New papers from the NBER

Financial Literacy, Schooling, and Wealth Accumulation by Jere R. Behrman, Olivia S. Mitchell, Cindy Soo, David Bravo  -  #16452 (AG)

Abstract:

Financial literacy and schooling attainment have been linked to household wealth accumulation. Yet prior findings may be biased due to noisy measures of financial literacy and schooling, as well as unobserved factors such as ability, intelligence, and motivation that could enhance financial literacy and schooling but also directly affect wealth accumulation.  We use a new household dataset and an instrumental variables approach to isolate the causal effects of financial literacy and schooling on wealth accumulation.  While financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, our approach reveals even stronger and larger effects of financial literacy on wealth.  Estimated impacts are substantial enough to suggest that investments in financial literacy could have large positive effects on household wealth accumulation.

http://papers.nber.org/papers/W16452

Policy Options for State Pension Systems and Their Impact on Plan Liabilities by Joshua Rauh, Robert Novy-Marx  -  #16453 (PE)

Abstract:

We calculate the present value of state pension liabilities under existing policies, and separately under policy changes that would affect pension payouts including cost of living adjustments (COLAs), retirement ages, and buyout schedules for early retirement. Liabilities if plans were frozen as of June 2009 would be $3.2 trillion if capitalized using taxable municipal curves, which credit states for a possibility of default in the same states of the world as general obligation debt, and $4.4 trillion using the Treasury curve.  Under the typical actuarial method of recognizing future service and wage increases, liabilities are $3.6 trillion and $5.2 trillion using municipal curves and Treasury curves respectively. Compared to $1.8 trillion in pension fund assets, the baseline level of unfunded liabilities is therefore around $3 trillion under Treasury rates.  A one percentage point reduction in COLAs would reduce total liabilities by 9‐11%, implementing actuarially fair early retirement could reduce them by 2‐5%, and raising the retirement age by one year would reduce them by 2‐4%.  Even relatively dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities around $1.5 trillion more than plan assets under Treasury discounting.  This suggests that taxpayers will bear the lion's share of the costs associated with the legacy liabilities of state DB pension plans.

http://papers.nber.org/papers/W16453

Public Pension Funding in Practice by Alicia H. Munnell, Jean-Pierre Aubry, Laura Quinby  -  #16442 (AG PE POL)

Abstract:

Public pension funding has recently become a front-burner policy issue in the wake of the financial crisis and given the pending retirement of large numbers of baby boomers.  This paper examines the current funding of state and local pensions using a sample of 126 plans, estimating an aggregate funded ratio in 2009 of 78 percent. Projections for 2010-2013 suggest that some continued deterioration is likely.  Funded status can vary significantly among plans, so the paper explores the influence of four types of factors: funding discipline, plan governance, plan characteristics, and the fiscal situation of the state.  Judging the adequacy of funding requires more than just a snapshot of assets and liabilities, so the paper examines how well plans are meeting their Annual Required Contribution and what factors influence whether they make them.  The paper also addresses the controversy over what discount rate to use for valuing liabilities, concluding that using a riskless rate of return could help improve funding discipline but would need to be implemented in a manageable way.  Finally, the paper assesses whether plans face a near-term liquidity crisis and finds that most have assets on hand to cover benefits over the next 15-20 years.  The bottom line is that, like private investors, public plans have been hit hard by the financial crisis and their full recovery is dependent on the rebound of the economy and the stock market.