Friday, March 20, 2015

New papers from the Social Science Research Network

"Time Inconsistency and Retirement Choice"
CESifo Working Paper Series No. 5208

T. SCOTT FINDLEY, Utah State University
Email: tscott.findley@usu.edu
FRANK CALIENDO, Utah State University
Email: frank.caliendo@usu.edu

Hyperbolic discounting with naiveté is widely believed to provide a better explanation than exponential discounting of why people borrow so much and why they wait so long to save for retirement. We reach a different set of conclusions. We show that if financial planning is enriched to include the choice of when to retire, then naïve hyperbolic discounters may borrow far less and start saving for retirement significantly earlier than exponential discounters.

"A Value-Based Approach to Pension Redesign in the US State Plans"
Netspar Discussion Paper No. 03/2014-080

ZINA LEKNIUTE, University of Amsterdam
Email: zina.lekniute@gmail.com
ROEL M. W. J. BEETSMA, University of Amsterdam - Research Institute in Economics & Econometrics (RESAM), Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute), Tinbergen Institute - Tinbergen Institute Amsterdam (TIA), Netspar
Email: r.m.w.j.beetsma@uva.nl
EDUARD H.M. PONDS, Algemene Pensioen Groep (APG), Tilburg University - Department of Economics, Netspar, Tilburg University - Center for Economic Research (CentER)
Email: eduard.ponds@apg.nl

This paper explores the financial sustainability of a typical U.S. state defined-benefit pension fund under the continuation of current policies and under alternative policies, such as alternative contribution, indexation and investment allocation policies. We explore the "classic" asset-liability management (ALM) results, which indicate that a policy of conditional indexation may substantially improve the financial position of the fund. We also investigate the value-based ALM results, which provide a market-based evaluation of the net benefits of the contract to the various stakeholders. All participant cohorts under our simulation horizon derive a substantial net benefit from the pension contract, implying that tax payers make substantial contributions to this pension arrangement. The aforementioned measures can be instrumental in alleviating the burden on the tax payer, though this will happen at the cost of a reduction in the value of the contract to the participants.

"Pension De-Risking"
Washington University Law Review, Vol. 93, No. 3, 2016 Forthcoming
Marquette Law School Legal Studies Paper No. 15-07

PAUL M. SECUNDA, Marquette University - Law School
Email: paul.secunda@marquette.edu
BRENDAN S. MAHER, University of Connecticut School of Law
Email: brendan.maher@law.uconn.edu

The United States is facing a retirement crisis, in significant part because defined benefit pension plans have been replaced by defined contribution retirement plans that, whatever their theoretical merit, have left significant numbers of workers unprepared for retirement. A troubling example of the continuing movement away from defined benefit plans is a new phenomenon euphemistically called “pension de-risking.”
Recent years have been marked by high-profile companies engaging in various actions designed to reduce the company’s exposure to pension funding risk (hence the term “pension de-risking”). Some de-risking strategies convert a federally-guaranteed pension into a more risky private annuity. Other approaches convert the pension into cash for the beneficiary, which may be insufficient to provide lasting retirement income. These strategies have raised many concerns that participants are getting the short end of the stick and that pension de-risking is undermining the statutory purpose of ERISA.
Regulators are only beginning to consider ways to appropriately police pension de-risking behavior. We propose that the government should take an aggressive stance in regulating such conduct. Participants as a class should not be made worse off by a pension de-risking transaction, and the relevant de-risking rules should so reflect. More specifically, regulators should (1) encourage desirable forms of de-risking by establishing regulatory safe harbors; (2) require a battery of procedural safeguards for annuitization transactions; (3) require improved disclosures for cash buyouts; and (4) limit cash buyouts when beneficiaries are not likely to meaningfully understand the potentially adverse consequences of trading a pension for cash.

"What Do Subjective Assessments of Financial Well-Being Reflect?"
CRR WP 2015-3

STEVEN A. SASS, Boston College - Center for Retirement Research
Email: steven.sass@bc.edu
ANEK BELBASE, Center for Retirement Research at Boston College
Email: anbelbas@gmail.com
THOMAS COOPERRIDER, Berkeley Research Group,LLC
Email: crr2131@bc.edu
JORGE D. RAMOS-MERCADO, Center for Retirement Research at Boston College
Email: crr381@bc.edu

