Long-Run Economic Perspectives of an Ageing Society

Final Report Summary - LEPAS (Long-Run Economic Perspectives of an Ageing Society)

Executive Summary:
The Lepas project integrated into modern economics a biologically founded process of individual aging, i.e. aging understood as the gradual deterioration of the functioning of body and mind. Using the novel life cycle approach we have investigated how aging affects health and productivity with a special focus on health inequality across the EU member states. We have applied the model in a setup of endogenous economic growth in order to show the feedback effects of aging on education and life-time labour supply effect long-run economic growth, competitiveness, and welfare. With multi-country models we have analyzed how aging influences human capital formation and migration flows in Europe. We have applied the framework to investigate the interaction between aging, retirement, and health in old age. We have applied the model to explain the observed education gradient, i.e. the inequality of health and life-expectancy across educational groups. We have investigated how aging interacts with health demand and supply and how this feeds back to the macro-economy. We tried to assess whether the EU's market economies and public sectors provide too much or too little health care. We have discussed our approach and results not only with experts from demography and economics but also with experts from the natural sciences, most importantly with the leaders in the fields of reliability theory and frailty accumulation, i.e. the methods that the Lepas project made accessible for economists. These discussions encouraged us in our endeavour to establish our approach as the new thinking about aging in the social sciences.
Project Context and Objectives:
Nearly 25 percent of people in the European Union in 2030 can be above age 65, up from about 17 percent in 2005. Europe's old-age dependency ratio (the number of people age 65 and older compared with the number of working age people ages 15-64) could more than double by 2050, from one in every four to less than one in every two. This is an unprecedented phenomenon with potentially very important implications on society that are far from being well understood.
Researchers with public finance background frequently deliver gloom predictions of the impact of ageing. However, we believe that in order to fully understand the effect of ageing on the economy, it is necessary to develop an economic theory of ageing that takes into account the endogenous evolution of human frailty and disability. Only if we understand both the biological and economic forces behind the changes in the functional status of human beings during their lives, we will be able to analyse the economic determinants of successful aging. Moreover, a solid modelling of aging is required to study its feedback effects on economic growth, innovation, health expenditure and supply, retirement decisions and intergenerational solidarity.
The core objective of the project is thus to integrate a conception of human senescence into macroeconomics that is founded in the life sciences. The expected milestone is a new theoretical framework based on economic and biological foundations in which we are able to analyze the endogenous evolution of morbidity along the life cycle, and its impact on education, savings, health demand, productivity, and growth.
The core element (WP4) is preceded by two background work packages. WP 2 delivers a survey article about the treatment of senescence in the natural sciences with special focus on approaches that are potentially useful for economists. WP 3 integrates applied econometrics with methods from biology, in particular allometry. The goal is to obtain a quantitative assessment of the relative contribution from biological drivers of morbidity and mortality vs. man-made (technological) drivers, in accounting for the observed increase in life expectancy over the last 100 150 years. It is then planned to have a joint workshop with leading researchers in the life sciences (in particular biology and gerontology) in order to further assess the common ground and the possibility of collaboration. For that purpose we have managed to get Professor James Carey from UC Davis, one of the world-wide leading figures in senescence research, as external advisor for our project. The gained knowledge is disseminated by publishing a conference volume. After the integration of a biological foundation of ageing into the macroeconomic toolbox and the deveopment an economic life-cycle model we move further ahead with several applications on EU relevant issues. We mainly address our work to (WP5) analyzing the optimal age of retirement from the individuals and from societys viewpoints, (WP6) evaluating the impact of migration on overall productivity and its implications for human capital formation (in a broad sense, including education and health) in an ageing society, and for the design of immigration management policies, (WP7) searching for the impact of the aging society on technical change and log-run growth and (WP8) quantifying whether too much or too little is spent on health investment.
The result is documented in several academic papers and disseminated to the general public through conference participation, publication, and a project specific web page (WP9).

Project Results:
WP 1: Coordination and project Management.

Objectives: Ensure effective planning, implementation and coordination of project activities. Monitoring project progress and budgeted resources.

Progress towards objectives and tasks completed:
The projects kick-off was held in Copenhagen in May 2009 with regular formal and informal meetings throughout the project life (see below). In addition to regular communication between the project partners, the coordination office established effective internal reporting structures to facilitate project controlling by eliciting biannual reports on activities and expended resources from all partners. The management team, assisted by an administrative manager, ensured proper financial management within the consortium and the appropriate communication of related matters to the European Commission. The prefinancing and the interim payment were distributed among all partners by the coordinator upon receipt and support has been continuously provided for partners in financial and administrative matters of the project, including the preparation of the periodic reports and the final report. All deliverables and activities were completed according to the description of work. The coordinator has also maintained regular contact with the External Advisory Board to inform them of project events and members of the EAB participated in the first LEPAS and second workshop/conference in June 2010 and June 2011.

List of project meetings, dates and venues
Kick-Off meeting, 05-06 May 2009, Copenhagen
LEPAS workshop, 16-18 June 2010, Vienna
Project meeting, 20-21 August 2010, Vienna
LEPAS workshop, 15-18 June 2011, Alicante
Skype conference, March 2012

WP 2: Aging and Frailty: What can be learned from the Natural Sciences?

