Monday, December 15, 2014

New papers from the NBER

Does Front-Loading Taxation Increase Savings? Evidence from Roth 401(k) Introductions

by John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian - #20738 (AG)

Abstract:

Can governments increase private savings by taxing savings up front instead of in retirement? Roth 401(k) contributions are not tax-deductible in the contribution year, but withdrawals in retirement are untaxed. The more common before-tax 401(k) contribution is tax-deductible in the contribution year, but both principal and investment earnings are taxed upon withdrawal. Using administrative data from eleven companies that added a Roth contribution option to their existing 401(k) plan between 2006 and 2010, we find no evidence that total 401(k) contribution rates differ between employees hired before versus after the Roth introduction, which means that the amount of retirement consumption being purchased by 401(k) contributions increases after the Roth introduction. A survey experiment suggests two behavioral factors play a role in the unresponsiveness of contribution rates to their tax treatment: (1) employee confusion about or neglect of the tax properties of Roth balances and (2) partition dependence.

http://papers.nber.org/papers/W20738?utm_campaign=ntw&utm_medium=email&utm_source=ntw

4. The Long Reach of Education: Early Retirement by Steven Venti, David A. Wise - #20740 (AG)

Abstract:

The goal of this paper is to draw attention to the long lasting effect of education on economic outcomes. We use the relationship between education and two routes to early retirement - the receipt of Social Security Disability Insurance (DI) and the early claiming of Social Security retirement benefits - to illustrate the long-lasting influence of education. We find that for both men and women with less than a high school degree the median DI participation rate is

6.6 times the participation rate for those with a college degree or more. Similarly, men and women with less than a high school education are over 25 percentage points more likely to claim Social Security benefits early than those with a college degree or more. We focus on four critical "pathways" through which education may indirectly influence early retirement - health, employment, earnings, and the accumulation of assets. We find that for women health is the dominant pathway through which education influences DI participation.

For men, the health, earnings, and wealth pathways are of roughly equal magnitude. For both men and women the principal channel through which education influences early Social Security claiming decisions is the earnings pathway. We also consider the direct effect of education that does not operate through these pathways.

The direct effect of education is much greater for early claiming of Social Security benefits than for DI participation, accounting for 72 percent of the effect of education for men and 67 percent for women.

For women the direct effect of education on DI participation is not statistically significant, suggesting that the total effect may be through the four pathways.

http://papers.nber.org/papers/W20740?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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Friday, December 5, 2014

New papers from the Social Science Research Network

"Individual Account Retirement Plans: An Analysis of the 2013 Survey of Consumer Finances"
EBRI Issue Brief, Number 406 (November 2014)

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

This paper assesses the status of American families’ accumulations in individual account (IA) retirement plans, both through the incidence of ownership and the amounts accumulated, using the Federal Reserve Board’s triennial Survey of Consumer Finances (SCF). Building on previous research by the Employee Benefit Research Institute (EBRI) using prior SCF surveys, this paper investigates the percentage of families who own various types of retirement plans, including IRAs. Next, it provides both median and average estimates of the value of the assets in these accounts, as well as the proportion of total financial assets represented and their relative percentages within the IA retirement plan universe. It then focuses on the value of IRA rollovers as part of the total IRA market, in order to glean a sense of the full contribution that the employment-based, retirement-plan system makes to total retirement assets. The percentage of all families with an employment-based retirement plan from a current employer decreased from 38.8 percent in 1992 to 36.2 percent in 2013. While retirement plan ownership from a current employer among families declined from 2010-2013, the percentage of family heads who were eligible for defined contribution (DC) plans and chose to participate held essentially stable at 78.2 percent in 2010 to 78.7 percent in 2013. The percentage of families owning individual retirement accounts (IRAs) or Keoghs was also unchanged from 2010 (28.0 percent) to 2013 (28.1 percent). Furthermore, the percentage of families with an individual account retirement plan from a current employer or a previous employer or an IRA/Keogh declined from 50.4 percent in 2010 to 48.2 percent in 2013. However, when including defined benefit (pension) retirement plans, the percentage with any retirement plan was unchanged from 63.8 percent in 2010 to 63.5 percent in 2013. While ownership of employment-based plans and IRAs was unchanged to declining in 2013, the median (mid-point) account balance of those families owning an individual account retirement plan increased in 2013: The value was $22,992 in 1992, reached $38,608 in 2001, and increased to $59,000 in 2013. Individual account retirement plan assets were a clear majority of families’ total financial assets (among those owning such plans): 70.3 percent in 2013 at the median, unchanged from 2010. Across all demographic groups in 2013, these assets’ share at the median of total financial assets was at least 49.2 percent (when these accounts were owned). By IRA type, regular IRAs accounted for the largest percentage of IRA ownership, but rollover IRAs had a slightly larger share of assets than regular IRAs in 2013.

