New papers from the Social Science Research Network

"Social Security and Retirement Around the World: Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms"
HKS Working Paper No. RWP11-007

KEVIN MILLIGAN, University of British Columbia - Department of Economics, National Bureau of Economic Research (NBER)
Email: kevin.milligan@ubc.ca
DAVID A. WISE, National Bureau of Economic Research (NBER), Harvard University - Harvard Kennedy School (HKS)
Email: dwise@nber.org

This is the introduction and summary to the fifth phase of an ongoing project on Social Security Programs and Retirement Around the World. The first phase described the retirement Incentives inherent in plan provisions and documented the strong relationship across countries between social security incentives to retire and the proportion of older persons out of the labor force. The second phase documented the large effects that changing plan provisions would have on the labor force participation of older workers. The third phase demonstrated the consequent fiscal implications that extending labor force participation would have on net program costs — reducing government social security benefit payments and increasing government tax revenues. The fourth phase presented analyzes of the relationship between the labor force participation of older persons and the labor force participation of younger persons in twelve countries. We found no evidence that increasing the employment of older persons will reduce the employment opportunities of youth and no evidence that increasing the employment of older persons will increase the unemployment of youth.

This phase is intended to set the stage for and inform future more formal analysis of disability insurance programs, with this key question: Given health status, to what extent are the differences in LFP across countries determined by the provisions of disability insurance programs? Here we first consider changes in mortality over time and in particular the relationship between mortality and labor force participation, thinking of mortality as one indicator of health that is comparable across countries and over time in the same country. We then consider how mortality is related to other indicators of health status, in particular self-assessed health and then how trends in DI participation are related to changes in health. Finally we consider the effect on disability insurance participation of "natural experiments" in which the disability insurance reforms were not prompted by changes in health status or by changes in the employment circumstances of older workers. We find that these "exogenous" reforms can have a very large effect on the labor force participation of older workers.

"The Impact of Deferring Retirement Age on Retirement Income Adequacy"

EBRI Issue Brief, No. 358, June 2011
JACK VANDERHEI, Employee Benefit Research Institute (EBRI), Temple University - Risk Management & Insurance & Actuarial Science; Email: vanderhei@ebri.org. CRAIG COPELAND, Employee Benefit Research Institute (EBRI),Email: COPELAND@EBRI.ORG

The EBRI Retirement Security Projection Model® (RSPM) was developed in 2003 to provide an assessment of national retirement income prospects. In this paper, the 2011 version of RSPM adds a new feature that allows households to defer retirement age past age 65 in an attempt to determine whether retirement age deferral is indeed sufficiently valuable to mitigate retirement income adequacy problems for most households (assuming the worker is physically able to continue working and that there continues to be a suitable demand for his or her skills). The answer, unfortunately, is not always "yes," even if retirement age is deferred into the 80s. RSPM baseline results indicate that the lowest preretirement income quartile would need to defer retirement age to 84 before 90 percent of the households would have a 50 percent probability of success. Although a significant portion of the improvement takes place in the first four years after age 65, the improvement tends to level off in the early 70s before picking up in the late 70s and early 80s. Households in higher preretirement income quartiles start at a much higher level, and therefore have less improvement in terms of additional households reaching a 50 percent success rate as retirement age is deferred for these households. If the success rate is moved to a threshold of 70 percent, only 2 out of 5 households in the lowest-income quartile will attain retirement income adequacy even if they defer retirement age to 84. Increasing the threshold to 80 percent reduces the number of lowest preretirement income quartile households that can satisfy this standard at a retirement age of 84 to approximately 1 out of 7. One of the factors that makes a major difference in the percentage of households satisfying the retirement income adequacy thresholds at any retirement age is whether the worker is still participating in a defined contribution plan after age 65. This factor results in at least a 10 percentage point difference in the majority of the retirement age/income combinations investigated. Another factor that has a tremendous impact on the value of deferring retirement age is whether stochastic post-retirement health care costs are excluded (or the stochastic nature is ignored). For the lowest preretirement income quartile, the value of deferral (in terms of percentage of additional households that will meet the threshold by deferring retirement age from 65 to 84) decreases from 16.0 percent to 3.8 percent by excluding these costs. The highest preretirement income quartile experiences a similar decrease, from 12.8 percent to 2.6 percent.

