Thursday, July 22, 2010

New Social Security papers from the Social Science Research Network (SSRN)


"Coverage of the Fully Funded Private Social Security System in Chile, Colombia, and Mexico" RAND Working Paper Series WR- 642

ORAZIO ATTANASIO, University College London - Department of Economics, Institute for Fiscal Studies (IFS), Centre for Economic Policy Research (CEPR), National Bureau of Economic Research (NBER)
XIMENA QUINTANILLA, University College London

This paper compares the differences of individual coverage in the fully-funded social security systems of three Latin American countries. Chile, Columbia, and Mexico each have defined contributions social security systems, yet there are significant differences in system design and incentive that may affect individuals' participation. Here, we examine social security coverage by comparing the system design, economic performance, and labor market structure of each country. We consider the different macroeconomic paths and labor markets structures of each country, especially those regarding the informal labor sector. Micro-data is also used to examine how personal and household characteristics affect the social security system participation. For Colombia, only cross-section estimations are carried out, while panel data for Chile and Mexico allows control for unobserved heterogeneity. Our study reveals the low coverage rates of each social security system is strongly related to economic cycles and the lack of compulsory contributions to the system by self-employed workers. We find a higher probability to contribute to the system for men, head of households, higher number of household members, married, and higher levels of education. Also, females with high levels of education are more likely to contribute to the social security system.

"Target-Date Fund Use Over Time" EBRI Notes, Vol. 31, No. 7, July 2010

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)

The use of target-date funds (TDFs) in 401(k) plans has increased rapidly in recent years. The percentage of all 401(k) plan participants using TDFs increased from 25 percent in 2007 to 31 percent in 2008. One of the reasons for this growth is that TDFs have been a popular choice for the default fund when 401(k) plans have an auto-enrollment feature. Consequently, use of these funds has been found to more likely occur among younger participants, participants with lower account balances, and participants with shorter tenure at their current job, as new workers are the most likely to be auto-enrolled in their employer's 401(k) plan. This paper examines the persistence of use in TDFs among those who were using these funds in 2007. Therefore, the percentage of participants who remain in these plans is determined, as well as the percentage of participants who added TDFs among those not already using them in 2007. The analysis is focused on 401(k) participants who were in plans that offered TDFs in 2007 to see whether they remained in TDFs, moved out of TDFs, or moved into TDFs if they were not already using them.

The PDF for the above title, published in the July 2010 issue of EBRI Notes, also contains the full text of another July 2010 EBRI Notes article abstracted on SSRN: "The Early Retiree Reinsurance Program: $5 Billion Will Last About Two Years."

"Social Security Benefits Formula 101: A Practical Primer" American Bar Association - Section of Taxation News Quarterly, Vol. 29, No. 4, Summer 2010

FRANCINE J. LIPMAN, Chapman University - School of Law
JAMES E. WILLIAMSON, San Diego State University - College of Business Administration

Despite the broad and deep reliance on Social Security benefits, very few of the hundreds of millions of current and future beneficiaries understand how the program works. This article presents through a hypothetical couple some of the basic concepts of the Social Security benefits formula.

"Revisiting Retirement Withdrawal Plans and Their Historical Rates of Return" 

FELIX SCHIRRIPA, Financial Designs, LLC

This paper examines the historical record of the so-called 4% rule, the popular guideline for sustainable real annual withdrawals in a self funded retirement. Our findings indicate that a withdrawal plan following this rule ("4R") carries an historical risk of failure for a long retirement that is much higher than generally acknowledged. For example, we find that 15% of the historical 35-year retirements failed when funded with equal parts of stocks and bonds. The "real" withdrawal plans that generated no historical failures were all less than 4%, sometimes far less, when retirements exceeded 25 years. The historical failure rates that we find for a 5R plan are higher than a 4R plan by a factor of at least three for all retirement periods.

The historical failures are not random. Rather they occur in clusters of years in which the majority of new retirement withdrawal plans fail. A key driver of these failures was a rapid, significant and lasting increase in the rate of inflation - this event increased withdrawals and contributed to a declining real rate of return that was ultimately unable to support the withdrawal plan.

Our review of the prior literature and a detailed description of the methodology used in the study appear at the end of the paper, after the Summary and Conclusions section.


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