Monday, April 21, 2014

New papers from the NBER

Bequests and Heterogeneity in Retirement Wealth,” by Mariacristina De Nardi, Fang Yang - #20058 (EFG PE)


Households hold vastly heterogenous amounts of wealth when they reach retirement, and differences in lifetime earnings explain only part of this variation. This paper studies the role of intergenerational transmission of ability, voluntary bequest motives, and the recipiency of accidental and intended bequests (both in terms of timing and size), in generating wealth dispersion at retirement, in the context of a rich quantitative model. Modeling voluntary bequests, and realistically calibrating them, not only generates more wealth dispersion at retirement and reduces the correlation between retirement wealth and lifetime income, but also generates a skewed bequest distribution that is close to the one in the observed data.

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Thursday, April 17, 2014

Upcoming event: American Academy of Actuaries, “Measuring for Success.”


News from the American Academy of Actuaries

Orange bullet FORUM

Invitation—Retirement for the AGES: Measuring for Success



Forum—Retirement for the AGES: Measuring for Success


April 28, 2014
9:30 A.M.–4:30 P.M. Eastern
Breakfast and Lunch provided


Ronald Reagan International Trade Center


Click here to register


The American Academy of Actuaries cordially invites you to a forum, Retirement for the AGES: Measuring for Success, on April 28 at the Ronald Reagan International Trade Center Pavilion in Washington. The forum, sponsored by the Academy’s Pension Practice Council, will bring together retirement community leaders, policymakers, and other stakeholders for a discussion and application of the AGES framework, and how closely certain plans and proposals adhere to the four AGES principles (Alignment, Governance, Efficiency, and Sustainability) that were outlined in the Academy monograph.

Attendees will have an opportunity to observe stakeholder panel discussions and engage with panelists for a lively discussion. Breakfast and lunch will be provided. Click here to view the agenda.

April 28, 2014
9:30 A.M.–4:30 P.M. Eastern

Registration begins at 8:30 A.M.
Breakfast and Lunch will be Served.
Click Here for More Information and to Register

Ronald Reagan International Trade Center

All are encouraged to attend. Space is limited, so please RSVP by Friday April 25, 2014.

For more information about this forum, please contact Kyla Ruiz at or 202-223-8196.

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Friday, April 11, 2014

New papers from the Social Science Research Network

"How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey"
EBRI Notes, Vol. 35, No. 3 (March 2014)

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)

In May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Since the concept of lifetime income illustrations on 401(k) statements is a relatively new innovation, little empirical evidence exists regarding how plan participants would respond. To find out, the Employee Benefit Research Institute’s new 2014 Retirement Confidence Survey (RCS) included a series of questions concerning monthly income illustrations similar in many respects to those provided by the EBSA’s online Lifetime Income Calculator. This paper presents an analysis of these survey results, which indicated that the vast majority of respondents (for this analysis, only workers who were currently contributing to an employer plan were included) found the information useful; more than 1 in 3 (36 percent) of the respondents thought that it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49 percent thought it was somewhat useful. More than half (58 percent) thought the estimated monthly income was in line with their expectations. Perhaps because of that, relatively few (only 17 percent of the respondents) said they would increase their retirement savings contributions as a result of hearing the monthly income estimate. However, of those responding that their illustrated value was much less or somewhat less than expected, more than a third (35 percent) indicated they would increase their contributions. It is, of course, possible that these respondents’ current participation in employment-based plans has already provided them the education and information necessary for an appreciation both of the projected total and the monthly income estimate, and thus a greater alignment of those projections with their expectations.
The PDF for the above title, published in the March 2014 issue of EBRI Notes, also contains the fulltext of another March 2014 EBRI Notes article abstracted on SSRN: "Brand-Name and Generic Prescription Drug Use After Adoption of a Full-Replacement, Consumer-Directed Health Plan With a Health Savings Account."

