Thursday, October 14, 2010

New papers from the Social Science Research Network


"Individuals' Uncertainty about Future Social Security Benefits and Portfolio Choice" 

RAND Working Paper Series WR- 782

ADELINE DELAVANDE, New University of Lisbon - Faculdade de Economia Email:
SUSANN ROHWEDDER, The RAND Corporation Email:

Little is known about the degree to which individuals are uncertain about their future Social Security benefits, how this varies within the U.S. population, and whether this uncertainty influences financial decisions related to retirement planning. To illuminate these issues, the authors present empirical evidence from the Health and Retirement Study Internet Survey and document systematic variation in respondents' uncertainty about their future Social Security benefits by individual characteristics. They find that respondents with higher levels of uncertainty about future benefits hold a smaller share of their wealth in stocks.

"Retirement Income Adequacy for Today's Workers: How Certain, How Much Will it Cost, and How Does Eligibility for Participation in a Defined Contribution Plan Help?" 

EBRI Notes, Vol. 31, No. 9, September 2010

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

The concept of retirement income adequacy for today's workers has been gaining increased interest in recent months with the prospects of lower investment yields as well as the limited employment options for Baby Boomers wanting to work past retirement. Earlier this year, EBRI updated its Retirement Security Projection Model® (RSPM) to show how the EBRI Retirement Readiness Ratings™ (measuring the percentage of households that are likely to have sufficient money in retirement to pay for basic expenses plus uninsured health care costs) have changed in the last seven years. The good news is that the portion of Boomers and Gen Xers "at risk" of having inadequate retirement income has actually decreased during that time, even after factoring in the recent decline in the financial markets and housing values. Early Boomers (those born between 1948 and 1954) had an "at risk" rating of 59 percent in 2003; however, by 2010 that number had dropped to 47 percent. The "at risk" ratings for Late Boomers (those born between 1955 and 1964) decreased from 55 to 44 percent, while those for Gen Xers (those born between 1965 and 1974) decreased from 57 to 45 percent. Unfortunately, that still leaves nearly one-half of the households in these age cohorts "at risk" of having inadequate retirement income, and the likelihood that the Early Boomers will run short of money within the first 10 years of retirement is as high as 41 percent for those in the lowest (preretirement) income quartile.

This paper builds on EBRI's Retirement Security Projection Model® (RSPM) to determine how much households need to save each year until retirement to maintain a probability level they will be able to afford simulated retirement expenses for the remainder of the lifetime of the family unit. The objective of this paper is to focus on the importance of future eligibility for a defined contribution plan, whether or not the employee actually chooses to participate. The RSPM model shows that eligibility for a defined contribution (primarily 401(k)) retirement plan has a significant positive impact on reducing the additional compensation most families need to achieve the desired level of retirement income adequacy. This finding has major implications for any policies that would decrease the percentage of workers eligible to participate in defined contribution retirement plans. Furthermore, it is clear from the results presented in the paper that the relative impact of future eligibility in a defined contribution plan will depend on several factors: the workers' ages; their relative income level; the probability of retirement income adequacy they desire; whether the appropriate target is the median additional percentage of compensation or one large enough that 3 out of 4 workers would have sufficient retirement income.

The PDF for the above title, published in the September 2010 issue of EBRI Notes, also contains the fulltext of another September 2010 EBRI Notes article abstracted on SSRN: "2010 Health Confidence Survey: Health Reform Does Not Increase Confidence in the Health Care System."

"When the State Mirrors the Family: The Design of Pension Systems" 

CESifo Working Paper Series No. 3191

VINCENZO GALASSO, University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER), Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Email:
PAOLA PROFETA, Bocconi University, CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Email:

This paper studies the transmission mechanism from family culture to economic institutions, by analyzing the impact of the within family organization on the original design of the public pension systems. We build a simple OLG model with families featuring either weak or strong internal ties. When pensions systems are initially introduced, in society with strong ties they replicate the tight link between generations by providing earnings related benefits; whereas in societies with weak family ties they only act as a safety net. To test this transition mechanism, we consider Todd (1982) historical classification of family types across countries. We find that in societies dominated by absolute nuclear families (i.e., weak family ties), pension systems act as a flat safety net entailing a large within-cohort redistribution, and viceversa in societies characterized by stronger family ties where pension systems are more generous. This link between the type of families and the design of pension systems is robust to testing for alternative explanations, such as legal origin, religion, urbanization and democratization of the country at the time of their introduction. Interestingly, historical family types matter for explaining the design of the pension systems, which represents a persistent feature, but not their size, which have largely changed over time.

"Insult to Injury: Disability, Earnings, and Divorce" 

PERRY SINGLETON, Syracuse University - Department of Economics Email:

This study examines the effect of work-limiting disabilities on the likelihood of divorce. Theoretically, the effect depends on the disability hazard at the time of onset and the impact of disability on marital value. The theory therefore implies, based on a set of empirically supported premises, that the effect of disability on divorce should decrease with age, increase with education, and increase with disability severity. Data from the Survey of Income and Program Participation support these predictions. The effect of a work-preventing disability is greatest among young, educated males, increasing the divorce hazard by 13.3 percentage points.

"Protecting the Social and Economic Interests of Persons Who Lose Their Employment in Kenya" 

STEPHEN THUKU MBAARO, affiliation not provided to SSRN Email:

Social security has been defined as the protection which society provides for its members through a series of public measures against the economic and social distress that otherwise would be caused by stoppage, or substantial reduction of earnings resulting from sickness, maternity, employment injury, unemployment, invalidity, old age and death the provision of medical care and the provision of subsidies for families with children.1 It is the process through which the Social and Economic rights are continually assured of a population amidst a variety of situations some of which are unforeseen and unpredictable such as loss of employment or in any of the ways herein above mentioned. This paper explores some of the mechanisms that Kenya has put in place to see to it that her workers are somehow cushioned from the social shock that follows loss of jobs and also suggests ways in which the existing systems can be improved.

"Fertility Impact of Social Transfers in Sub-Saharan Africa – What About Pensions?" 

GÖRAN HOLMQVIST, affiliation not provided to SSRN Email:

The potential link between child-related cash transfers and increased fertility is often raised an issue of concern when debating their use. Old-age pension is a form of cash transfer where theory would suggest the opposite impact, i.e. pensions equal decreasing fertility. A handful of Sub-Saharan African countries have introduced non-contributory social pensions that cover the great majority of the older population. It makes them into a distinct group in relation to the rest of the region where public old-age security arrangements, if existing at all, are largely reserved for the formal sector. This paper attempts to trace any impact these high-coverage pension schemes may have had on fertility. Findings suggest that there has been such an impact, in the range of 0,5 to 1,5 children less per woman depending on model specification.

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