Friday, October 2, 2015

New papers from the Social Science Research Network

"What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Account Balances, 2007-2013"
EBRI Issue Brief, Number 418 (September 2015)

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)
SARAH HOLDEN, Investment Company Institute
LUIS ALONSO, Employee Benefit Research Institute (EBRI)
STEVEN BASS, Investment Company Institute

This paper analyzes changes in 401(k) account balances of consistent participants in the EBRI/ICI 401(k) database over the six-year period from year-end 2007 to year-end 2013. Two major insights emerge from looking at consistent participants in the EBRI/ICI 401(k) database over this six-year time period: The average 401(k) account balance fell 25.8 percent in 2008, and then rose from 2009 through year-end 2013. Overall, the average account balance increased at a compound annual average growth rate of 10.9 percent from 2007 to 2013, to $148,399 at year-end 2013. The median (midpoint) 401(k) account balance increased at a compound annual average growth rate of 15.8 percent over the period, to $75,359 at year-end 2013. At year-end 2013, the average account balance among consistent participants was more than twice the average account balance among all participants in the EBRI/ICI 401(k) database. The consistent group’s median balance was more than four times the median balance across all participants at year-end 2013. Three primary factors affect account balances: contributions, investment returns, and withdrawal/loan activity. The percentage change in average account balance of participants in their 20s was heavily influenced by the relative size of their contributions to their account balances and increased at a compound average growth rate of 46.6 percent per year between year-end 2007 and year-end 2013. The asset allocation of the 4.2 million 401(k) plan participants in the consistent group was broadly similar to the asset allocation of the 26.4 million participants in the entire year-end 2013 EBRI/ICI 401(k) database. On average at year-end 2013, about two-thirds of 401(k) participants’ assets were invested in equities, either through equity funds, the equity portion of target-date funds, the equity portion of non-target-date balanced funds, or company stock. Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants. Equity holdings by consistent 401(k) participants increased slightly among younger participants and decreased slightly for older participants. High allocations to equities dropped for both groups from 2007 to 2013. More consistent 401(k) plan participants held target-date funds at year-end 2013 than at year-end 2007, on net; many of those with target-date funds held all of their 401(k) account in target-date funds.

"How Much Longer Do People Need to Work?"

ALICIA H. MUNNELL, Boston College - Center for Retirement Research
ANTHONY WEBB, Boston College - Center for Retirement Research
ANQI CHEN, Center for Retirement Research at Boston College

Working longer is a powerful lever to enhance retirement security. Individuals should be able to extend the number of years they work because, on average, they are healthier, live longer, and face less physically demanding jobs. But averages are misleading when discrepancies in health, job prospects, and life expectancy have widened between individuals with low and high socioeconomic status (SES). To understand the magnitude of the problem, this paper, using data from the Health and Retirement Study, specifies how much longer households in each SES quartile would need to work to maintain their pre-retirement standard of living and compares those optimal retirement ages with their planned retirement ages to calculate a retirement gap. It then uses regression analysis to explore whether the gap reflects poor circumstances or poor planning – that is, the extent to which the retirement gap results from health, employment, and marital shocks that occur before the HRS interview but too late for the household to adjust saving (between ages 50 and 58), as opposed to a gap resulting from inadequate foresight. The analysis shows that households in lower-SES quartiles have larger retirement gaps, and this pattern remains true even after controlling for late-career shocks. In short, the most vulnerable have the largest retirement gaps, and these gaps arise from poor planning rather than late-career shocks.