"Measuring Adequacy of Retirement Savings"
Melbourne Institute Working Paper No. 5/14

JOHN BURNETT, Towers Watson
KEVIN THOMAS DAVIS, University of Melbourne - Department of Finance, Financial Research Network (FIRN)
CARSTEN MURAWSKI, University of Melbourne - Department of Finance, Financial Research Network (FIRN)
ROGER WILKINS, University of Melbourne - Melbourne Institute of Applied Economic and Social Research

This article introduces four metrics quantifying the adequacy of retirement savings taking into account all major sources of retirement income. The metrics are applied to a representative sample of the Australian population aged 40 and above. Employers in Australia currently make compulsory contributions of 9.25 percent of wages and salaries to tax-advantaged defined-contribution employee retirement savings accounts. Our analysis reveals that compulsory retirement savings, even when supplemented by the means-tested government pension and private wealth accumulation, are not in general sufficient to fund a comfortable lifestyle during retirement. We further find that omitting one or more 'pillars' of saving will significantly bias estimates of retirement savings adequacy. Our analysis also points to several shortcomings of the widely-used income replacement ratio as an indicator of savings adequacy.

"Time-Inconsistent Preferences and the Mandatory Saving Role of Social Security"

T. SCOTT FINDLEY, Utah State University
FRANK CALIENDO, Utah State University

We investigate the mandatory saving role of social security as a potential remedy to time-inconsistent saving behavior. Our model incorporates a "generalized" credit market that nests the extremes of missing credit markets and perfect credit markets, and it also includes the broad spectrum of possibilities in between. We prove that a fully-funded social security arrangement is irrelevant only at the knife edge of perfect credit markets. In other words, if there is a market imperfection of any degree then social security can improve the welfare of individuals with time-inconsistent preferences. We conclude that non-standard preferences provide a more compelling justification for the mandatory saving role of social security than previously supposed.

"An Integrated Notional Defined Contribution (NDC) Model with Retirement and Permanent Disability"

MANUEL VENTURA-MARCO, University of Valencia - Faculty of Economics
CARLOS VIDAL-MELIƁ, University of Valencia - Faculty of Economics

This paper develops an actuarial overlapping generations model (AOLG) that integrates old-age and permanent disability into a generic NDC framework. In the model, the account balances of participants who do not survive are distributed as inheritance capital to the accounts of the (non-disabled) active survivors on a birth cohort basis. The model includes realistic demography insofar as it takes into account an age schedule of mortality and the uncertainty concerning the timing of disability, and allows for changes in the economically active population and for a large number of generations of contributors and pensioners to coexist at each moment in time. The results achieved in the numerical example we present endorse the fact that the model really works and show an optimal integration of both contingencies into the NDC framework. The model can easily be linked to real practices in social security policies because, to mention just a few positive features, it could be implemented without much difficulty, it would help to improve actuarial fairness, it would uncover the real cost of disability and minimize the political risk of disability insurance being used as a vote-buying mechanism.

"Federalism and Fiduciaries: A New Framework for Protecting State Benefit Fund"
62 Drake Law Review 503 (2014)

RICHARD E. MENDALES, Charleston School of Law

The financial crisis has underlined the difficulties states and localities face in paying benefits to their employees. The most spectacular example is Detroit's bankruptcy, but across the country, state and local employees face sharp cuts in benefits, as their employers fight for solvency. A federal solution such as the Employment Retirement Income Security Act (ERISA), which protects private pensions, is precluded both by considerations of federalism and the practical impossibility of getting major legislation through Congress. This Article proposes an alternative: a uniform state code, like other uniform state laws such as the Uniform Commercial Code, that states could adopt to govern both state and local benefit plans. The proposed uniform code is based on common statewide financing. Funds would be administered by a nonpolitical council that would employ actuaries and inspectors to protect the integrity of funds inspected and disbursed according to standards set by the code. Statewide funding for state and local plans has advantages already enjoyed by states such as New York, including more sophisticated fiduciaries to supervise investments, reduced costs imposed by financial intermediaries, and greater diversification of investments. The code would go beyond existing state and local plans in creating state emergency funds paralleling the federal Pension Benefit Guaranty Corporation to ensure payment of benefits during unforeseen crises. Making the code uniform would enable adopting states to follow each others' practices and interpretation of code provisions. Moreover, with congressional approval, it would facilitate compacts among groups of states to pool benefit and emergency funds, giving them greater overall safety, ability to diversify, and leverage over financial intermediaries.