Objectives: This WP provides an overview over developments on the modelling of the aging process in physics, biology, gerontology, and bio-demography with a special focus on the question of which ideas can be fruitfully borrowed for an implementation of ageing in economic models.

Tasks:
2.1: Studying the literature on Biology and aging
2.2: Analyzing possible adoptions in Economics
2.3: Consultations with Advisory Board
2.4: Writing report

Progress towards objectives and tasks completed:
The tasks of the work package were tackled as a joint effort between all four partners with each partner contributing to the same question from a different viewpoint. At LUH the focus was on measurement of aging and the explanations offered for the most striking regularities (Gompertz law and the Strehler-Mildvan correlation) in the natural science literature (task 2.1). From the theoretical side, reliability theory was identified as the most promising approach for integration into economic modelling (task 2.2). The implication of the theory has been tested with the so called frailty index developed in medical literature. The frailty index turned out to be a very useful concept also for economists. LUH has develop the index (which is so far only available for the US, Canada and Australia) for European countries. A presentation of the survey was given at the Vienna workshop in June 2010. First developments on how to integrate findings from the biological literature in an estimated economic model of health and longevity were initiated (task 2.2). New findings and their usefulness in economics and biology have been discussed with James Carey from the projects external advisory board, who was also present in Vienna and gave a fascinating keynote lecture on recent developments on aging in biology (task 2.3).
At UCPH the focus was on metabolic theories of aging and the connection between allometric measures and aging. In particular, two theories were inspected and evaluated: the free radical theory which considers that oxidative stress leads to cellular damage and thereby organism senescence; and the telomere theory which considers that cell division and oxidative stress lead to cell senescence and thereby aging of the organism. It was assessed in how far these theories may be helpful in shedding light on why longevity varies across societies. At VID the focus was on the evolutionary theories of ageing and in particular on the close links between the processes of fertility and ageing. For that purpose life history analysis was studied, which offers a rigorous explanation for the evolutionary forces behind the ageing process. Key elements of ageing are the value of transfers, opportunity concepts of growth, and quality LEPAS quantity trade off in soma. First investigations if and how these theories can be integrated into the economic models have been conducted. At UA the literature was analyzed from a human capital perspective, i.e. aging understood as the decay of human capital. Different approaches to human capital accumulation have been reviewed, with a focus on what the available literature on human capital in economics is missing by disregarding the biological determinants of depreciation of human capital.
Four written reports (task 2.4) have been developed within WP2 dealing with the above topics: A Primer for Economists - Part I: Senescence, a Missing Piece in Human Capital Theory; Part II: Measuring Ageing; Part III: Metabolism and Longevity; Part IV: Evolutionary Theories of Ageing.

Part I: Senescence, a Missing Piece in Human Capital Theory
Advancing in the understanding of the impact of the aging phenomenon on the economy requires the comprehension of the different dimensions of senescence. Only then, a successful study of its feedback effects on economic growth, innovation, health expenditure and supply, retirement decisions and intergenerational solidarity will be possible. Part I of the survey puts the problem into perspective, treating aging as the decay of human capital. It briefly reviews different approaches to human capital accumulation that make evident the lack of attention that economists have given to the determinants of its depreciation. The section also surveys evidence that clearly point out that the decay of human skills and health is influenced by the environment, usage, and maintenance practices. The conclusion is that the evolution of human capital during the life cycle is badly described by existent theories that treat depreciation or, for our purposes, aging as purely exogenous.

Part II: Measuring Ageing
This paper is written for (health-) economists with an interest in the conceptualization and modelling of aging in demography, biology, and bio-gerontology. It reviews two alternative methods to measure aging and a theory that explains the outcome of both these measurements. It explains how aging, conceptualized as increasing probability to die, can be accurately and conveniently measured by the Gompertz-Makeham law. It discusses the historical stability of the estimated parameters of the law, inferences about human life-span, and the similarities and differences of aging across sexes, countries, and species. Alternatively, aging can be measured as accumulation of bodily deficits. The paper reviews the frailty index, designed to measure biological aging, and demonstrates important similarities and differences between the force of mortality and frailty accumulation. The paper provides also an introduction to reliability theory and shows how increasing mortality and frailty can be explained as a stochastic process of loss of built-in redundancy of organisms. The analysis provides some tentative conclusions about the future of human aging and some suggestions for the modelling of health and mortality in economics.

Part III: Metabolism and Longevity
This study reviews non-evolutionary biological theories of aging. The rate of living theory, being the oldest, proposes that there is a fixed amount of living available to biological organisms. We discuss evidence from the literature on allometric scaling, which might provide some support for the premise that there could be a biomechanical explanation for limited maximum life-span of individual species. The last two theories provide insights into biological mechanisms generating aging, and limiting longevity. The free radical theory suggests that oxidative stress leads to cellular damage and thereby organism senescence; the telomere theory considers that cell division and oxidative stress lead to cell senescence and thereby aging of the organism. These theories may be helpful in shedding light on why longevity varies across societies. Some formal statements of the theories and empirical evidence to their importance to human longevity are presented.