"The Gap Between Expected and Actual Retirement: Evidence From Longitudinal Data"
EBRI Notes, Vol. 35, No. 11 (November 2014)

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI)
Email: banerjee@ebri.org

This EBRI paper compares the expected and actual retirement for the same group of workers. It finds a majority (55.2 percent) of these workers retired within three years (before or after) of their expected retirement. Specifically, the longitudinal findings show that 38.0 percent retired before they expected, 48.0 percent retired after they expected, and 14.0 percent retired the year they expected to retire. It also shows that more people (35.9 percent) actually retired after 65 than expected (18.9 percent), and among those who expected to retire after 65, 56.6 percent did so. The study also shows that these longitudinal findings (comparing one cohort at different times) differ from cross-sectional findings (comparing different cohorts at the same time), which are reported more frequently. It shows that in 2012, the expected probability of working full-time after age 65 was 48.7 percent and 46.0 percent, respectively, among men and women working full-time. But only 12.7 percent of men and 6.0 percent of women worked full-time after age 65 in 2012. EBRI also found that people who have a retirement plan tend to retire closer to when they expected, compared with those without a plan. It also found that the gap between expected and actual retirement among those with defined benefit plans and defined contribution plans is generally very small. A large difference exists in later-than-expected retirement between pre- and post-September 2008, when the markets crashed. Pre-September 2008, 83.9 percent retired either earlier or no later than three years after their expected retirement, but only 59.3 percent did so post-September 2008. Clearly, the economic recession delayed the retirement of many people. The EBRI study uses data from the University of Michigan’s Health and Retirement Study (HRS), which is sponsored by the National Institute on Aging, and is the most comprehensive national survey of older Americans.
The PDF for the above title, published in the November 2014 issue of EBRI Notes, also contains the fulltext of another November 2014 EBRI Notes article abstracted on SSRN: “Views on the Value of Voluntary Workplace Benefits: Findings from the 2014 Health and Voluntary Workplace Benefits Survey.”

"Insights from Switzerland's Pension System"
Pension Research Council WP 2014-16

MONIKA BUTLER, University of St. Gallen, CESifo (Center for Economic Studies and Ifo Institute)
Email: Monika.Buetler@unisg.ch

This chapter takes Switzerland's much praised three-pillar system to illustrate some of the challenges pension system reforms face in an aging society. It shows that policymakers are confronted by some individuals with behavioral anomalies, and by others who strategically exploit the system. The trade-off between providing incentives and adequate retirement income limits policy options, especially if reformers do not want to impose too many restrictions on individual choice and avoid excessive burdens for the young generation. Pension reforms can also be seriously challenged by political constraints, in particular, when voters have a direct say on proposed changes.

"Lifetime Job Demands, Work Capacity at Older Ages, and Social Security Benefit Claiming Decisions"
CRR WP 2014-15

LAUREN HERSCH NICHOLAS, University of Michigan at Ann Arbor - Institute for Social Research (ISR)
Email: lnichola@umich.edu

We use Health and Retirement Study data linked to the Department of Labor’s O*Net classification system to examine the relationship between lifetime exposure to occupational demands and retirement behavior. We consistently found that both non-routine cognitive analytic and non-routine physical demands were associated with worse health, earlier labor force exit, and increased use of Social Security Disability Insurance. The growing share of workers in jobs with high levels of cognitive demand may contribute to growth in DI use.

