Thursday, March 26, 2009

New Social Security papers from the Social Science Research Network


"Are All Americans Saving 'Optimally' for Retirement?" Michigan Retirement Research Center Research Paper No. 2008-189

JOHN KARL SCHOLZ, University of Wisconsin - Madison - Department of Economics, National Bureau of Economic Research (NBER) Email:
ANANTH SESHADRI, University of Wisconsin - Madison - Department of Economics Email: ASESHADR@SSC.WISC.EDU

Many people fear that Americans are preparing poorly for retirement. But developing rigorous evidence on this issue is difficult. In this paper we briefly discuss evidence on the adequacy of retirement wealth accumulation. We conclude that existing descriptive evidence does not seem consistent with dire assessments of poor financial preparation. We then extend the straightforward, but computationally complex dynamic programming approach used in our earlier work to assess the adequacy of retirement wealth preparation of Americans born before 1954. We find only 4 percent of HRS households have net worth below their optimal targets in 2004, though this percentage is somewhat higher for more recent HRS cohorts. While our work is preliminary, we find little evidence that Americans born before 1954 have prepared poorly for retirement.

"Comparing Strategies for Retirement Wealth Management: Mutual Funds and Annuities" 

GAOBO PANG, Watson Wyatt Worldwide Email:
MARK J. WARSHAWSKY, Watson Wyatt Worldwide Email:

We compare wealth management strategies for individuals in retirement, focusing on trade-offs regarding wealth creation and income security. Systematic withdrawals from mutual funds generally give opportunities for greater wealth creation at the risk of large investment losses and income shortfalls. Fixed and variable life annuities forgo bequest considerations and distribute the highest incomes. A variable annuity with guaranteed minimum withdrawal benefit (VA GMWB) somewhat addresses both income need and wealth preservation. Mixes of mutual funds and fixed life annuities deliver solutions broadly similar to and even more flexible than a VA GMWB strategy.

"Dynamic Lifecycle Strategies for Target Date Retirement Funds" 

ANUP K. BASU, Queensland University of Technology Email:
ALISTAIR BYRNE, University of Edinburgh - Business School Email:
MICHAEL E. DREW, Griffith University Email:

Lifecycle funds offered to retirement plan participants gradually reduce their exposure to stocks as they approach the target date of retirement. We show that such deterministic switching rules produce inferior wealth outcomes for the investor compared to strategies that dynamically alter the allocation between growth and conservative assets based on cumulative portfolio performance relative to a set target. The dynamic allocation strategies proposed in this paper exhibit almost stochastic dominance (ASD) over strategies that switch assets unidirectionally without consideration of portfolio performance.

"Calculating Savings Rates in Working Years Needed to Maintain Living Standards in Retirement" 

GAOBO PANG, Watson Wyatt Worldwide Email:
MARK J. WARSHAWSKY, Watson Wyatt Worldwide Email:

We establish an empirically based lifecycle model to gauge savings and replacement rates for maintaining a steady living standard over life. We consider a variety of scenarios and demonstrate that savings rates vary substantially with individuals' economic and demographic situations as well as retirement plan provisions. This result highlights that meaningful retirement planning must be specific to individuals or households and be based on a comprehensive knowledge of living means and needs.

"Sensitivity Analysis for a Dynamic Stochastic Accumulation Model for Optimal Pension Savings Management" 

TIBOR JAKUBIK, affiliation not provided to SSRN
IGOR MELICHERCIK, Comenius University - Faculty of Mathematics, Physics and Informatics; Department of Applied Mathematics and Statistics Email:
DANIEL SEVCOVIC, Comenius University - Faculty of Mathematics, Physics and Informatics Email:

Since January 2005, pensions in Slovakia are operated by a three-pillar system. This paper concentrates on the mandatory, fully funded second pillar. We recall the dynamic stochastic accumulation model proposed in [9]. Pension asset managers are very cautious and hold low stocks proportions in the pension funds. We discuss the sensitivity of the level of savings with respect to the proportion of stocks in the portfolios. Furthermore, we perform the sensitivity analysis with respect to correlation between stock and bond returns and risk aversion. Finally, we prove linearity of the level of savings with respect to the contribution rate.


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