Part IV: Evolutionary Theories of Ageing
This chapter is devoted to evolutionary (life history) theories of ageing that aim for an explanation of the genetic architecture of the life history with a view to understanding why ageing and senescence occur. Life histories are defined as cycles of maturation, fertility and mortality. A key question is to understand why ageing, i.e. decreasing fertility and increasing mortality with age, has evolved, although it is clearly bad at the individual level. We begin by reviewing the classical evolutionary theories of ageing: mutation accumulation, antagonistic pleiotropy and disposable soma theories. To some extent, these theories fail to explain, however, decreasing mortality at young ages and/or post reproductive survival, phenomena that occur in many species, in particular in birds and mammals, including humans. Newer theories seek to address these issues by incorporating transfer-giving to children and more detailed modelling of the physiological mechanisms underlying the process of ageing. We consider first an extension to mutation-selection theory including inter-generational transfers and then turn to discuss life history models that explicitly include optimization of a fitness criterion as an evolutionary objective function. We discuss how these models have been used to derive realistic mortality patterns and other features of ageing.

WP 3: Accounting for Increasing Life-Expectancy

Objectives: This work package aims to elucidate the sources of recent increases in life expectancy.

Tasks:
3.1: Data compiling
3.2: Application of allometric methodology
3.3: Analyses of results
3.4: Writing scientific article

Progress towards objectives and tasks completed:
Four major working papers (task 3.4) on this topic have been made available during the project life:

Optimal Aging and Death
Eye Disease and Development
Optimal aging and death: understanding the Preston curve
Long-Run Trends of Human Aging and Longevity

The papers are available from the project web site: http://www.lepas-fp7.de/index.php.

The following contains a brief description of the major results:

Optimal Aging and Death
Build on the insights gained through Work Package 2, which aimed to provide an overview of the exportable tools from the natural sciences, in terms of modelling aging and the incidence of death (task 3.1). Specifically, the key innovation of this working paper is to integrate a natural science founded approach to aging into an otherwise fairly standard economic model of consumption/savings choice by a representative household. Broadly speaking, the representative households find investments in health attractive as these expenditures serve to slow down the aging process (at the individual level), allowing for greater life span and thus higher welfare. At the same time, households value other things that do not prolong life. These expenditures naturally constitute the alternative costs of health spending. Within this setting the first key question is how households would optimally want to allocate their income over the life cycle. Once this choice has been made, the model predicts the (optimal) ageing and timing of household death (task 3.2). The second important question is then the accounting question: How important is income to changes in life expectancy? How important are technological innovations to life expectancy? How important are changes in prices (of health services) to life expectancy. The model does remarkably well in accounting for the income gradient in the data (the so-called Preston curve). A first key result is that prevailing differences in average income across countries (and thus in implied, optimal, health investments) can account for difference in life expectancy at age 20 of about a decade. Income therefore matters a great deal (task 3.3). However, a second key result of the analysis is that technological change (increases in health efficiency) has a much greater impact on longevity, quantitatively; the impact from technology is also much larger than that of changes in health services (task 3.3). From a policy perspective this suggests that improvements in health efficiency (which might involve institutional reform of the health sector) will likely have a much bigger impact on health of the populations than policies geared towards subsidizing health spending by individuals (task 3.3).

Eye Disease and Development
This working paper tries to grip the question: How important is health to development outcomes? This is a particularly difficult question to address, as health both impacts on growth, and is the result of income growth. In order to isolate the impact from health empirically one needs to disentangle these two effects. This working paper attacks this difficult separation problem by examining a particular condition (associated with aging): loss of vision from cataract. The key ideas, facilitating us to disentangle impact from loss of vision on growth, is to look at cross-country differences in cataract prevalence which is ascribed to climatic conditions, and not income per se. Building on a large natural science literature (task 3.1) the paper employs UVB radiation in this regard (task 3.2). By studying the impact from the part of cataract incidence across countries which is a consequence of climate variation, we can isolate the impact from cataract, as this variation (in the data) cannot be ascribed to the influence from income. The empirical results are very strong. Loss of vision is a strong determinant of current human capital levels and income per capita differences. More broadly, the results provide new evidence that health is a major determinant of economic growth (task 3.3).

Optimal aging and death: understanding the Preston curve
There exists a strong positive and concave correlation between income and life expectancy across countries, known as the Preston curve. This curve has had, and continues to have, a considerable impact on public health policy and academic research (task 3.3). In order to understand the Preston curve better we develop a model of optimal intertemporal consumption, in which households are subject to physiological aging ultimately culminating in death (task 3.2). In modelling aging we draw on recent research in the fields of biology and medicine. The speed of the aging process, and thus the time of death, is endogenously determined by optimal health investments. We calibrate the model to US data, and proceed to show that the model accounts for nearly 80% of the cross-country differences in life expectancy that the Preston curve captures.

