Tuesday, November 24, 2009

New working papers from the Michigan Retirement Research Center

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


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):



What Replace Rates Should Households Use? by John Karl Scholz and Ananth Seshadri


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):



Proximity and Coresidence of Adult Children and their Parents: Description and Correlates by Janice Compton and Robert A. Pollak


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):


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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.

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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.

Documents and Links
Speaker Biographies


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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
by Richard W. Johnson, Melissa M. Favreault, and Corina Mommaerts

Dutch Pension Funds in Underfunding: Solving Generational Dilemmas
by Niels Kortleve and Eduard Ponds

Fees and Trading Costs of Equity Mutual Funds in 401(k) Plans and Potential Savings from ETFs and Commingled Trusts
by Richard W. Kopcke, Francis M. Vitagliano, and Zhenya S. Karamcheva

An Update on 401(k) Plans: Insights from the 2007 Survey of Consumer Finances
by Alicia H. Munnell, Richard W. Kopcke, Francesca Golub-Sass, and Dan Muldoon

Insult to Injury: Disability, Earnings, and Divorce
by Perry Singleton 

Medicare Part D and the Financial Protection of the Elderly
by Gary V. Engelhardt and Jonathan Gruber

The Role of Information for Retirement Behavior: Evidence Based on the Stepwise Introduction of the Social Security Statement
by Giovanni Mastrobuoni

Social Security and the Joint Trends in Labor Supply and Benefits Receipt Among Older Men
by Bo MacInnis

The Wealth of Older Americans and the Sub-Prime Debacle
by Barry Bosworth and Rosanna Smart

The Asset and Income Profile of Residents in Seniors Care Communities
by Norma B. Coe and Melissa Boyle

Pension Buyouts: What Can We Learn from The UK Experience?
by Ashby H.B. Monk

What Drives Health Care Spending? Can We Know Whether Population Aging Is A 'Red Herring'?
by Henry J. Aaron 

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Friday, November 13, 2009

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. Benítez-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.

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Do seniors deserve that extra $250?

David Francis of the Christian Science Monitor
says yes.

To seriously answer this question, I'd think you'd have to ask:

  • Are they being treated worse by Social Security than other participants? The answer to that is no: receiving a zero COLA when inflation has been negative is much better than receiving a positive COLA that merely keeps up with inflation.
  • Are seniors suffering more due to the recession than other Americans? Again, I'd say the answer is no: they're not affected by higher unemployment, most low-income seniors have relatively few assets to be affected by financial markets, and their biggest source of income – Social Security – is continuing to pay benefits.
  • Will the payment to seniors stimulate the economy better than other uses of the money? Probably not – I'd rather focus on job creation – but that's an open question.
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Social Security Online Benefit Calculator Leads to Faulty Conclusions

Over at AEI's Enterprise Blog, I commented on a Washington Post article by MIT professor Simon Johnson and Yale law student James Kwak arguing that Social Security and 401(k) plans won't provide for a decent income in retirement. While they have a good qualitative case – after all, Social Security is facing insolvency and 401(k) plans face problems regarding participation rates and investment choices – their estimates of Social Security benefits just seemed too low.

As it turned out, the problem was that they relied on one of SSA's online benefit calculators. As I pointed out last year regarding the Social Security Statement, while the calculator claims to show benefits "in today's dollars" it actually doesn't. It shows benefits in "wage indexed" dollars, which can make for a big difference. Johnson and Kwak were quick to acknowledge the error, which after all wasn't their fault, and discussed the issue further on their Baseline Scenario blog. But it's the source of the error that I'm interested in.

Johnson and Kwak estimate benefits for individuals retiring in 2051. Let's say that the nominal benefit – meaning, the dollar amount that's actually paid each month – was $4000. To inflation adjust that back to today, we multiply $4,000 by the ratio of today's CPI to the projected 2051 CPI: based on this table from the 2009 Trustees Report those numbers are 100/315.37, meaning that the inflation adjusted value of $4,000 is $1,268.

Now let's look at the wage-indexed value, which is what the Social Security Statement will give you and what you get when you choose "in today's dollars' from the online calculator. To get that, you multiply $4,000 by the ratio of today's average wage to the average nominal wage in 2051, which from the same table is $42,042/$209,615, which gives you only $802.

