The Michigan Retirement Research Center Working Papers has released three new working papers. ************************************************************ Gain and Loss: Marriage and Wealth Changes Over Time by Julie Zissimopoulos Abstract: Family composition has changed dramatically over the past 25 years. Divorce rates increased and remarriage rates declined. While considerable research established a link between marriage and earnings, far less is empirically understood about the effect of marriage on wealth although wealth is an important measure for older individuals because it represents resources available for consumption in retirement. In this paper we employ eight waves of panel data from the Health and Retirement Study to study the relationship between wealth changes and marital status among individuals over age 50. This research advances understanding of the relationship by first, incorporating measures of current and lifetime earnings, mortality risk and other characteristics that vary by marital status into models of wealth change; second, measuring the magnitude of wealth loss and gain associated with divorce, widowing and remarriage and third, estimating wealth change before and after marital status change so the change in wealth change is not the result of individuals entering or leaving the household and other sources of unobserved differences are removed from estimates of the effect of marriage on wealth. Our results suggest no differences in wealth change over time among individuals that remain married, divorced, widowed, never married and partnered over 7 years. In the short-run there are substantial wealth changes associated with marital status changes. Divorce at older ages is costly, remarriage is wealth enhancing and people appear to change their savings in response to changes in marital status. Key Findings: * Married people over age 50 save more out of their lifetime earnings than remarried, divorced, widowed or partnered individuals. * Changes in wealth at older ages is similar for married couples and single men who do not change marital status, but divorced and widowed women save less. * Individuals who divorce experience a loss of wealth two to four years before the divorce and during the divorce, and wealth recovery from increased savings after divorce. * Divorced individuals that remarry accumulate wealth at higher rates than those who remain divorced. View/Download Working Paper (PDF): http://www.mrrc.isr.umich.edu/dl.cfm?pid=651&type=102 -------------------------------------------------------------------------------- What Replace Rates Should Households Use? by John Karl Scholz and Ananth Seshadri Abstract: Common financial planning advice calls for households to ensure that retirement income exceeds 70 percent of average pre-retirement income. We use an augmented life-cycle model of household behavior to examine optimal replacement rates for a representative set of retired American households. We relate optimal replacement rates to observable household characteristics and in doing so, make progress in developing a set of theory-based, but readily understandable financial guidelines. Our work should be a useful building block for efforts to assess the adequacy of retirement wealth preparation and efforts to promote financial literacy and well-being. Key Findings: * Common financial planning advice calls for households to ensure that retirement income fall between 70 and 85 percent of pre-retirement income in order to maintain pre-retirement living standards. * However, the common rules of thumb do not consider important factors that impact lifetime earnings and consumption, such as marital status, level of education, race, and number of children. * We find that 48 percent of married couples have an optimal replacement rate of less than 65 percent of pre-retirement income. View/Download Working Paper (PDF): http://www.mrrc.isr.umich.edu/dl.cfm?pid=652&type=102 -------------------------------------------------------------------------------- Proximity and Coresidence of Adult Children and their Parents: Description and Correlates by Janice Compton and Robert A. Pollak Abstract: The ability of family members to engage in intergenerational transfers of hands-on care requires close proximity or coresidence. In this paper we describe and analyze the patterns of proximity and coresidence involving adult children and their mothers using data from the National Survey of Families and Households (NSFH) and the U.S. Census. Although intergenerational coresidence has been declining in the United States, most Americans live within 25 miles of their mothers. In both the raw data and in regression analyses, the most robust predictor of proximity of adult children to their mothers is education. Individuals are less likely to live near their mothers if they have a college degree. Virtually all previous studies have considered coresidence alone, or else treat coresidence