Monday, March 29, 2010

New papers from the Social Science Research Network


"The Recent Evolution of Pension Funds in the Netherlands: The Trend to Hybrid DB-DC Plans and Beyond" 

EDUARD H.M. PONDS, affiliation not provided to SSRN
BART VAN RIEL, Government of the Netherlands - Social Economic Council

According to the classification in official statistics, Dutch pension plans have mainly preserved their DB character in recent years. The dominant reaction of pension funds to the fall in funding ratios at the beginning of this century has been a switch from final-pay schemes to average-wage schemes. This contrasts sharply with the experience in the United States and the United Kingdom, where the fall in pension funding ratios has accelerated the switch from DB to DC schemes.

This paper scrutinizes the recent evolution of Dutch pension plans: how does the evolution of Dutch pension funds diverge from that of Anglo-Saxon pension funds, and how can we explain this divergence.' Using an ALM framework, we argue that the current average-wage pension plans may be better viewed as hybrid DB-DC schemes, as indexation of all liabilities has been made solvency-contingent. Because these hybrid plans make use of two steering mechanisms to control solvency risk, Dutch pension funds display a high effectiveness in minimizing the risk of under-funding.

The current hybrid schemes reflect a compromise between the various stakeholders. We examine the institutional basis for this compromise, and contrast this with the situation in Anglo-Saxon pension funds, where primarily employers are responsible for absorbing funding deficits, which gives them in turn more grip on pension plan design issues. In addition, we look at the role of unions, the strong preferences within the Dutch society for collective risk-sharing, and the underlying high level of social trust, as explanations for the divergence with the experience in the US and the UK.

For the longer term, we foresee that Dutch pension plans will shift further towards stand-alone multimember plans, often being called collective DC. This will be accompanied by more differentiation in risk exposure between younger and older members.

Collective risk-sharing will thus remain an important element in Dutch pension funds. In this sense, the evolution of Dutch pension schemes diverges from the developments of Anglo-Saxon pension funds, where risks are shifted more to the individual. Finally, we argue that collective risk-sharing has some important advantages over individual risk-sharing.

"Retirement Security and the Stock Market Crash: What are the Possible Outcomes?" 

BARBARA A. BUTRICA, The Urban Institute
KAREN E. SMITH, Urban Institute
ERIC J. TODER, National Bureau of Economic Research (NBER)

This paper simulates the impact of the 2008 stock market crash on future retirement savings under alternative scenarios. If stocks remain depressed as after the 1974 crash, 20 percent of pre-boomers born 1941-45 and 22 percent of late boomers born 1961-65 would see their retirement incomes drop 10 percent or more. Working another year would reduce the share of these big losers to 14 percent for late boomers. Because most pre-boomers were already retired, their share of big losers would decline slightly, to 19 percent. Delaying retirement would disproportionately benefit low-income people because their additional earnings exceed their stock market losses.

"An Update on 401(K) Plans: Insights from the 2007 Survey of Consumer Finance" 

ALICIA H. MUNNELL, Boston College - Center for Retirement Research
RICHARD W. KOPCKE, Federal Reserve Bank of Boston
FRANCESCA GOLUB-SASS, Boston College - Center For Retirement Research (CRR)
DAN MULDOON, Center for Retirement Research at Boston College

The maturation of the 401(k) system and the enactment of the Pension Protection Act of 2006, which made 401(k) plans easier and more automatic, were expected to enhance the role that 401(k)s played in the provision of retirement income. So, originally, the release of the Federal Reserve's 2007 Survey of Consumer Finances (SCF) seemed like a great opportunity to reassess 401(k)s. But the 2007 SCF reflects a world that no longer exists. Interviews were conducted between May and December, when the Dow Jones was at 14,000 (the peak was October 9, 2007) and housing prices were only slightly off their peak.

Given the collapse of the financial markets and the economy, this paper uses the 2007 SCF data as a starting point in evaluating the condition of 401(k)s and the factors that affect participation and contributions, and relies on more recent data and estimates to paint a full and current picture. The analysis proceeds as follows. The first section describes the evolution of 401(k) plans and how the Pension Protection Act of 2006 would be expected to improve the performance of these plans. The second section uses data from the 2007 SCF and other sources to update previous findings on participation, contribution levels, investments, and withdrawals. The third section explores in more depth how individual characteristics and plan design affect participation and contributions in 401(k) plans. The fourth section then projects how the events of 2008 have affected various aspects of 401(k) plans. The final section concludes that whereas 401(k) plans were showing some improvement in 2007 and the analysis of participation and contribution decisions confirmed the trend toward auto-enrollment and the maturation of the system, the events of 2008 highlight the limitations of 401(k) plans in serving as the only supplement to Social Security.

"Social Security and the Joint Trends in Labor Supply and Benefits Receipt Among Older Men" 

BO MACINNIS, Institute for Social Research

Using data from the Current Population Surveys, we find an increase in the fraction of older American men who worked without receiving Social Security retirement benefits and a decline in the fraction of men who claimed benefits without working during the period 1980-2006. Using bivariate probit regressions, we find that an increase in Social Security's normal retirement age decreased labor force participation rate regardless of benefits receipt status; that an increase in the delayed retirement credit increased benefit receipt regardless of labor force status; and that labor force participation and claiming Social Security benefits are strongly and negatively correlated.

"Public Pensions, Changing Employment Patterns, and the Impact of Pension Reforms Across Birth Cohorts: A Microsimulation Analysis for Germany" 

IZA Discussion Paper No. 4815

JOHANNES GEYER, German Institute for Economic Research (DIW Berlin)
VIKTOR STEINER, Zentrum Fuer Europaeische Wirtschaftsforschung (ZEW) - Center for European Economic Research, Institute for the Study of Labor (IZA)

We analyze the impact of changing employment patterns and pension reforms on the future level of public pensions across birth cohorts in Germany. The analysis is based on a rich dataset that combines household survey data from the German Socio-Economic Panel Study (SOEP) and process-produced microdata from the German pension insurance. A microsimulation model is developed which accounts for cohort effects in individual employment and unemployment and earnings over the lifecycle as well as the differential impact of recent pension reforms. Cohort effects for individuals born between 1937 and 1971 vary greatly by region, gender and education and strongly affect lifecycle wage profiles. The largest effects can be observed for younger cohorts in East Germany and for the low educated. Using simulated life cycle employment and income profiles, we project gross future pensions across cohorts taking into account changing demographics and recent pension reforms. Simulations show that pension levels for East German men and women will fall dramatically among younger birth cohorts, not only because of policy reforms but due to higher cumulated unemployment. For West German men, the small reduction of average pension levels among younger birth cohorts is mainly driven by the impact of pension reforms, while future pension levels of West German women are increasing or stable due to rising labor market participation of younger birth cohorts.

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