with a maximum of 774 per a month
• U.S.A. 46 with a maximum of 1172.9 per a month

Length

• Korea 8 months
• U.S.A. 26 weeks (6 months)

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Social Insurance Policy Parameters in the Model
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Pension Amount in Korea and U.S.A.
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Model

• Dynamic Discrete Choice Model with a Finite
  Lifetime

Choice
Each option describes an agents labor supply and
job search decision
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Preference
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Current Period Utility
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Budget Constraint
where
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Optimal Decision Rule
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Estimation Method
Method of Simulated Moments

• Simulated
• No analytic representation because of
  integrals involved in computing Emax value ?
  Estimation by numerical simulation

• Method of Moments
• Compare a moment function from the data and
  the same function from the simulated data

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Moments
First Group Parameters
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Second Group Parameters
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Algorithm

• Outer Minimization Powells Direction Set Method

• Inner Dynamic Program Value Function Iteration

• Process

1. Fix Parameters like Pension Policy Parameters
3. Find wage coefficients and health transition
probabilities
4. Compute moments from the data and from the
simulated data, and calculate the value of the
criterion function
5. Go back the steps and Search over the
parameter space to minimize the criterion function
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Results

• Profile of the Unemployed and Out of the Labor
  Force
• Employment Rate and LFPR Profile
• LFPR of Old Males with Different Health Status
• Estimated Parameters
• Social Insurance System vs. Preference for Leisure

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First Group Parameters
Korea
U.S.A.
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Second Group Parameters
U.S.A.
Korea
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Policy Experiments

• Fully-Blown Pension System in Korea
• Disability Pension Rejection Rate
• Disability Pension Benefit Level
• Old-Age Pension Benefit Level
• Old-Age Pension Penalty Rate for Early Retirement

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Korea (-) 1.947 in LFPR
U.S.A. () 2.697 in LFPR
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Korea () 0.611 in LFPR
U.S.A. () 1.366 in LFPR
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