"Are Retirees Falling Short? Reconciling the Conflicting Evidence"
CRR WP 2014-16

ALICIA H. MUNNELL, Boston College - Carroll School of Management
Email: crr4381@bc.edu
MATTHEW S. RUTLEDGE, Boston College
Email: rutledma@umich.edu
ANTHONY WEBB, Boston College - Center for Retirement Research
Email: webbaa@bc.edu

This paper examines conflicting assessments of whether people will have adequate retirement income to maintain their pre-retirement standard of living. The studies that it examines use data from the Survey of Consumer Finances (SCF), the Health and Retirement Study (HRS), and the HRS supplement Consumption and Activities Mail Survey (CAMS). Critical components of the analysis are behavioral assumptions about household consumption patterns when children leave home and when households retire. A key limitation is that the behavioral assumptions in the different studies are based on incomplete knowledge of actual household behavior.
The paper found that:
*A simple – assumption-free – calculation of wealth to income by age clearly indicates that households retiring in the future will be less prepared than those in the past.
*Studies showing that households are saving optimally hinge crucially on assumptions that people are willing to accept declining consumption as they age and that they sharply reduce their consumption when the children leave home.
*While other studies have found consumption does not decline early in retirement, new analysis suggests that many will be unable to maintain this pace over their full retirement.
The policy implications of the findings are:
*Households are more likely than not to be falling short in their retirement preparedness.
*Such shortfalls should be taken into consideration as policymakers discuss options for reforming Social Security.
*To bolster retirement preparedness, policymakers may want to consider ways to encourage more private saving, such as requiring 401(k)s to adopt auto-enrollment and auto-escalation policies and to apply these policies to current workers as well as new hires.

"Causal Effects of Retirement Timing on Subjective Physical and Emotional Health"

ESTEBAN CALVO, Universidad Diego Portales - Facultad de Economía y Empresa - Instituto de Políticas Públicas, Boston College - Sociology Department - Center for Retirement Research
Email: estebancalvo@gmail.com
NATALIA SARKISIAN, Boston College, Department of Sociology
Email: natalia@sarkisian.net
CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration
Email: Chris.Tamborini@ssa.gov

Objective: This article explores the effects of the timing of retirement on subjective physical and emotional health. Using panel data from the Health and Retirement Study (HRS), we test four theory-based hypotheses about these effects — that retirements maximize health when they happen earlier, later, anytime, or on time.
Methods: We employ fixed and random effects regression models with instrumental variables to estimate the short- and long-term causal effects of retirement timing on self-reported health and depressive symptoms.
Results: Early retirements — those occurring prior to traditional and legal retirement age — dampen health.
Discussion: Workers who begin their retirement transition before cultural and institutional timetables experience the worst health outcomes; this finding offers partial support to the psychosocial-materialist approach that emphasizes the benefits of retiring later. Continued employment after traditionally expected retirement age, however, offers no health benefits. In combination, these findings offer some support for the cultural-institutional approach, but suggest that we need to modify our understanding of how cultural-institutional forces operate: Retiring too early can be problematic, but no disadvantages are associated with late retirements. Raising the retirement age, therefore, could potentially reduce subjective health of retirees by expanding the group of those whose retirements would be considered early.

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Thursday, December 4, 2014

New paper from the Social Science Research Network

"Lifetime Job Demands, Work Capacity at Older Ages, and Social Security Benefit Claiming Decisions"
CRR WP 2014-15

LAUREN HERSCH NICHOLAS, University of Michigan at Ann Arbor - Institute for Social Research (ISR)
Email: lnichola@umich.edu

We use Health and Retirement Study data linked to the Department of Labor’s O*Net classification system to examine the relationship between lifetime exposure to occupational demands and retirement behavior. We consistently found that both non-routine cognitive analytic and non-routine physical demands were associated with worse health, earlier labor force exit, and increased use of Social Security Disability Insurance. The growing share of workers in jobs with high levels of cognitive demand may contribute to growth in DI use.

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Wednesday, November 19, 2014

New papers from the Social Science Research Network

"Social Security in an Analytically Tractable Overlapping Generations Model with Aggregate and Idiosyncratic Risk."
Max Planck Institute for Social Law and Social Policy Discussion Paper No. 290-14

DANIEL HARENBERG, Swiss Federal Institute of Technology Zurich - CER-ETH - Center of Economic Research at ETH Zurich
Email: dharenberg@ethz.ch
ALEXANDER LUDWIG, Goethe University Frankfurt - Research Center SAFE, University of Cologne - Faculty of Management, Economics and Social Sciences
Email: ludwig@safe.uni-frankfurt.de

When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations and demonstrate that they interact over the life-cycle. The interactions appear even though the two risks are orthogonal and they amplify the welfare consequences of introducing social security. On the one hand, the interactions increase the welfare benefits from insurance. On the other hand, they can in- or decrease the welfare costs from crowding out of capital formation. This ambiguous effect on crowding out means that the net effect of these two channels is positive, hence the interactions of risks increase the total welfare benefits of social security.

"Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013"
EBRI Issue Brief, No. 405 (October 2014)

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

This paper examines the level of participation by workers in public- and private-sector, employment-based pension or retirement plans, based on the U.S. Census Bureau’s March 2014 Current Population Survey (CPS), the most recent data currently available. It begins with an overview of retirement plan types and participation in these types of plans and describes the data used in this study, along with their relative strengths and weaknesses. From these data, results on participation in employment-based retirement plans are analyzed for 2013 across various worker and employer characteristics. The report then explores retirement plan participation across U.S. geographical regions, including state-by-state comparisons, as well as comparisons by certain consolidated statistical areas (CSAs). In addition, trends from 1987-2013 in employment-based retirement plan participation are presented across many of the same worker and employer characteristics that are used for 2013. Furthermore, an accounting of the number of individuals who worked for employers that did not sponsor a plan and of workers who did not participate in a plan in 2013 is provided by various demographic and employer characteristics. The percentage of workers participating in an employment-based retirement plan increased in 2013, increasing for the first time since 2010 among all workers and private-sector workers. The retirement plan participation level depends on the type of worker being considered: Among all American workers in 2013, 51.3 percent worked for an employer or union that sponsored a retirement plan (the sponsorship rate), while 40.8 percent participated in a plan. Among wage and salary workers ages 21-64, the sponsorship rate increased to 56.0 percent, and the portion participating increased to 45.8 percent. Among full-time, full-year wage and salary workers ages 21-64, the sponsorship rate was 62.3 percent and 54.5 percent of the workers participated in a retirement plan. Almost 74 percent of wage and salary public-sector workers participated in an employment-based retirement plan. Being white or having attained a higher educational level were also associated with higher probabilities of participating in a retirement plan. Of the 67.9 million wage and salary workers who worked for an employer who did not sponsor a plan, 17.9 million (26.4 percent) were ages 25 or younger or 65 or older. Almost 30 million (43.6 percent) were not full-time, full-year workers, and 29.2 million (43.0 percent) had annual earnings of less than $20,000. Furthermore, 39.3 million (57.8 percent) worked for employers with less than 100 employees. Workers at large employers were far more likely to participate than those at smaller firms.

"Distributional Effects of Means Testing Social Security: An Exploratory Analysis"
Michigan Retirement Research Center Working Paper No. 2014-306

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
THOMAS L. STEINMEIER, Texas Tech University - Department of Economics and Geography
Email: thomas.steinmeier@ttu.edu
NAHID TABATABAI, Dartmouth College - Department of Economics
Email: nahid.tabatabai@dartmouth.edu

This paper examines the distributional implications of introducing additional means testing of Social Security benefits where proceeds are used to help balance Social Security’s finances. Benefits of the top quarter of households ranked according to the relevant measure of means are reduced using a modified version of the Social Security Windfall Elimination Provision (WEP). The replacement rate in the first bracket of the benefit formula, determining the Primary Insurance Amount (PIA), would be reduced from 90 percent to 40 percent of Average Indexed Monthly Earnings (AIME).
Four measures of means are considered: total wealth; an annualized measure of AIME; the wealth value of pensions; and a measure of average indexed W2 earnings. The empirical analysis, based on data from the Health and Retirement Study, starts with a baseline benefit for each household, calculated as the product of the average benefit-tax ratio under the current system, multiplied by the taxes paid by the household.
These means tests would reduce total household benefits by 7 to 9 percentage points, amounting to 15.4 to 16.4 percent of the benefits of affected workers at baseline. We find that the basis for means testing Social Security makes a substantial difference as to which households have their benefits reduced, and that different means tests may have different effects on the benefits of families in similar circumstance. We also find that the measure of means used to evaluate the effects of a means test makes a considerable difference as to how one would view the effects of the means test on the distribution of benefits.