as a limiting case of close proximity. We show that this treatment is misleading. We find substantial differences in the correlates of proximity by gender and marital status, indicating the need to model these categories separately. Other demographic variables such as age, race and ethnicity also affect the probability of coresidence and close proximity, but characteristics indicating a current need for transfers (e.g., disability) are not correlated with close proximity. Key Findings: * While intergenerational coresidence has been declining in the United States, most Americans live within 25 miles of their mothers. * Individuals are less likely to live near their mothers if they have a college degree. * Adult children are more likely to live with their mother when the mother is older, in poor health, and unmarried. * Compared to whites, black Americans are more likely to live near and to live with their mothers, while Hispanic Americans are no more likely to live close to their mothers, but are twice as likely to live with their mothers. View/Download Working Paper (PDF):
Tuesday, November 24, 2009
New working papers from the Michigan Retirement Research Center
Monday, November 23, 2009
First we raid Social Security, then we raid Medicare…
I argued in this piece for AEI's The American online magazine that the health reform bill proposed by Sen. Max Baucus would reduce the 10-year budget deficit only through an accounting trick by which increased Social Security taxes – which should, you know, be saved for Social Security – would be counted against the cost of the plan's increased health coverage. But it seems that no entitlement is left un-raided: the legislation put forward by Senate Majority Leader Reid, which contains the raid on the Social Security trust fund, would also impose some accounting tomfoolery on Medicare. It's well-known by now that Reid's plan would increase the Medicare payroll tax to help offset the costs of the plan. What I didn't know, though, is that these new taxes would first be laundered through the Medicare trust fund, creating an entirely fictitious improvement in Medicare's financial health. The new taxes are credited to the Medicare trust fund, created an entitlement to new revenues from the rest of the budget. But the actual revenues will immediately be used to cover non-Medicare health costs. Looks like double-counting to me. The folks over at e21 explain.
Wednesday, November 18, 2009
AEI event presentations/video available online
Keeping Granny on the Job: Pension Reform and Labor Force Participation in the United States and Chile In an era of increased life expectancies and underfunded pensions, longer work lives may be the best way to increase retirement income security. But what incentives does Social Security present to Americans thinking of working longer? What could reform do to encourage longer work lives? At this AEI conference, AEI resident scholar Andrew G. Biggs will discuss research on Social Security's incentives to delay retirement, while Estelle James, a pension consultant and former World Bank economist, will present findings on how Chile's 1980 pension reform affected labor force participation by seniors. Jagadeesh Gokhale of the Cato Institute will comment.
Sunday, November 15, 2009
New working papers from the Center for Retirement Research
The Center for Retirement Research at Boston College has released a number of new working papers: Work Ability and the Social Insurance Safety Net in the Years Prior to Retirement Dutch Pension Funds in Underfunding: Solving Generational Dilemmas Fees and Trading Costs of Equity Mutual Funds in 401(k) Plans and Potential Savings from ETFs and Commingled Trusts An Update on 401(k) Plans: Insights from the 2007 Survey of Consumer Finances Insult to Injury: Disability, Earnings, and Divorce Medicare Part D and the Financial Protection of the Elderly The Role of Information for Retirement Behavior: Evidence Based on the Stepwise Introduction of the Social Security Statement Social Security and the Joint Trends in Labor Supply and Benefits Receipt Among Older Men The Wealth of Older Americans and the Sub-Prime Debacle The Asset and Income Profile of Residents in Seniors Care Communities Pension Buyouts: What Can We Learn from The UK Experience? What Drives Health Care Spending? Can We Know Whether Population Aging Is A 'Red Herring'?
by Richard W. Johnson, Melissa M. Favreault, and Corina Mommaerts
by Niels Kortleve and Eduard Ponds
by Richard W. Kopcke, Francis M. Vitagliano, and Zhenya S. Karamcheva
by Alicia H. Munnell, Richard W. Kopcke, Francesca Golub-Sass, and Dan Muldoon
by Perry Singleton
by Gary V. Engelhardt and Jonathan Gruber
by Giovanni Mastrobuoni
by Bo MacInnis
by Barry Bosworth and Rosanna Smart
by Norma B. Coe and Melissa Boyle
by Ashby H.B. Monk
by Henry J. Aaron
Friday, November 13, 2009
How well prepared are Americans for retirement
I have a guest-post over at Baseline Scenario blog.