Long-Run Trends of Human Aging and Longevity
Over the last 200 years humans experienced a huge increase of life expectancy (task 3.1). These advances were largely driven by extrinsic improvements of their environment (for example, the available diet, disease prevalence, vaccination, and the state of hygiene and sanitation). In this paper we ask whether future improvements of life-expectancy will be bounded from above by human life-span. Life-span, in contrast to life-expectancy, is conceptualized as a biological measure of longevity driven by the intrinsic rate of bodily deterioration. In order to pursue our question we first present a modern theory of aging and show that immutable life-span would put an upper limit on life-expectancy (task 3.2). We then show for a sample of developed countries that human life-span thus defined was indeed constant until the 1950s but increased since then by about eight years in sync with life-expectancy. In other words, we find evidence for manufactured life-span (task 3.3).

WP 4: An Economic Life-Cycle Model of aging and Senescence

Objectives: Providing a general framework that integrates aging in the biological sense of deterioration of physical and mental quality into an economic model of the life cycle.

Tasks:
4.1: Study of alternative formalizations of adoptable elements from Biology
4.2: Construction of model
4.3: Solving the model and generation of predictions
4.4: Writing scientific

Progress towards objectives and tasks completed:
First a model is being constructed where aging is understood as the decay of human capital (task 4.2). We have reviewed different approaches to human capital accumulation that make evident the lack of attention that economists have given to the determinants of its depreciation. We have looked at evidence that clearly point out that the decay of human skills and health is influenced by the environment, usage, and maintenance practices (task 4.1). Our main conclusion has been that the evolution of human capital during the life cycle is badly described by existent theories that treat depreciation or, for our purposes, aging as purely exogenous. We have been able to finalize a model based on the theory of human capital acquisition put forward by Bils and Klenow (2000, American Economic Review) but extended it to incorporate elements from Biology, and in particular, frailty theory (task 4.2). Another line of attack consists of extending the natural science founded model of aging (see Work Package 3) to the study of optimal labour supply. In the greater context of understanding the impact of aging on growth, it is useful to understand how physiological aging individuals choose to plan their lifetime labour supply, including the timing of retirement (task 4.3). The analytical framework and modelling has been achieved. The end results of these efforts were a fully articulated framework which allowed for a deeper understanding on how aging influences life cycle consumption and savings as well as time of retirement and human capital investments (schooling) (task 4.3). The LUH generated a working paper (task 4.4) Health and Education: Understanding the gradient, available online at: http://www.lepas-fp7.de/lepas-proc-2011-19.pdf. This paper is currently in the review process at a prestigious journal. UCPH has contributed to every aspect of the project raging from data collection (task 4.1) to the execution of the empirical analysis (task 4.3). Moreover, the UCPH has been deeply involved in the paper (task 4.4) Eye disease and development, which studies the impact of age related eye diseases on the incentive to undertake important human capital investments, available at: http://www.lepas-fp7.de/lepas-proc-2010-16.pdf. The paper has been presented a number of times by Pablo Selaya (see dissemination activities). The paper has been submitted, and revisions have subsequently been requested by Review of Economic Studies, one of the leading general-interest journals in the field of economics (task 4.4).

The following contains a brief description of the major results:

Health and Education: Understanding the gradient

This study presents a novel view on education and health behaviour of individuals constrained by aging bodies. The aging process, i.e. the accumulation of health deficits over time, is built on recent insights from gerontology. The loss of body functionality, which eventually leads to death, can be accelerated by unhealthy behaviour and delayed through health expenditure. The proposed theory rationalizes why better educated people optimally choose a healthier lifestyle, that is why they spend more on health and indulge less in unhealthy behaviour. The model is calibrated for the average male US citizen. In the benchmark case a difference of the return to education that motivates one year more of education motivates also about 8 percent less unhealthy behaviour and 5 percent more health expenditure and thus explains half a year gain of longevity. Progress in medical technology explains why the education gradient gets larger over time.

Eye disease and development
Using cross?country data, this study examines the impact of cataract on economic development. We hypothesize that an earlier onset of vision loss reduces the return to human capital investments, which delays the onset of the demographic transition and lowers long?run labour productivity. Empirically, there is a strong negative correlation between cataract prevalence and labour productivity. However, since cataract can be cured surgically given adequate resources, prevalence rates are unlikely to be exogenous. We therefore develop an epidemiologically founded identification strategy: the age of onset of cataract is strongly affected by exposure to solar ultraviolet B radiation. Our IV estimates supports a detrimental impact of cataract on aggregate labour productivity. The size of the impact can plausibly be accounted for by a differential timing of the demographic transition.

The economic life-cycle model developed in this WP was further used to solve the different questions within other WP: (WP5) analyzing the optimal age of retirement from the individuals and from societys viewpoints, (WP6) evaluating the impact of migration on overall productivity and its implications for human capital formation (in a broad sense, including education and health) in an ageing society, and for the design of immigration management policies, (WP7) searching for the impact of the aging society on technical change and log-run growth and (WP8) quantifying whether too much or too little is spent on health investment.

WP 5: Aging and Retirement

Objectives Analyzing the optimal age of retirement from the individuals and from societys viewpoints, and also the effect and sustainability of pension plans.