"Life-Cycle Consumption, Asset Allocation, and Pension Design Under Non-Standard Preferences"

STEFAN ZIMMERMANN, University of Vienna - Faculty of Business, Economics, and Statistics
Email: stefan.zimmermann.sz@gmail.com

This paper uses a behavioral life-cycle model to analyze different pension schemes when people display non-standard consumption preferences and income-heterogeneity. Retirement resources depend on public pension benefits and individual savings accumulated over working life. Individual savings crucially depend on the choice between low-risk and high-risk assets, because there is a sizable return gap. Mainstream economic models do not adequately capture peoples’ life-cycle asset allocation patterns, that is, their investment in safe and risky assets. The proposed model makes a better prediction. I investigate whether a transition towards a funded pension scheme is desirable, and whether different income classes could benefit from different pension schemes. The rationale is that a non-funded pension component provides better downward risk protection for the low-income earners, whereas a funded pension component is more appealing to rent-seeking, high-income earners. Simulation results reveal that a funded pension scheme is most promising for all income classes — considering reasonable demographic and financial market projections for Germany.

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Thursday, October 30, 2014

Wednesday, October 29, 2014

Upcoming event: “AARP - Better Financial Security in Old-Age? The Promise of Longevity Annuities”

Public Policy Economic Security Update

AARP Public Policy Institute

 

About PPI

More PPI Research

Join the Discussion
Better Financial Security in Old-Age?
The Promise of Longevity Annuities

November 6, 2014
10:00 AM - 12:00 PM EST
The Brookings Institution
Washington, DC

David John, Deputy Director of the Retirement Security Project and senior advisor at the AARP Public Policy Institute, is one of the featured speakers at the event described below.

Better Financial Security in Old-Age? The Promise of Longevity Annuities

Longevity annuities-a financial innovation that provides protection against outliving your money late in life-have the potential to reshape the retirement security landscape. Typically bought at retirement, a longevity annuity offers a guaranteed stream of income beginning in ten or 20 years at a markedly lower cost than a conventional annuity that begins paying out immediately.

Sales have grown rapidly and it will be even easier to purchase the annuities in the future given new Treasury regulations. While economists have touted the attractiveness of longevity annuities as a way to ensure the ability to maintain one's living standards late in life, significant barriers to a robust market remain-including lack of consumer awareness, questions about product value, and employer concerns with taking on fiduciary responsibility by offering these products to their employees.

Can longevity annuities overcome these barriers to find widespread popularity among Americans retirees? On November 6, the Retirement Security Project will host a panel of experts to discuss the potential for these products to contribute to the economic security of older Americans.  Speakers include William Gale, David John, Henry J. Aaron, David Wessel, Benjamin Harris, Mark Iwry and more.

Register to Attend

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New paper: “Injecting Work Incentives into the Social Security Disability Program”

 

Summary from the NCPA Policy Digest:

In 2013, the Social Security Disability Insurance (SSDI) program spent $143 billion while taking in just $111 billion. That shortfall, explains Jagadeesh Gokhale, economist for the Cato Institute, will only continue, and the SSDI Trust Fund is projected to run out of money entirely in 2016.

In addition to being insolvent, Gokhale explains that the SSDI program -- intended to provide a safety net for individuals unable to work -- is full of work disincentives. Many individuals enrolled in the program are actually able to work, at least to some degree, but they choose not to for fear of losing SSDI benefits.

Gokhale explains that some individuals move into the SSDI program after exhausting unemployment benefits. Indeed, various research indicates that there are a number of SSDI enrollees with work capabilities:

  • A study comparing identical SSDI applicants -- some of whom were admitted to the program while the rest were rejected from the program -- found that many rejected applicants returned to  the work force, indicating that over 25 percent of current SSDI beneficiaries actually have work capacity.
  • Another study found the likelihood of a rejected SSDI applicant returning to work to be 35 percent.

If a substantial number of SSDI enrollees actually have work capabilities, shouldn't they be encouraged to exercise those capabilities and reenter the work force? Gokhale suggests a new benefit structure in order to induce enrollees to work rather than remain in SSDI, outside of the labor force, for fear of losing benefits. His plan would:

  • Use a "benefit offset" that would reduce an enrollee's SSDI benefits if he enters the workforce but would provide an additional subsidy -- from a non-SSDI source -- based on his earnings.
  • That subsidy would increase as his earnings increase, in order to encourage, rather than discourage, additional work.

In short, Gokhale describes his plan as one that would pay capable individuals to work rather than pay them to remain idle. While there are many SSDI enrollees who appear to have some level of work capability, they choose not to enter the labor force. By creating an incentive structure that only improves with work activity, Gokhale suggests more SSDI beneficiaries would return to work and seek employment.

Source: Jagadeesh Gokhale, "SSDI Reform: Promoting Gainful Employment while Preserving Economic Security," Cato Institute, October 22, 2014.

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