Thursday, May 20, 2010

New papers from the Social Science Research Network


"Retirement Annuity and Employment-Based Pension Income, Among Individuals Age 50 and Over: 2008" 

EBRI Notes, Vol. 31, No. 5, May 2010

KENNETH J. MCDONNELL, Employee Benefit Research Institute (EBRI)

This paper looks at one slice of the income pie of the older population: retirement annuities and employment-based defined benefit (DB) pensions. It analyzes the population age 50 and over in order to take into account the prevalence of early retirement options available to individuals beginning at age 50. Recent data from the March 2009 Current Population Survey, conducted by the U.S. Census Bureau, confirm earlier findings that gender, marital status, age, education, and other demographic variables have a significant impact on the likelihood of a worker receiving a retirement annuity and/or employment-based pension income in retirement. There may also be a strong correlation between these same variables and the amount of pension income received from private and/or public-sector employment-based retirement plans. For example, in 2008, 27.7 percent of men age 50 and older with a graduate-level education received an annuity and/or pension income, compared with 19.3 percent of men without a high school diploma – a differential of 8.4 percentage points (see Figure 1). While notable, this differential in receipt of an annuity and/or pension income pales in comparison with the differential in the amounts these men received: In 2008, men with graduate-level degrees received 4.2 times the median annuity and/or pension income that was received by men without a high school diploma (calculated from Figure 1). Figure 1 also shows how age, education, marital status, and income are related to annuity and/or pension recipiency and to the amounts males received in 2008; Figure 2 shows the same data for females.

Current trends show that future retirees may not have a steady income stream in retirement. Fewer employees are participating in a DB plan, which, in the past, almost always paid benefits in the form of an annuity upon retirement. In today's work place, an increasing number of DB plans are offering a lump-sum distribution option at retirement. Also, increasing numbers of employees are participating in a defined contribution (DC) plan, primarily a 401(k) plan. This trend has had a positive impact, in that many workers who previously had no retirement plan at all now at least have access to a tax-favored plan. However, DC plans are far less likely to offer an annuity option to retirees than are DB plans.

The PDF for the above title, published in the May 2010 issue of EBRI Notes, also contains the full text of another May 2010 EBRI Notes article abstracted on SSRN: "Total Individual Account Retirement Plan Assets, by Demographics, 2007, With Market Adjustments to March 2010."

"Shaping Private Pensions: Analyzing the Link Between Social Security and Retirement Adequacy" 

IRENE MUSSIO, Towers Watson

Public pension schemes are most often discussed from a social welfare and public policy point of view. Nevertheless, the design of public pensions should also be taken into close consideration by companies planning and designing private pension plans for their employees. Social security and private pensions are both very important parts of retirement resources for the vast majority of the population and the adequacy of these resources thus depends not only on the generosity of social security but also on the financial commitment employers choose to make to private arrangements.

In this sense, private pensions come to complement social security benefits and, in many cases, they are either explicitly or implicitly integrated with public provision. In many countries, private pension designers consider projected social security benefits and contributions when defining their overall benefit strategy. It is vital, nevertheless, that more employers take into account the specificities of first pillar pensions in each country so as to develop benefit packages that complement social security benefits effectively.

Accordingly, in the following paper we will examine and analyze social security systems across eight developed nations (Canada, France, Germany, Italy, Japan, Netherlands, UK and US). We have based our comparison on three key aspects: the generosity of state benefits; whether the focus rests on the insurance or redistributive role of social security; and the long term sustainability of public pensions. We will show that the way in which these aspects are defined and interact have different implications in terms of how companies plan and design the retirement benefits offered to employees.

"Public Sector Pensions: Rationale and International Experiences" 

Pension Corporation Research, June 2009

FRANK EICH, Pension Corporation

This paper is about public sector pensions, an issue that has become increasingly contentious in a number of countries in recent years, including in the United Kingdom. In the UK the public debate has focused on the perceived generosity of these pensions, which, it is often claimed, contrasts with the pension promises made in the private sector. This paper does not attempt to answer whether public sector pension promises are relatively generous in the UK or elsewhere but instead aims to provide the bigger picture against which a discussion of public sector pension provision could be held.

The origin of today's public sector pensions can be traced back at least to Ancient Rome, which offered pensions to its military personnel. Pensions to public sector workers can also be traced back several centuries even though their provision remained on an ad-hoc basis for longer, while universal pension provision for all is a creation of the modern welfare state. The issue of public sector pensions is intrinsically linked to the role of the state in society. Beyond the provision of pure public goods such as defence, the role of the state varies widely across countries, for example in the provision (and funding) of health or long-term care. The role of the state has also changed over time, for example in the telecommunications sector, reflecting technological progress and ideological changes.

In most countries working for the state comes with a number of privileges (e.g. job security) but also with certain responsibilities (e.g. relinquishing the right to strike). An international comparison reveals that in a number of countries the state is also a special employer in the sense that it offers more generous pensions than the private sector. This is, however, not the case in all countries. The paper argues that the government might pursue a number of objectives going beyond poverty alleviation by offering more generous pensions but also stresses that more generally the objectives of efficiency, equity and sustainability remain desirable even in the context of public sector pensions.

"The Shrinking Tax Preference for Pension Savings: An Analysis of Income Tax Changes, 1985-2007" 

GARY BURTLESS, Brookings Institution, Boston College - Retirement Research Center
ERIC J. TODER, Urban Institute

The value of the tax preference for pensions depends on the marginal tax schedule and on the tax treatment of income from assets held outside a pension account. We examine the change over time in the value of pension investing, accounting for changes in the tax schedule and in the treatment of equity and bond income. We find that changes in U.S. tax law, especially the treatment of equity income, have led to sizeable changes in the value of the pension tax preference. On balance the value of the pension tax preference to worker-savers is modestly lower than it was in the mid-1980s and substantially lower than it was in the late 1980s.

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