Now, one big problem is that the calculator doesn't even tell you you're getting wage-indexed dollars. So when your scheduled benefit is actually worth $1,268 in today's dollars you'll think you're only getting $802. The fact that an MIT professor and a Yale law student couldn't figure this out seems like pretty good evidence that it's confusing. When I raised this issue last year with regard to the Statement, the agency's solution was to take the phrase "in today's dollars" out to the Statement. That eliminates one problem, but leaves the reader to only guess in what form their benefits might be expressed.

Second, even if there were full disclosure that benefit estimates were in wage-indexed dollars, it's not clear to me whether there's any usefulness in the number. I understand how to calculate wage-indexed dollars, but these figures don't mean anything to me (and I'd guess not to other people either). Moreover, anyone who's actually trying to plan their retirement – which, presumably is what the Statement and the online calculators are for – would express their retirement income either in today's dollars (to show their real purchasing power) or in nominal dollars, to make them comparable to benefit estimates from 401(k) plans or DB pension plans. (If anyone can find me a retirement calculator that expresses income in wage-indexed dollars I'll send you a bottle of wine to celebrate.) Throwing wage-indexed dollars into the mix serves only to confuse people or give them mistaken estimates of their retirement income.

As you might have noticed, this is an issue that ticks me off. There's very little substantive case for showing benefits in wage-indexed dollars – try to explain to someone what they mean and you'll see the blank look on their face. That's probably why there's no effort to explain any of this either on the web sites or in the Statement. While it would be a simple task to fix the calculator and Statement so they would show benefits in inflation adjusted dollars, I suspect the reason this isn't done is that people would ask questions why their benefit estimates had changed from last year to this year. What most people would see as an improvement some people in the agency would perceive as an admission that they'd previously been wrong, and some folks don't like to do that. But that mis-serves the public: Social Security is the largest form of retirement income for most Americans and the only way the typical person can know what they're going to get is if they're told. We should do a better job of telling them than we are.

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Wednesday, November 11, 2009

Updated Social Security Fix-It Book Available

The Center for Retirement Research has updated their very nice Social Security Fix-It Book. Check it out here.

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The Fiscal Wake Up Tour Takes to the Airwaves

This afternoon I appeared with other members of the Fiscal Wake Up Tour – the Concord Coalition's Bob Bixby; the Brookings Institution's Isabel Sawhill; and the Peter G. Peterson Foundation's David Walker – on Southern California Public Radio's Patt Morrison show to talk about the fiscal challenges facing the country.

I was a bit downbeat today, maybe because the health reforms that were supposed to fix our budget problems will more than likely make them worse. But some things have to get worse before they can get better; let's hope this is one of them.

In any case, tune in online by clicking here.

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Presentations from APPAM session on the challenges of entitlement growth

On Friday I was lucky enough to moderate a great session at the annual APPAM conference on Aging, Health and the Challenge of Entitlement Growth, featuring a presentation by CBO director Doug Elmendorf and comments by Gene Steuerle of the Urban Institute and Jim Klumpner, a long-time Capitol Hill economist who now teaches at Princeton and George Washington. While nothing can replace the actual presentations and the discussion that followed, which was of course moderated to perfection, I've posted the PowerPoints by Elmendorf, Steuerle and Klumpner. Thanks to CBO's Joyce Manchester for landing the big fish for the session.

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New paper: “Marital History, Race, and Social Security Spouse and Widow Benefit Eligibility in the United States”

SSRN turns up a new paper, "Marital History, Race, and Social Security Spouse and Widow Benefit Eligibility in the United States," by Christopher R. Tamborini, Howard Iams and Kevin Whitman, all of the Social Security Administration. Here's the abstract:

Large-scale changes in American family structures over the past decades have important implications for the retirement experiences of women. In this study, the authors use a restricted-use file of the Marital History Module of the U.S. Census Bureau's Survey of Income and Program Participation to investigate changes in the marital histories of women aged 40 to 69 years between 1990 and 2004, with a focus on outcomes relevant for Social Security spouse and widow benefit eligibility. Multinomial and binary logistic regression analyses show significant changes in women's marital patterns since 1990, with more substantial shifts occurring among recent cohorts. Due to downward trends in marriage, the authors find a modest decline in Social Security spouse and widow benefit eligibility in 2004, particularly among Black women born toward the end of the baby boom generation.