Tasks:
5.1: Searching for stylized facts and key policy issues
5.2: Consultations with Advisory Board
5.3: Extending the model to analyze the WP topic
5.4: Solving the model and generating predictions
5.5: Writing scientific article

Progress towards objectives and tasks completed:
Research on the existing economic literature on the topic has been performed in order to investigate the main policy issues that surround it. We have focused on papers and books that study the evolution of the optimal age of retirement and its relationship with longevity (task 5.1). This literature has emphasized pension programs, the wage profile, labour productivity, and risk of mortality as main factors that affect retirement. During this time, we have also made progress regarding the generation of an initial version of the economic life-cycle model of aging and senescence (WP4) which can handle the issues addressed by WP5 and 6 more appropriately (task 5.3).
LUH and UCPH wrote a scientific report (task 5.5) The Genesis of the Golden Age: Accounting for a Century of Rising Leisure and Health applying the extended model to understand the historical evolution of retirement age and retirement duration (task 5.4). This report can be found as a chapter of the scientific book (D9.10). A report Understanding the Differences in Longevity across the EU Member States was written trying to project the future of retirement age and retirement duration in the EU member countries. UA studied empirically with the help of the extended model how people make retirement decisions, and the determinants of a tool that can be important for a transition to retirement and help alleviate financial problems in Europe. A small amount of time was also allocated to consult with members of the advisory board (task 5.2). Finally, UA has chosen one of the extensions and produced a scientific article (task 5.5) titled An alternative to retirement: Part-timework. This scientific article is also published as a book chapter in the LEPAS scientific book (D9.10) and available at: http://www.lepas-fp7.de/lepaswp-2012-2.pdf .

The following contains a brief description of the major results:

The Genesis of the Golden Age: Accounting for a Century of Rising Leisure and Health
This paper presents progress in the modelling of the economics of ageing and retirement. In particular, the theory allows us to examine the influence from wage growth on years of retirement, as both longevity and retirement age are endogenously determined. When applied to the EU member states we find that reasonable growth in wages, in the absence of reforms, can be expected to increase years of retirement considerably in the years to come. Accordingly, there is little to suggest that the weight of the retirement burden has been underestimated in past projections. On the contrary, by underestimating the impact of wage growth on longevity, current projections may well underestimate years of retirement and thereby the strain on EU member states government finances in the future.

Understanding the Differences in Longevity across the EU Member States
Longevity varies considerably across the post enlargement EU member states. Evaluated around the year 2000 life expectancy at age 20 varied by roughly a decade while income per worker varied by about a factor of eight. With respect to income, convergence within the members of the European Union is to be expected in the years to come. Naturally, the question arises whether and how much the convergence of income will help to close gap in longevity. Moreover, beyond income, what are the most effective ways at raising longevity within the EU? In order to address these questions the Lepas Project has developed a physiologically-founded economic model of health demand over the life-cycle, drawing on recent advances in the modelling of aging and longevity from the natural sciences. The main conclusions summarized in this report are:
Convergence of income per capita (labour productivity) across the EU member states can be expected to close a considerable fraction the life expectancy gap. But productivity advances are not the most powerful determinant of longevity.
The most powerful determinant of increases in longevity is improvement in health efficiency (medical technological progress). Health efficiency should be the main policy target.
Targeting prices (subsidies on wages or prices in the health sector) is a relatively ineffective way of increasing longevity.

An alternative to retirement: Part-time work
Part time work can facilitate participation in the labour market and smooth the transition to retirement. Part-time employment, however, represents for the most part an involuntary choice. The aim of this chapter is to conduct an empirical investigation of the determinants of part-time work. Using Spanish labour market data, we find that part-time work becomes a more desired employment alternative as people age, and that education and childrens age have opposite effects on women and mens probabilities of voluntary part-time employment. Interestingly, most part-time work among women occurs in low-skill occupations, whereas part-time work among men is mainly concentrated in high-skill jobs.

WP 6: The effect of immigration on the European aging society

Objectives: Evaluating the impact of migration on overall productivity and its implications for human capital formation (in a broad sense, including education and health) in an ageing society, and for the design of immigration management policies.

Tasks:
6.1 Studying the stylized facts of modern European migratory flows
6.2 Building the model
6.3 Solving and calibrating the model for some European countries
6.4 Generating predictions
6.5 Policy implications
6.6 Writing scientific article

Progress towards objectives and tasks completed:
The first step has been the investigation of existing economic literature on the topic, as well as with the main policy issues that surround it (task 6.1). The literature on the impact of migration flows has been the primary target. Different multi-country frameworks studying the size and sign of the effects of migration on the long-run income and productivity of each (developed/developing) economy in a context of free international trade and migration have been revised. These studies concentrate on the analysis of the country of origin. The next step was to extent the existing economic life-cycle model of aging and senescence, developed in WP4, in order to evaluate the impact of migration on overall productivity and its implications for human capital formation (task 6.2). A life-cycle model was picked among the extensions tested and different predictions were produced (task 6.3 and 6.4). The model and the generated predictions were summarized in a scientific article titled Immigration, evolution of skills, and social security, available at: http://www.lepas-fp7.de/lepas-proc-2011-20.pdf. UA presented a preliminary version of the scientific article at the second LEPAS Conference on the Biology and Economics of Aging that took place in Alicante in June 2011.

