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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Monday, October 27, 2014

New paper from the NBER

Will They Take the Money and Work? An Empirical Analysis of People's Willingness to Delay Claiming Social Security Benefits for a Lump Sum

by Raimond Maurer, Olivia S. Mitchell, Ralph Rogalla, Tatjana Schimetschek - #20614 (AG LS PE)

Abstract:

This paper investigates whether exchanging the Social Security delayed retirement credit (currently paid as an increase in lifetime annuity benefits) for a lump sum would induce later claiming and additional work. We show that people would voluntarily claim about half a year later if the lump sum were paid for claiming any time after the Early Retirement Age, and about two-thirds of a year later if the lump sum were paid only for those claiming after their Full Retirement Age. Overall, people will work one-third to one-half of the additional months, compared to the status quo. Those who would currently claim at the youngest ages are likely to be most responsive to the offer of a lump sum benefit.

http://papers.nber.org/papers/W20614?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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Friday, October 24, 2014

CRFB: Social Security Getting Harder to Fix

The Committee for a Responsible Federal Budget blogs that the tax of fixing Social Security solvency is getting tougher:

A hypothetical solution that would have closed the shortfall last year now only closes about 95 percent of the shortfall. Previously, a 2.9 percentage point tax increase (raising the combined payroll tax from 12.4% to 15.3%) would be enough to solve the shortfall. Now, that increase would need to be 3.1 percent. Similarly, a 17.5 percent reduction in all benefits would have addressed the shortfall last year, but it would need to be 18.4 percent this year. Furthermore, these options assume the changes are made immediately. Waiting 20 years requires changes to be 50 percent larger.

Check out their full blog here.

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New papers from the Social Science Research Network

"The Retention Effects of High Years of Service Cliff-Vesting Pension Plans"

JESSE M. CUNHA, Naval Postgraduate School, Naval Postgraduate School
Email: jcunha@nps.edu
AMILCAR ARMANDO MENICHINI, Naval Postgraduate School
Email: aamenich@nps.edu
ADAM CROCKETT, University of New South Wales (UNSW) - Australian Defence Force Academy
Email: adam.j.crockett@gmail.com

We study the retention effects of the Australian military’s decision to remove a 20-year cliff-vesting requirement from their retirement system in 1991. We follow to the present individuals who self-selected into and out of the 20-year cliff-vesting plan, as well as those who were forced out of the plan. Eliminating the high years of service cliff-vesting provision leads to consistently higher attrition over time.

"Early Retirement Across Europe. Does Non-Standard Employment Increase Participation of Older Workers?"
Netspar Discussion Paper No. 10-2014-044

JIM BEEN, Leiden University - Department of Economics, Netspar
Email: j.been@law.leidenuniv.nl
OLAF VAN VLIET, Leiden University - Leiden Law School, Leiden University - Department of Economics
Email: o.p.van.vliet@law.leidenuniv.nl

In many European countries, the labor market participation of older workers is considerably lower than the labor market participation of prime-age workers. This study analyzes the variation in labor market withdrawal of older workers across 13 European countries over the period 1995-2008. We seek to contribute to existing macro-econometric studies by taking non-standard employment into account, by relating the empirical model more explicitly to optional value model theory on retirement decisions and by using a two-step IV-GMM estimator to deal with endogeneity issues. The analysis leads to the conclusion that part-time employment is negatively related to labor market withdrawal of older men. This relationship is less strong among women. Additionally, we find that part-time employment at older ages does not decrease the average actual hours worked. Furthermore, the results show a positive relationship between unemployment among older workers and early retirement similar to previous studies.

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