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Tuesday, March 25, 2014

Jeff Brown: Boosting Social Security Could Hurt Retirement Security

University of Illinois economist Jeffrey Brown, a former member of the Social Security Advisory Board, writes for Forbes that proposals to raise Social Security benefits without fixing the program’s finances could make America’s retirees worse rather than better off.

Check out his piece here.

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Wednesday, March 19, 2014

Upcoming event: CSIS, Lessons from Abroad for the U.S. Entitlement Debate

Lessons from Abroad for the U.S. Entitlement Debate

CSIS Policy Forum
Rudolph G. Penner
Institute Fellow, Urban Institute

Richard Jackson
Senior Associate, CSIS

Edward Whitehouse
Head of Pension Policy Analysis, OECD

James C. Capretta
Senior Fellow, Ethics & Public Policy Center
Wednesday, March 26, 2014
3:00 p.m. – 5:00 p.m.

CSIS, First Floor
1616 Rhode Island Avenue,
Washington, DC 20036
The Center for Strategic and International Studies invites you to join us for a discussion of the global state of the art in retirement policy and pension system reform. The occasion is the release of Lessons from Abroad for the U.S. Entitlement Debate, a new CSIS report that puts the U.S. aging challenge in international perspective, reviews the most promising retirement reform initiatives in other developed countries, and draws lessons for U.S. policymakers.

Please RSVP by clicking here.
Note: You must log on to your CSIS account to register. If you do not have an account with CSIS you will need to create one. If you have any difficulties, or do not receive “password reset emails” please contact

Follow @CSIS and #CSISLive for live updates.

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Tuesday, March 18, 2014

New issue brief: “Do Longevity Expectations Influence Retirement Plans?”

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

“Do Longevity Expectations Influence Retirement Plans?”

By Mashfiqur R. Khan, Matthew S. Rutledge, and April Yanyuan Wu

The brief’s key findings are:

  • Workers who think they have excellent chances of living to ages 75 and 85 plan to work longer than those who think their chances are poor.
  • These perceptions of life expectancy also influence workers’ actual retirement behavior, though to a lesser degree.
  • These results are consistent with the notion that while workers who expect to live longer plan to retire later, actual behavior is influenced by unexpected shocks.
This brief is available here. Read more!

Friday, March 7, 2014

New papers from the Social Science Research Network

"Means-tested Age-Pension and Saving"
UNSW Australian School of Business Research Paper No. 2014-03

SANG-WOOK (STANLEY) CHO, University of New South Wales - Australian School of Business - School of Economics
RENUKA SANE, Indian Statistical Institute, New Delhi

We investigate whether households adjust retirement savings decisions in response to changes in the means-tested public pension plans. The policy in question lowered the taper rate of the assets test on the age pension in Australia in 2007. We use HILDA, a detailed micro panel data-set for Australian households and focus on the age group between 50 and 64 in 2006, prior to the reform. We compare savings behaviours of those who were constrained to increase financial wealth because of the assets test prior to the reform with those who were not constrained, and find that assets tests do have a perverse impact on saving.

"Promoting Later Planned Retirement: The Differential Impact of Construal Level Interventions for Younger and Older Individuals"
Netspar Discussion Paper No. 06/2013-076

RON VAN SCHIE, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
BENEDICT G. C. DELLAERT, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE), Erasmus Research Institute of Management (ERIM)
BAS DONKERS, Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE), Erasmus Research Institute of Management (ERIM), Tinbergen Institute