Subjective financial assessments are used by social scientists as a measure of financial well-being and by households as the basis for action. Financial well-being, however, increasingly requires workers to build-up savings to meet hard-to-see future needs, specifically retirement, their children’s education, and paying off student loans.
This paper analyzes data from the FINRA Investor Education Foundation’s 2012 Financial Capability Survey to test whether subjective financial assessments 1) primarily reflect day-to-day, rather than distant, financial concerns; 2) increasingly reflect distant concerns if the household’s day-to-day finances are in reasonably good shape; and 3) increasingly reflect distant concerns if the worker is financially literate.
The paper found that:
* Subjective financial assessments primarily reflect day-to-day conditions.
* This remains the case even if the household’s day-to-day finances are in reasonably good shape.
* Financial literacy enhances sensitivity to the lack of a retirement plan and having a mortgage greater than the value of one’s house, but it has no noticeable effect on sensitivity to life and medical insurance deficits, having an inactive retirement plan, not saving for college, or student debt burdens.
The policy implications of the findings are:
* Subjective financial assessments have become a poor measure of financial well-being.
* Workers by themselves cannot be expected to devote much effort to addressing distant deficits.
* Initiatives to improve well-being must raise awareness – or compensate for the lack of awareness – of hard-to-see distant future deficits.

Read more!

Thursday, March 19, 2015

New paper: "Retirement Income Among American Indians and Alaska Natives in the American Community Survey"

"Retirement Income Among American Indians and Alaska Natives in the American Community Survey"
Research and Statistics Note, No. 2015-01, February 2015

JOHN L. MURPHY, Government of the United States of America, Social Security Administration, Office of Retirement Policy
Email: john.murphy@ssa.gov

The authors present data on annual retirement income of American Indians and Alaska Natives (AIANs) from the American Community Survey and include separate analyses for AIANs of single-race and multiple-race backgrounds. The authors also compare retirement income of AIANs with that of whites and blacks and find that, overall, annual retirement income among all AIANs was significantly lower than that of whites and also of blacks.

Read more!

Wednesday, March 18, 2015

New paper from the NBER

“The In-State Equity Bias of State Pension Plans,” by Jeffrey R. Brown, Joshua M. Pollet, Scott J. Weisbenner - #21020 (AG AP PE)

Abstract:

This paper provides evidence on the investment behavior of 27 state pension plans that manage their own equity portfolios. Even though these state plans typically hold broadly diversified portfolios, they  substantially over-weight the equity of companies that are headquartered in-state. The over-weighting of within-state stocks by these plans is three times larger than that of other institutional investors.

We explore three possible reasons for this in-state bias: familiarity bias, information-based investing, and political considerations. While there is a substantial preference for in-state stocks, there is no similar tilt toward holding stocks from neighboring states or out-of-state stocks in the state's primary industry. States generate excess returns through their in-state investment activities, particularly among smaller stocks in the state's primary industry.

We also find that state pension plans are more likely to hold a within-state stock if the headquarters of the firm is located in a county that gave a high fraction of its campaign contributions to the current governor. These politically-motivated holdings yield excess returns for the pension fund.

http://papers.nber.org/papers/W21020?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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Friday, March 13, 2015

New papers from the Social Science Research Network

"Social Interactions and the Retirement Age"
Netspar Discussion Paper No. 10/2014-075

NIELS VERMEER, CPB Netherlands Bureau of Economic Policy Analysis
Email: C.A.F.Vermeer@cpb.nl
MAARTEN VAN ROOIJ, De Nederlandsche Bank, Netspar
Email: m.c.j.van.rooij@dnb.nl
DANIEL J. VAN VUUREN, CPB Netherlands Bureau of Economic Policy Analysis
Email: D.J.van.Vuuren@cpb.nl

In this study we gauge the impact of social interactions on individual retirement preferences. A survey including self-assessments and vignette questions shows that individual preferences are affected by preferences and actual retirement behavior of the social environment. Retirement from paid work depends on the retirement age of relatives, friends, colleagues and acquaintances. Information and advice provided by the social environment play a role in the retirement decision. A majority of respondents would postpone retirement when their social environment retires later. Our results indicate that a one year increase in the retirement age in an individual’s social environment is followed by an average increase of three months in the individual’s own retirement age. In addition, people show the tendency to stick more to the state pension age than to other retirement ages, which may suggest that the state pension age functions as a social norm.

"Time Inconsistency and Retirement Choice"
Netspar Discussion Paper No. 11/2014-076

T. SCOTT FINDLEY, Utah State University
Email: tscott.findley@usu.edu
FRANK CALIENDO, Utah State University
Email: frank.caliendo@usu.edu

Hyperbolic discounting with naiveté is widely believed to provide a better explanation than exponential discounting of why people borrow so much and why they wait so long to save for retirement. We reach a different set of conclusions. We show that if financial planning is enriched to include the choice of when to retire, then naive hyperbolic discounters may borrow far less and start saving for retirement significantly earlier than exponential discounters.