The following contains a brief description of the major results:

Immigration, evolution of skills, and social security
Migration is sometimes seen as a panacea to circumvent the financial problems associated to ageing societies. Other authors, however, see it as a burden, because the arrival of migrant workers can depress the wage of non-educated natives and reduce the economys average productivity. In this paper, we analyze the effect of migration on workers productivity and the wage gap. We construct a life-cycle model with endogenous educational choices and health investment. Our results point out that, when human capital investment over the life cycle is possible, migration does not universally increase the wage gap, this depends on the economys initial conditions.

WP 7: Endogenous R&D-driven Growth in an Ageing Society

Objectives: Searching for the impact of the aging society on technical change and log-run growth within the context of the basic model provided by WP4.

Tasks:
7.1: Searching for stylized facts and key policy issues
7.2: Constructing the model to analyzed the WP topic
7.3: Solving the model and generating predictions
7.4: Writing scientific article

Progress towards objectives and tasks completed:
The partners performed the literature search on technical change and log-run growth caused by the aging society (task 7.1). Thereby, the UA team focused on the most R&D intensive sector, the pharmaceutical industry, increasingly important in aging societies. UCPH has studied the background theoretical literature which so far has considered the nexus between aging (usually in the specific sense of mortality or health) and Research and Development. Moreover, they have been surveying the empirical literature, which studies the link between health and growth, mediated by technological change. Issues and problems concerning the construction/extension of the model were discussed at the Vienna meeting, also with participants from outside the LEPAS group. LUH and UCPH have finalized a model to investigate how human longevity has a bearing on education and education driven growth in the long-run (task 7.2). It was shown that a distinction between life expectancy and healthy life expectancy resolves the puzzle that people in developed countries life longer, educate longer, but work less during their life time than they used to do 100 years ago (task 7.3). Two scientific articles "Life Expectancy, Labor Supply, and Long-Run Growth: Reconciling Theory and Evidence" and A model of health investment, medicine consumption, and income were written presenting these results (task 7.4). These articles are available online at: http://www.lepas-fp7.de/lepaswp-2012-1.pdf and http://www.lepas-fp7.de/lepaswp-2012-3.pdf

The following contains a brief description of the major results:

"Life Expectancy, Labour Supply, and Long-Run Growth: Reconciling Theory and Evidence"
We set up a three-period overlapping generation model in which young individuals allocate their time to schooling and work, healthy middle aged individuals allocate their time to leisure and work and their income to consumption and savings for retirement, and old age individuals live off their savings. The three period setup allows us to distinguish between longevity and active life expectancy (i.e. the expected length of period 1 and 2). We show that individuals optimally respond to a longer active life by educating more and, if the labours supply elasticity is high enough, by supplying less labour. We calibrate the model to US data and show that the historical evolution of increasing education and declining labour supply can be explained as an optimal response to increasing active life expectancy. We integrate the theory into a unified growth model and re-establish increasing life expectancy as an engine of long-run economic development.

A model of health investment, medicine consumption, and income
The human population, all over the planet, is enjoying an increasing average life span that is expected to extend another 10 years by 2050. The rising number of older adults generates an unprecedented demand on the public health system. This chapter presents a growth framework of health prevention investment and medical technology consumption in which the use of medical techniques and diseases endogenously determine the levels of income and health. In the model, there are two forms of medical technology: one is embodied in medicines that try to cure sick individuals, whereas the other is disembodied knowledge that tries to prevent health deterioration.
I find that larger saving rates are not only a consequence of a larger productivity of the consumption-goods technology; more productive pharmaceutical products and higher levels of preventive-health knowledge also increase the incentive to saving, and allow the economy to achieve larger levels of income, mitigating the adverse effects of ageing.

WP 8: Health, Survival and Consumption over the Life Cycle

Objectives Quantifying whether too much or too little is spent on health investment.

Tasks:
8.1: Searching for stylized facts and key policy issues
8.2: Constructing a continuous age-structured control model
8.3: Solving the model and generating predictions
8.4: Writing scientific article