Individuals’ planned retirement age is affected by a trade-off between financial costs (a feasibility oriented consideration) and the number of years in retirement (a desirability oriented consideration). Previous research shows that construal level interventions (i.e., activating a global vs. local mindset with individuals) affect the relative importance of these two types of decision aspects such that primary considerations become more important under a global mindset compared to secondary considerations. In this research we predict that this results in an age-related reversal of the effect of a construal level induced global mindset on planned retirement age. The reason is that as individuals’ chronic temporal distance to retirement decreases (i.e., they become older) their primary retirement goals are likely to change. Younger individuals are temporally distant from retirement and primarily driven by desirability goals, while older individuals are temporally close to retirement and driven by feasibility goals. Therefore, since a global construal level intervention increases the impact of individuals’ primary goals, we predict that such an intervention decreases planned retirement age for the younger age group but increases it for the older age group. Results from two online surveys confirm this predicted decision process. They show first that indeed younger individuals are more likely than older individuals to plan for a retirement age that they cannot afford. Second, the results demonstrate that a construal level intervention-induced global mindset increases the impact of desirability considerations on planned retirement age for younger individuals (and lowers planned retirement age), but that it increases the impact of feasibility considerations for older individuals (and increases planned retirement age). Jointly, these findings underline the importance of taking into account both individuals’ chronic and situationally-induced mental construals of the planned retirement decision when designing policy communications to promote individuals’ retirement at a later age.

"How Well Did Social Security Mitigate the Effects of the Great Recession?"
FEDS Working Paper No. 2014-13

WILLIAM PETERMAN, The Federal Reserve Board of Governors
KAMILA SOMMER, Federal Reserve Board

This paper quantifies the welfare implications of the U.S. Social Security program during the Great Recession. We find that the average welfare losses due to the Great Recession for agents alive at the time of the shock are notably smaller in an economy with Social Security relative to an economy without a Social Security program. Moreover, Social Security is particularly effective at mitigating the welfare losses for agents who are poorer, less productive, or older at the time of the shock. Importantly, in addition to mitigating the welfare losses for these potentially more vulnerable agents, we do not find any specific age, income, wealth or ability group for which Social Security substantially exacerbates the welfare consequences of the Great Recession. Taken as a whole, our results indicate that the U.S. Social Security program is particularly effective at providing insurance against business cycle episodes like the Great Recession.

"Characteristics of Noninstitutionalized DI and SSI Program Participants, 2010 Update"
Research and Statistics Note, 2014

MICHELLE STEGMAN, Government of the United States of America - Office of Program Development, Social Security Administration
JEFFREY HEMMETER, Social Security Administration

The authors use data from the 2008 panel of the Survey of Income and Program Participation (SIPP) matched to administrative records from the Social Security Administration (SSA) to produce tables describing the characteristics of Disability Insurance (DI) beneficiaries and Supplemental Security Income (SSI) recipients in December 2010. This match to survey data allows the authors to provide detailed information on the economic and demographic characteristics of program participants not available in administrative records. These tables update those previously published by DeCesaro and Hemmeter (2008) using 2002 data.

"Retirement Distribution Strategies with Mortality Uncertainty"

YUANSHAN CHENG, Texas Tech University
TAO GUO, Texas Tech University

Retirement distribution planning helps ensure the quality of life of retirees with all types of uncertainty. Probability of successfully funding through retirement has been a widely studied topic (Bengen, 1994; Ameriks et. al, 2001; Finke et. al, 2011; Pfau, 2012). However these studies treat the whole household only as one agent (Hubener et. al, 2013). And also, these literatures usually assume a 30 year planning horizon. For financial planning industry, some of the clients are couples and some of them outlive the 30 years planning horizon. So there is a need to study retirement for married retirees and set planning horizon conditional on their real mortality risk.
This paper adds to the current literature by constructing a simulation framework incorporating conditional mortality risk and evaluating the distribution of outcomes. Within this framework, all types of strategies can be evaluated with different objective functions (such as maximizing the probability of success within the specified planning horizon, maximizing annual consumption, and maximizing expected total utility during retirement), different consumption pattern (fixed versus variable).
Within the context of married couples, the joint mortality risks results in totally different retirement distribution outcomes, compared with the ones suggested by the previous studies.

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