Thursday, November 12, 2009
New working papers from MRRC
The Michigan Retirement Research Center released three new working papers: Investor Behavior and Fund Performance under a Privatized Retirement Accounts System: Evidence from Chile by Elena Krasnokutskaya and Petra Todd Abstract: In the U.S. and in Chile, there have been heated debates about the relative merits of a decentralized privatized pension system relative to a more traditional social security system. On the firm side, there are concerns that pension funds engage in anticompetitive behavior and take advantage of consumers' by charging high fees and account maintenance changes. On the consumer side, there are concerns that consumers do not select wisely among funds and take on too much risk. Any pension system with insurance features to protect against low levels of pension accumulations is potentially subject to moral hazard problems, in the form of consumers' taking on too much risk. In the case of Chile, the government provides a minimum pension benefit to those with low pension accumulations, which can make some consumers more willing to take risks. For these reasons, the Chilean government introduced regulations on pension fund firms' investments designed to limit risk. This paper analyzes the determinants of consumers' choices of pension fund and of pension fund characteristics (performance and fees), taking into account governmental regulations. In particular, it estimates a demand and supply model of the pension fund investment market using a longitudinal household dataset gathered in 2002 and 2004 in Chile, administrative data on fund choices, and longitudinal data on cost determinants of pension funds. We find that the existing regulation actually increases the level of risk in the market, reduces heterogeneity across firms, and reduces incentives for consumers to participate in the pension fund program. We suggest alternative more effective forms of regulation. Key Findings: * Low participation in the Chilean pension system, which is mandatory only for full-time workers in the formal sector, is due in part to the large informal sector of the economy. * Regulation requiring that pension fund administrators deliver a return within 2% of the industry average encourages more risk taking than if portfolio risk were regulated. * Fewer people also participate in the pension plan because of the risk taking by pension firms. * Older and younger individuals are more averse to risk. * The market is efficiently served by more than one firm. Social Security Literacy and Retirement Well-Being by Hugo A. BenÃtez-Silva, Berna Demiralp and Zhen Liu Abstract: We build upon the growing literature on financial literacy, which studies the prevalence of lack of knowledge about various financial issues, and analyze how much people know about the Social Security rules using a small pilot survey conducted in 2007, and a follow-up and extended survey funded by MRRC conducted in December of 2008. We then assess the consequences of the apparent prevalence of lack of information by individuals about the rules governing the Social Security system using a realistic and empirically-based life-cycle model of retirement behavior under uncertainty. We investigate the individual's retirement and savings decisions under incomplete information and unawareness, in which a portion of the population does not know some or all of the rules of the system. We compare the outcomes in these cases to the outcome under full information, computing the welfare gain resulting from the acquisition of information regarding the Social Security system. Our analysis can illuminate the need for policies that foster knowledge of the system, which can improve welfare, and can result in better policy outcomes. Key Findings: * Lack of basic knowledge about rules for obtaining Social Security benefits is widespread. * Younger people are less informed than older people, however, only 70% of individuals aged 55 to 64 are aware of the minimum retirement age. * Individuals who are reinterviewed show a large increase in knowledge about Social Security. * The benefits of being fully informed about Social Security vary by age. * Awareness could be increased by targeting messages pertinent to individuals based on their age or income level. The Displacement Effect of Public Pensions on the Accumulation of Financial Assets by Michael Hurd, Pierre-Carl Michaud and Susann Rohwedder Abstract: The generosity of public pensions may depress private savings and provide incentives to retire early. While there is plenty of evidence supporting the latter effect, there remains considerable controversy as whether or not public pensions crowd out private savings. This paper uses international micro-datasets collected over recent years to investigate whether public pensions displace private savings. The identification strategy relies on differences in the progressivity or non-linearity of pension formulas across countries. We also make use of large heterogeneity in earnings across education group and country. The evidence we present is consistent with previous studies using cross-sectional and time-series variation in savings and pensions. We estimate that an extra dollar of pension wealth depresses accumulated financial assets at the time of retirement by 23 to 44 cents and that an extra ten thousand dollars in pension wealth reduces the average retirement age by roughly 1 month. Key Findings: * The generosity of public pension systems affects both private saving rates and the timing of retirement. * Our study of 12 countries shows that generous public pensions depress lifetime asset accumulation. * For every dollar of pension wealth, financial assets are reduced by 23 to 44 cents. * Higher public pension levels also induce earlier retirement. * Retirement comes one month earlier for every $10,000 of pension wealth.
Do seniors deserve that extra $250?
David Francis of the Christian Science Monitor To seriously answer this question, I'd think you'd have to ask:
says yes.
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