Thursday, July 29, 2010

New papers from the Social Science Research Network

"The EBRI Retirement Readiness Rating:™ Retirement Income Preparation and Future Prospects" 

EBRI Issue Brief, No. 344, July 2010

JACK VANDERHEI, Employee Benefit Research Institute (EBRI), Temple University - Risk Management & Insurance & Actuarial Science
CRAIG COPELAND, Employee Benefit Research Institute (EBRI)

The EBRI Retirement Readiness Rating™ was developed in 2003 using the EBRI Retirement Security Projection Model® (RSPM) to provide assessment of national retirement income prospects. The 2010 update uses the most recent data and considers retirement plan changes (e.g., automatic enrollment, auto escalation of contributions, and diversified default investments resulting from the Pension Protection Act of 2006) as well as updates for financial market performance and employee behavior (based on a database of 24 million 401(k) participants). This paper presents the results of the 2010 update. The baseline 2010 Retirement Readiness Rating™ finds that nearly one-half (47.2 percent) of the oldest cohort (Early Baby Boomers) are simulated to be "at risk" of not having sufficient retirement resources to pay for "basic" retirement expenditures and uninsured health care costs. The percentage "at risk" drops for the Late Boomers (to 43.7 percent) but then increases slightly for Generation Xers to 44.5 percent. Households in the lowest one-third when ranked by preretirement income are simulated to be "at risk" 70.3 percent of the time, while the middle-income group has an "at-risk" level of 41.6 percent. This figure drops to 23.3 percent for the highest-income group. These numbers are generally much more optimistic than those simulated for the same groups seven years earlier. In 2003, 59.2 percent of the Early Boomers were simulated to be "at risk," as well as 54.7 percent of the Late Boomers and 57.4 percent of the Generation Xers. When the simulation results are classified by future eligibility in a defined contribution plan, the differences in the "at-risk" percentages are quite large. For example, Gen Xers with no future years of eligibility have an "at-risk" level of 60 percent, compared with only 20 percent for those with 20 or more years of future eligibility.

The model simulates a distribution of how long retirement money will cover the expenses for Early Boomers (assuming retirement at age 65). A household is considered to "run short of money" if their resources in retirement are not sufficient to meet minimum retirement expenditures plus uncovered expenses from nursing home and home health care expenses. While knowing the percentage of households that are "at risk" is obviously valuable, it does nothing to inform one of how much additional savings is required to achieve the desired probability of success. Therefore, this analysis also models how much additional savings would need to be contributed from 2010 until age 65 to achieve adequate retirement income 50, 70, and 90 percent of the time for each household. While this concept may be difficult to comprehend at first, it is important to understand that a retirement target based on averages (such as average life expectancy, average investment experience, and average health care expenditures in retirement) provides, in essence, a retirement planning target that has approximately a 50 percent "failure" rate. Adding the 70 and 90 percent probabilities allows more realistic modeling of a worker's risk aversion.

"Lowering Social Security's Duration-of-Marriage Requirement: Distributional Effects for Future Female Retirees" 

Journal of Women & Aging, Vol. 22, No. 3, pp. 184-203, 2010

CHRISTOPHER R. TAMBORINI, U.S. Social Security Administration
KEVIN WHITMAN, U.S. Social Security Administration

A number of alternatives to Social Security's auxiliary benefit system have been proposed in the context of changes in American family and work patterns. This article focuses on one modification therein - lowering the 10-year duration-of-marriage requirement for divorced spouses. Using a powerful microsimulation model (MINT), we examine the distributional effects of extending spouse and survivor benefit eligibility to 5- and 7-year marriages ending in divorce among female retirees in 2030, a population largely comprised of baby boomers. Results show that the options would increase benefits for a small share of female retirees, around 2 to 4%, and would not affect the vast majority of low-income divorced older women. However, of those affected, the options would substantially increase benefits and lower incidence of poverty and near poor. Low-income divorced retirees with marriages between 5 and 9 years in length and a deceased former spouse face the greatest potential gains.

"The Effect of Social Entitlement Programs on Private Transfers: New Evidence of Crowding Out" 

KRISTOPHER GERARDI, Federal Reserve Bank of Atlanta
YUPING TSAI, Spelman College

We use the introduction of a large social security program in Taiwan to estimate the effect of an exogenous increase in government transfer payments to the elderly on the private transfer behavior of their adult children. Using the Panel Study of Family Dynamics (PSFD), a nationally representative dataset of Taiwanese households for the years 2002, 2004, and 2006, we adopt an instrumental variables (IV) strategy that accounts for the endogeneity of receiving public transfers. Our empirical results show strong evidence of crowding out on the extensive margin (the probability of providing a positive transfer), and weaker evidence of crowding out on the intensive margin (the amount of the transfer conditional on it being positive).

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