"Pension Management between Financial Market Development and Intergenerational Solidarity: A Socio-Economic Analysis and a Comprehensive Model"
EGPA 2015 Annual Conference, Toulouse, 26-28 August 2015

YURI BIONDI, French National Center for Scientific Research (CNRS)
MARION BOISSEAU, Université Paris Dauphine

In recent decades, management modes for pension obligations has been coevolving with political and financial economic strategies aimed to prompt and promote active financial markets and institutional investors, as well as transnational harmonisation and convergence of accounting standards between private and public sectors. In this context, our article provides a theoretical analysis of these management modes for pension obligations, drawing upon a comprehensive review of existing practice and regulation. The latter are still inconsistent with the actuarial representation that has been fostered by international institutions, including the World Bank, the European Commission and the International Public Sector Accounting Standards (IPSAS) Board. According to our frame of analysis, a variety of viable modes of pension management exists and may be acknowledged. Our article elaborates a model of pension management in view to clarify and improve on pension protection, that is, the assurance of continued provision of pension payments at their agreed levels under viable alternative modes of pension management. Drawing upon this model, we further develop policy recommendations for accounting and prudential regulations concerned with pension obligations.

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Monday, September 28, 2015

New paper from the NBER: “The Cost of Uncertainty about the Timing of Social Security Reform”

The Cost of Uncertainty about the Timing of Social Security Reform by Frank N. Caliendo, Aspen Gorry, Sita Slavov - #21585 (AG PE)


We develop a model to study optimal decision making in the face of uncertainty about the timing and structure of a future event. The model is used to study optimal decision making and welfare when individuals face uncertainty about when and how Social Security will be reformed. When individuals save optimally for retirement, the welfare cost of uncertainty about the timing and structure of reform is just a few basis points of total lifetime consumption. In contrast, the cost of reform uncertainty can be greater than 1% of total lifetime consumption for individuals who do not save.

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Friday, September 25, 2015

New paper: “How Has Shift to Defined Contribution Plans Affected Saving?”

The Center for Retirement Research at Boston College has released a new Issue in Brief:

“How Has Shift to Defined Contribution Plans Affected Saving?”

by Alicia H. Munnell, Jean-Pierre Aubry, and Caroline V. Crawford

The brief’s key findings are:

  • Many believe that people are saving less for retirement due to the shift from defined benefit (DB) to defined contribution (DC) plans.
  • The analysis uses National Income and Product Accounts data, with adjustments, to compare DB benefit accruals with DC contributions from 1984-2012.
  • The results show that the percentage of total salaries going to retirement saving has declined slightly during this period.
  • But if returns on asset accumulations are included, the annual change in pension wealth is relatively steady, so the shift to DC plans has not led to less total saving.
  • What has changed is that individuals, rather than plan sponsors, now bear all of the risk.

This brief is available here



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2015 Technical Panel Report Released

The 2015 Technical Panel on Assumptions and Methods, which was appointed by the Social Security Advisory Board, has released its report. The report covers a range of issues, both in terms of assumptions and methods and how the results of the Trustees and SSA actuaries’ calculations should be presented to the public. However, the table below summarizes the results of the main assumption changes the panel recommended to the Social Security Trustees. If all were adopted, Social Security’s long-term funding shortfall would rise from 2.68% of taxable payroll to 3.42%.


Click here to access the report.

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Tuesday, September 15, 2015

New paper: “Social Security Disability Insurance Program Is Financially Unsustainable”

Social Security Disability Insurance Program Is Financially Unsustainable

Veronique de Rugy | Sep 02, 2015

“The 2015 annual report from the Social Security Board of Trustees shows that the program’s disability component is in immediate trouble. Data from the latest report show that the disability fund will be depleted as soon as next year and unable to pay full benefits to beneficiaries.”

Click here to read the whole paper.

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New paper: “The Financial Feasibility of Delaying Social Security: Evidence from Administrative Tax Data”

The Financial Feasibility of Delaying Social Security: Evidence from Administrative Tax Data

Gopi Shah Goda, Shanthi Ramnath, John B. Shoven, Sita Nataraj Slavov

NBER Working Paper No. 21544
Issued in September 2015
NBER Program(s):   AG PE

Despite the large and growing returns to deferring Social Security benefits, most individuals claim Social Security before the full retirement age, currently age 66. In this paper, we use a panel of administrative tax data on likely primary earners to explore some potential hypotheses of why individuals fail to delay claiming Social Security, including liquidity constraints and private information regarding one’s expected future lifetime.