This made me think of two things: first, about the only way to get a truly good return from Social Security going forward is for one member of a household to receive spousal benefits; but second, changes in marital patterns by race could mean that spousal benefits become predominantly for white people. I prepared the chart below from Census data a few years ago and so the data isn't completely up to date, but the changes in black/white marriage rates since the 1950s are pretty extreme.

Back in 1950 blacks had roughly the same marriage rate as whites, but since then patterns have sharply diverged. In 2000 around 25 percent of whites over age 15 had never been married, which is only a few percentage points higher than the 1950 level. But around 44 percent of blacks had never been married in 2000, compared to only around 25 percent in 1950. As a result, fewer and fewer black retirees in the future will tend to be eligible for spousal benefits.

I'm not a huge fan of Social Security's spouse benefits, which seem to reward neither contributions nor need, and – as I'll point out in Friday's sure-to-be-fantastic AEI panel on Social Security's effect on work incentives – impose high marginal tax rates on women's labor. But these racial disparities might be another reason to give spousal benefits the heave-ho.

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Monday, November 9, 2009

New paper: Literacy and Financial Sophistication Among Older Americans

The National Bureau of Economic research has released a new paper, titled "Financial Literacy and Financial Sophistication Among Older Americans" by Annamaria Lusardi, Olivia S. Mitchell and Vilsa Curto. Here's the abstract:

This paper analyzes new data on financial literacy and financial sophistication from the 2008 Health and Retirement Study. We show that financial literacy is lacking among older individuals and for the first time explore additional questions on financial sophistication which proves even scarcer. For this sample of older respondents over the age of 55, we find that people lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees. In view of the fact that individuals are increasingly required to take on responsibility for their own retirement security, this lack of knowledge has serious implications.

Click here to access the NBER page (subscription required, but I believe a free version is available here.)

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Friday, November 6, 2009

Upcoming event: Social Security reform and labor force participation of seniors

On Friday November 13 at AEI we'll be holding a panel discussion titled "Keeping Granny on the Job" looking at the ways in which Social Security and Social Security reform can affect incentives for individuals to delay retirement.

I will present a paper co-authored with David Weaver and Gayle Reznik of SSA titled "Social Security and Marginal Returns to Work Near Retirement" that analyzes the increase in benefits that accompanies an additional year of work for near-retirees. (The short answer is 'not much', but the reasons are interesting.)

The second paper will be presented by Estelle James, a pension consultant and lead author of the World Bank's "Averting the Old Age Crisis." The paper, co-authored with Alejandra Cox Edwards of California State University, Long Beach, is titled "Do Individual Accounts Postpone Retirement: Evidence from Chile." It looks at the labor force participation of individuals under Chile's reformed pension plan, which is generally actuarially neutral with regard to additional work, relative to individuals who remained under the previous defined benefit program.

Jagadeesh Gokhale, senior fellow at the Cato Institute, will provide commentary. It should be an interesting event.

The panel is from 12 to 2 pm; lunch will be provided. Click here to register.

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Thursday, November 5, 2009

Wednesday, November 4, 2009

Law Review Articles on Social Security

TaxProf Blog links to comments by Benjamin Templin on an earlier Cornell Law Review article by Neil Buchanan. Buchanan argues that we shouldn't take projections of Social Security's insolvency all too seriously; Templin replies that it makes sense to diversify the Social Security trust fund into stocks, even if we aren't yet sure if/when insolvency will take place. I commented on some of Buchanan's arguments here.

While I enjoyed both articles, it does strike me that there's a qualitative difference between law review articles on Social Security and those in policy or economic journals. There's more footnoting in law review articles, to be sure – I was shocked at how much extra citation work was requested when an article of mine was adapted for a law journal – but overall the presentation of evidence and argument strikes me as generally sloppier than what you'd find in a policy article. Maybe it's because lawyers see themselves as proponents of arguments with less obligation to present contrary evidence – I guess the opposition is supposed to supply that.

For instance, Buchanan notes "the overwhelmingly regressive effect of the Bush tax cuts." Being curious, I checked the cite: it simply references the 2001 and 2003 tax legislation, as if that's enough to establish overwhelming regressivity. Overall it just doesn't seem at the level you'd expect from a good economics or policy article, be the author from the left or the right.

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