"How Changes in Longevity Annuity Prices and Longevity Risk Affect Retirement Income Adequacy"

EBRI Notes, Vol. 32, No. 6, June 2011
YOUNGKYUN PARK, Employee Benefit Research Institute (EBRI)
Email: park@ebri.org

Building on the May 2011 EBRI Issue Brief, this paper analyzes how changes in longevity annuity prices and longevity risk affect retirement income adequacy of retirees facing three different types of risk-investment income, longevity, and long-term care risk. Longevity annuities are similar to immediate annuities in that they provide a stream of fixed benefits over time (usually until death). Unlike an immediate annuity, which (as the name implies) begins to provide a benefit immediately upon purchase, a longevity annuity starts to distribute its payments only when the retiree reaches an advanced age, such as 80 or 85. The price of a longevity annuity is lower than that of an immediate annuity because it is mainly determined by conditional survival, which declines with age. In other words, a longevity annuity distributes higher payments per premium dollar compared with an immediate annuity because the payments are deferred until a commencement age at which the chance of survival declines. Since retirement income adequacy depends, in part, on different annuity prices (how much the annuity costs) and mortality (how long the individual lives), this paper analyzes how those factors would affect the retirement income adequacy of retirees targeting a desired level of adequacy (e.g., a 90 percent probability of adequacy). As the price of a longevity annuity increases, and as longevity risk grows, more initial retirement wealth is needed and the degree of annuitization needs to be increased - especially to achieve a 90 percent chance of adequacy (the inverse is true as well). The optimal degree of annuitization with a longevity annuity, however, depends on how much an individual's retirement portfolio is invested in equities. The analysis also shows how changes in longevity annuity price and longevity risk affect retirement income adequacy in terms of a multiple of final earnings. Note: The simulation results presented here were based on certain assumptions for a male retiring at age 65, with specific long-term capital market and investment expenses, and long-term general and health-care cost inflation rates. Additional research is needed to analyze retirement income adequacy for a female or a household with alternative assumptions.

The PDF for the above title, published in the June 2011 issue of EBRI Notes, also contains the fulltext of another June 2011 EBRI Notes article abstracted on SSRN: "Tracking Health Insurance Coverage by Month: Trends in Employment-Based Coverage Among Workers, and Access to Coverage Among Uninsured Workers, 1995-2009."

"The Future of Retirement and the Pension System: How the Public's Expectations Vary Over Time and Across Socio-Economic Groups"

CentER Working Paper Series No. 2011-065

LUC BISSONNETTE, Tilburg University
Email: l.bissonnette@uvt.nl
ARTHUR H. O. VAN SOEST, RAND Corporation, Netspar, Tilburg University, Institute for the Study of Labor (IZA)
Email: A.H.O.vanSoest@uvt.nl

We analyze expectations of the Dutch population of ages 25 and older concerning the future generosity state and occupational pensions, the two main pillars of the Dutch pension system. Since the summer of 2006, monthly survey data were collected on the expectations of Dutch households concerning purchasing power of occupational pensions, eligibility and purchasing power of old age social security benefits, and the average retirement age ten or twenty years from now. We investigate how these expectations have changed over time and how they vary with socio-economic characteristics. Exploiting the fact that we have data until September 2010, we also analyze the effect of the recent financial and economic crisis. We find significant differences in expectations of different socio-economic groups, mainly suggesting that groups who are probably better informed were also more pessimistic.

"Subcultures in Household Financial Decision-Making: An Exploratory Study of Risky Asset Ownership in the Netherlands"

MICHAEL M. DOWLING, Trinity College, Dublin - School of Business Studies
Email: Michael.M.Dowling@tcd.ie

Research into cultural influences on financial decision-making is increasingly delivering interesting and novel findings on how households make their financial decisions. This study utilises a large population-representative survey of households in the Netherlands to investigate whether World Values Survey cultural dimensions are related to intra-national differences in household financial decision-making. The main finding is that subcultures characterised as Self-Expressive are more than twice as likely to own risky assets as those on the opposite end of the cultural dimension (Survivalists). These findings are robust to checks for confounding factors such as gender and income.