We find that approximately 31-34% of beneficiaries who claim prior to the full retirement age have assets in Individual Retirement Accounts (IRAs) that would fund at least 2 additional years of Social Security benefits, and 24-26% could fund at least 4 years of Social Security deferral with IRA assets alone. Our analysis suggests that these percentages would be considerably higher if other assets were taken into account. We find evidence that those who claim prior to the full retirement age have higher subjective and actual mortality rates than those who claim later, suggesting that private information about expected future lifetimes may influence claiming behavior.

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Friday, September 11, 2015

New papers from the Social Science Research Network

"Defaulting Retirement Distributions Out of Defined-Contribution Plans: A Role for Managed-Payout Target-Date Portfolios"


Default features in defined-contribution plans are designed to improve the retirement security of plan participants. To date, these have focused on the challenge of saving, ignoring the more complex challenge of dissaving. Automatic default provisions for drawing down participant account balances after retirement could be beneficial. Conceptually, the objective is to reframe the Zeitgeist of defined-contribution plans from that of savings plans closer to that of income continuation plans with pension-like features. This could be accommodated though a managed payout feature designed into the plan’s default investment strategy.

"Employee Financial Literacy and Retirement Plan Behavior: A Case Study"

ROBERT L. CLARK, North Carolina State University - Poole College of Management
ANNAMARIA LUSARDI, George Washington University - Department of Accountancy, National Bureau of Economic Research (NBER)
OLIVIA S. MITCHELL, University of Pennsylvania - The Wharton School, National Bureau of Economic Research (NBER)

This paper uses administrative data on all active employees of the Federal Reserve System to examine participation in and contributions to the Thrift Saving Plan, the system’s defined contribution (DC) plan. We have appended to the administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, Federal Reserve employees are more financially literate than the general population; furthermore, the most financially savvy are also most likely to participate in and contribute the most to their plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. Finally, we examine changes in employee plan behavior a year after the financial literacy survey and compare it to the baseline. We find that employees who completed an educational module were more likely to start contributing and less likely to have stopped contributing to the DC plan post-survey.

"The Intergenerational Welfare State and the Rise and Fall of Pay-as-You-Go Pensions"

TORBEN M. ANDERSEN, University of Aarhus - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute), Centre for Economic Policy Research (CEPR), Institute for the Study of Labor (IZA)
JOYDEEP BHATTACHARYA, Iowa State University - Department of Economics

This paper develops a theory of the two-armed intergenerational welfare state, consistent with key features of modern welfare arrangements, and uses it to rationalise the rise and fall in generosity of pay-as-you-go pensions solely on efficiency grounds. By using the education arm, a dynamically-efficient welfare state is shown to improve upon long-run laissez faire even when market failures are absent. To release these downstream welfare gains without hurting any transitional generation, help from the pension arm is needed. In the presence of an intergenerational education externality, pensions initially rise in generosity but can be replaced by fully funded pensions eventually.

"Does Financial Sophistication Matter in Retirement Preparedness?"
Journal of Personal Finance, 14 (2), 9-20, 2015

KYOUNGTAE KIM, University of Alabama - Department of Consumer Sciences
SHERMAN D. HANNA, Ohio State University (OSU)

Lack of financial sophistication has been suggested as a cause of retirement plan failure. We extend previous studies of retirement adequacy by testing the effect of financial sophistication proxies on projected retirement adequacy, using the 2010 Survey of Consumer Finances (SCF) dataset. We found that only 44% of households with a fulltime head aged 35 to 60 are adequately prepared for retirement in 2010, compared to 58% in 2007. Our multivariate analysis shows that college educated households are more likely to have an adequate retirement than those with less than a high school degree. Households using a financial planner are more likely to have an adequate retirement than those that do not use one.

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