Progress towards objectives and tasks completed:
Based on a thorough review of economic life-cycle models with endogenous survival, we have initiated two lines of modelling.
1. VID (and collaborators) have developed a continuous age-structured optimal control model (task 8.2) allowing the derivation of socially optimal patterns (over age and time) of health investments if these contribute towards lowering mortality. The modelling is based on empirical evidence of age-specific mortality schedules and seeks to arrive at stylized yet realistic age-profiles of health spending (task 8.1). The results allow an interpretation of the determinants of (optimal) health spending within each age-group based on the age-specific (monetary) value of survival. The model has been applied to two policy-relevant research questions (task 8.3): First, we have examined how the value of survival (and, thus, the incentive to invest in health) depends on the value the decision-maker attaches to progeny. Typically, failure to include the value of progeny leads to an underestimation of the value of survival for individuals still within their fertile years. It was also examined how preferences and future economic prospects shape the value of progeny. Second, we have analysed a model in which (positive or negative) externalities with regard to health spending lead to inefficiencies in individual as opposed to social health spending. By considering the private vs. social value of survival a current as well as a dynamic component of the inefficiency can be identified. An optimal internalising transfer policy is characterised and numerical analysis is employed to examine the age pattern and consequences for longevity and consumption of the inefficiency. As it turns out, positive externalities typically imply underspending on health relative to consumption and sizeably lower longevity, whereas negative externalities imply overspending on health without significant effects on longevity.
2. We have developed a simple two-period life-cycle model with endogenous survival. This model has been applied in order to study the effects of risk aversion with respect to length of life on savings and health investments. It shows that greater risk aversion with respect to length of life tends to reduce savings and has an ambiguous effect on health investments. Health investments are boosted if and only if the survival probability is sufficiently high to begin with and otherwise discouraged. Furthermore, the presence of risk aversion tends to exacerbate income-related inequalities in health and savings.
Two peer-reviewed papers regarding these topics were published: "The Reproductive Value as Part of the Shadow Price of Population" and "Externalities in a Life-Cycle Model with Endogenous Survival" These papers are available at: http://www.demographic-research.org/volumes/vol24/28/ and http://pdn.sciencedirect.com/science?_ob=MiamiImageURL&_cid=271684&_user=10&_pii=S0304406811000747&_check=y&_origin=browse&_zone=rslt_list_item&_coverDate=2011-10-31&wchp=dGLzVlV-zSkWz&md5=7dd1fa3cb4bacfa104eb6de83da69d8d/1-s2.0-S0304406811000747-main.pdf
Further work was undertaken on the joint modelling of health care and retirement decisions within a life-cycle model with endogenous survival (tasks 8.2 and 8.3). The material was then written up as a conference and working paper "Optimal Choice of Health and Retirement in a Life-Cycle Model", available at: task 8.4 and presented at several seminars and conferences. Revisions were started on the paper on the inclusion of risk aversion with respect to the length of life. The insights of individual life-cycle models were included into two macro-economic models: (i) a model of an age-structured population in which both mortality and fertility are endogenous (tasks 8.2 and 8.3) which was also presented at a seminar; and (ii) a Blanchard-Yaari type OLG model with endogenous growth in order to study the impact of a public health care sector on economic growth (tasks 8.2 and 8.3). At the moment a first draft of a scientific paper is close to completion (task 8.4).

The following contains a brief description of the major results.

"The Reproductive Value as Part of the Shadow Price of Population"
The reproductive value (see Fisher 1930) arises as part of the shadow price of the population in a large class of age-structured optimal control models. We mentioned that the generalized reproductive value can have a negative sign. As an example, consider a model minimizing the impact of a population of a pest on a valuable supply of a resource. If the pest population (destroying the resource) is modelled, the corresponding shadow price will be negative. This implies that also the generalized reproductive value (i.e. the impact of yet to be born pest individuals on the future stock of the resource) is negative. For another application, consider an age-specific predator/prey model, embracing cattle and wolves, for example, as presented in Wrzaczek et al. (2010). Also in this example the reproductive term can be negative depending on the type of objective function (e.g. the reproductive value of the predator, if in contrast to the prey, it has no direct economic value in and of itself). A further epidemiological application involving the interaction of infected and susceptible individuals is presented in Wrzaczek et al. (2010). Finally, we want to emphasize that the concept of the reproductive value is not only applicable to humans and animals, but also to self-renewing machines or even capital (for examples see Sethi and Thompson (2000), Feichtinger et al. (2006) and references therein).

"Externalities in a Life-Cycle Model with Endogenous Survival"
We study socially vs. individually optimal life cycle allocations of consumption and health, when individual health care curbs own mortality but also has a spillover effect on other persons survival. Such spillovers arise, for instance, when health care activity at aggregate level triggers improvements in treatment through learning-by-doing (positive externality) or a deterioration in the quality of care through congestion (negative externality). We combine an age-structured optimal control model at population level with a conventional life cycle model to derive the social and private value of life. We then examine how individual incentives deviate from social incentives and how they can be aligned by way of a transfer scheme. The age-patterns of socially and individually optimal health expenditures and the transfer rate are derived. Numerical analysis illustrates the working of our model.

"Optimal Choice of Health and Retirement in a Life-Cycle Model"
We examine within a life-cycle set-up the simultaneous choice of health care and retirement (together with consumption), when health care contributes to both a reduction in mortality and in morbidity. Health tends to impact on retirement via morbidity, determining the disutility of work, and through longevity, determining the need to accumulate retirement wealth. In contrast, the age of retirement drives health through changes in the value of survival and the value of morbidity reductions. We apply our model to analyse the effects of moral hazard in the annuity market: While moral hazard always induces excessive health investments and an excessive duration of working life it also triggers an excessive level of consumption if the impact of health on the disutility of work is sufficiently large. We examine a transfer scheme and mandatory retirement as policies to curtail moral hazard.

WP 9: Dissemination of Results

Objective: Dissemination of Results. Organization of Expert Meeting and Conference. Preparation of summaries, new letters, and policy briefs presenting the results of the project. Coordination and editing of the final scientific book.

