Health and labor market uncertainty over the lifecycle: The impact on households’ risk capacity and retirement income adequacy
Under the new pension agreement, pension providers must assess appropriate levels of investment risk for different age groups, depending on their ability to bear risks (risk capacity) in addition to risk preferences. Standard lifecycle investment profiles, where risk reduces as individuals grow older, assume a constant labor income. These profiles do not consider substantial differences in labor market uncertainty at different parts of the income distribution. For instance, some households are much more exposed to long-lasting unemployment or work disability than others.
Against this background, to determine risk capacity, this project aims to accurately measure labor market uncertainty over the lifecycle for different groups (gender, position in the income distribution, and sector), with a particular focus on health as a source of uncertainty, and to understand its impact on optimal investment profiles, and retirement income adequacy. We use unique individual-level data from Statistics Netherlands available for scientific research, including tax records on income and wealth (incl. housing), payroll (polis) administration on hours worked and sector, and health records. We link these data to determinants of health in the Lifelines cohort study.
Our project is a continuation of the Netspar theme project ‘Uncertainty over the lifecycle: implications for pensions and savings behavior.‘ It complements the topicality project ‘Dynamics of risk attitudes‘ that focuses on risk preferences. In contrast, our project is about risk capacity. It extends the topicality project ‘Measuring risk capacity‘ by allowing for labor market uncertainty and considering different sectors using administrative data on the entire population.