"Retirement Income Among American Indians and Alaska Natives in the American Community Survey"
Research and Statistics Note, No. 2015-01, February 2015

JOHN L. MURPHY, Government of the United States of America, Social Security Administration, Office of Retirement Policy
Email: john.murphy@ssa.gov

The authors present data on annual retirement income of American Indians and Alaska Natives (AIANs) from the American Community Survey and include separate analyses for AIANs of single-race and multiple-race backgrounds. The authors also compare retirement income of AIANs with that of whites and blacks and find that, overall, annual retirement income among all AIANs was significantly lower than that of whites and also of blacks.

"On the Effectiveness of Pension System in the Republic of Moldova"

ANDREI PETROIA, Economic Studies Academy of Moldova - Faculty of Finance
Email: petroia5@hotmail.com

The social security system is the main and most important social protection system. It typically covers all citizens of the Republic of Moldova, paying social security contributions and benefits. In addition, the instrument of accumulation and redistribution of financial resources is the State Social Insurance Budget – an independently budget with special status, which is part of the national budget.
This paper’s aim is to examine the efficiency of the national pension system in Moldova, identifying problems functioning of that system approached the "strong" and "weak" thereof in order to find optimal ways to improve for the system given.
The general points in this paper are: analyzing the history and the types of pensions and the existing legal and regulatory framework in the national social insurance; carrying out general feature of national pension system in Moldova; examine the situation and identifying problems in the state social insurance in Moldova; providing proposals and suggestions on improving the social security system.

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Thursday, March 12, 2015

Upcoming event: “Illustrating Retirement Income for Defined Contribution Plan Participants”

 

LUNCH FORUM
Discussing
Illustrating Retirement Income for Defined Contribution Plan Participants:
A Critical Analysis of the Department of Labor Proposal

with Mark Warshawsky

Wednesday, March 18, from Noon to 1:00 at
Americans for Tax Reform

722 12th Street, NW
7th FLOOR
Washington, D.C. 20005
RSVP

(Pizza and soft drinks will be provided)
This is a widely attended event.

Mark J. Warshawsky is a visiting scholar at the Mercatus Center of George Mason University. His research interests include employer-sponsored retirement programs, social security, financial planning, health and long-term care financing, corporate and public finance, and macroeconomics. He is a co-author of the Fundamentals of Private Pensions, Ninth Edition (Oxford University Press, 2010) and author of Retirement Income: Risks and Strategies (MIT Press, 2012).

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Monday, March 2, 2015

Winter Newsletter from the Michigan Retirement Research Center

MRRC Newsletter: Volume 15, Issue 1 - February 2015

Director's corner

John Laitner

This newsletter has announcements and key findings for a number of recently completed MRRC research projects. The cycle of most MRRC projects ends with government’s fiscal year.

Online accounts help in financial planning

The Social Security Administration encourages workers and retirees eligible for benefits to sign up for a my Social Security account.

MRRC 2014 recap: key findings for the year’s working papers

Full papers are available online at www.mrrc.isr.umich.edu/publications/papers/.

MRRC experiences staff transitions

Becky Bahlibi, MRRC’s research process manager for 16 years, retired at the end of December 2014, although she has continued to work with us on a temporary basis while her replacement, Cheri Brooks, gets comfortable in the position.

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Social Security projections: Why do SSA and CBO differ?

Over at Investor’s Business Daily, Jed Graham looks at why CBO’s projections for Social Security’s financing are more gloomy than those from the Social Security Trustees. One issue Jed doesn’t highlight, but which I think plays a pretty big part, is that CBO takes a more optimistic view regarding longevity improvements than SSA does. Lower mortality is great for us, but not so great for Social Security.

Jed does hit on one unusual point:

CBO expects ObamaCare to shrink employment by the equivalent of 2.5 million full-time workers a decade from now — reducing Social Security payroll tax revenue. But SSA doesn't see any negative impact on work or earnings.

SSA Chief Actuary Stephen Goss told IBD that his department looked at Medicare's 1966 launch and "did not see any big move in the (labor force) participation rate."

I find the response from SSA confusing: CBO projects lower employment due to the ACA based on a number of very specific parts of the law that lower the return to work and, in some cases, can increase an individual’s income if they work less. While Medicare also provided people with greater access to healthcare, in the vast majority of cases these new beneficiaries were age 65 and up, making comparisons to the ACA dubious, to my mind. I can say for sure that the CBO’s projections for labor supply are correct – though I suspect they are – but SSA should analyze the work responses to the ACA in the same context that the CBO did, not simply by looking back at historical examples that may not be very relevant.

Read more!