Tasks:
9.1: Organization of conferences
9.2: Establishing and administering the project webpage
9.3: Writing and distribution newsletters
9.4: Writing and distributing policy briefs
9.5: Final Scientific book.

Progress towards objectives and tasks completed:
Results were presented and discussed at local and international scholarly meetings - conferences, seminars, workshops (see list of dissemination activities). The first LEPAS workshop and conference (task 9.1) took place on 17-18 June 2010 in Vienna, involving the consortium, the advisory board and external guests. As WP leader, VID coordinated the organization of the meeting and the preparation of the conference volume. This first LEPAS conference aimed to discuss our work during the first year of the project. For this purpose we invited Jim Carey (member of the scientific board) and key researchers in the field of economic growth and longevity in addition to all members of the LEPAS project. The aim was to discuss our work as well as to learn more about alternative approaches from the external participants. Topics included the bio-demographic approach to ageing (keynote by Jim Carey); empirical regularities between survival and frailty across different populations; the relationship between longevity, savings, labour supply and economic growth; the modelling of individual behaviour directed towards health and survival; and the effects of eye-sight (as an age-related measure of health) on economic productivity. To document our presentations and papers we have set up a conference volume at the LEPAS homepage (http://www.lepas-fp7.de/publications.php). The second LEPAS workshop and conference (task 9.1) took place on 15-18th June 2011 in Alicante, involving the consortium, the advisory board and external guests. Researchers from Spain, Germany, Austria, Denmark, Switzerland, United States, and Canada attended it. An open search was carried out to advertise the event and the LEPAS project. The papers presented were included in the Conference Volume (http://www.lepas-fp7.de/publications.php) which was prepared together with the LUH and UCPH. Topics included (a) measuring aging in individuals and populations, (b) explaining health inequalities around the world and (c) the impact of health on schooling and retirement decisions. Moreover, the consortium attempted a broad interdisciplinary discussion. Therefore, the three key note lectures were held of a biologist, a medical scientist and a demographer, all working on this field of research. Afterwards, they interdisciplinary discussed the LEPAS research results.

Through our series of policy briefs we aim to summarize key findings of our project and introduce them to the public and interested stakeholders (task 9.4). These are brief statements in an accessible, non-scientific language that will help to highlight our relevant findings. In the first policy review (http://www.lepas-fp7.de/p-brief-2009-09-02.pdf) we lay out the main objectives of the project in order to advertise the research agenda. In the second policy brief (http://www.lepas-fp7.de/p-brief-2010-04-19.pdf) we lay out our approach to modelling ageing arguing that we need to incorporate a more realistic process of senescence into our economic models. In our third policy brief (http://www.lepas-fp7.de/p-brief-2010-10-31.pdf) we discuss the role of income for explaining differences of life expectancy across countries. In the fourth policy review (http://www.lepas-fp7.de/p-brief-2011-04-26.pdf) we showed that cross-country differences in prosperity can explain differences in longevity (at age 20) of up to a decade. The fifth policy brief (http://www.lepas-fp7.de/p-brief-2012-04-01.pdf) described the ageing population as a global phenomenon. All partners contributed to the policy briefs and have also helped in their wide distribution among both researchers and the public.

The LEPAS webpage was launched in Month 1 of the project and acts as our main communication portal for the scientific community as well as the public (task 9.2). Through the webpage, we announce the objectives of the LEPAS project, post our work in form of LEPAS-working papers and reports on ongoing and upcoming activities such as project workshops. All working papers, conference volumes and policy briefs are publicly available on the website via the following links: http://www.lepas-fp7.de/publications.php; http://www.lepas-fp7.de/policy-briefs.php. The overall LEPAS research was compiled in a scientific book (task 9.5) which is currently in press.

Note that several papers are currently in a review process, but not yet stated as peer-reviewed.
Potential Impact:
Socio-economic impact and the wider societal implications of the project:
The aging European population is bound to have important effects on economic outcomes. In particular, it has long been recognized that the major demographic changes on the horizon will strongly impact on public budgets. Specifically, one can envision rising expenditures on health care and social security, accompanied by decimated tax revenues due to a receding work force and, possibly, a labour productivity slowdown. As a result, the Welfare State will be put under pressure, spawning the need for policy intervention. The process of a rising mean age of the European populations is largely caused by declining fertility rates, which automatically shifts the age distribution of the population. However, the above challenges are also affected in a major way by the gradual prolonging of life-spans and by the incidence of morbidity during life. Senescence affects the expenditure side (for health care in particular), as well as the revenue side (through productivity). The LEPAS project provides a framework for analysing the economic consequences of aging based on solid natural science foundations. As a result, it creates a far better basis for economic analysis of aging, and thus provides a much firmer foundation for the development of policy advice geared towards providing a steady stream of public goods to the European population.

List of Websites:
http://www.lepas-fp7.de

Partner 1: Gottfried Wilhelm Leibniz Universität Hannover (LUH)
Partner 2: University of Copenhagen (UCPH)
Partner 3: Universidad de Alicante (UA)
Partner 4: Vienna Institute of Demography (VID)

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