New papers from the Social Science Research Network

"Tax Reform Options: Promoting Retirement Security" 
EBRI Issue Brief, No. 364, November 2011

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)
Email: vanderhei@ebri.org

This paper analyzes two recent proposals to change the existing tax treatment of 401(k) retirement plans and is based on EBRI's proprietary Retirement Security Projection Model.™ Currently, the combination of worker and employer contributions in a defined contribution plan is capped by the federal tax code at the lesser of $49,000 per year or 100 percent of a worker's compensation (participants over age 50 can make additional "catch-up" contributions). As part of the effort to lower the federal deficit and reduce federal "tax expenditures," two major reform proposals have surfaced that would change current tax policy toward retirement savings: (1) a plan that would end the existing tax deductions for 401(k) contributions and replace them with a flat-rate refundable credit that serves as a matching contribution into a retirement savings account; (2) the so-called "20/20 cap," included by the National Commission on Fiscal Responsibility and Reform in their December 2010 report, "The Moment of Truth," which would limit the sum of employer and worker annual contributions to the lower of $20,000 or 20 percent of income, the so-called "20/20 cap." If the current exclusion of worker contributions for retirement savings plans were ended in 2012 and the total match remains constant, the average reductions in 401(k) accounts at Social Security normal retirement age would range from a low of 11.2 percent for workers currently ages 26-35 in the highest-income groups, to a high of 24.2 percent for workers in that age range in the lowest-income group. Earlier EBRI analysis of enacting the 20/20 cap starting in 2012 showed it would, as expected, most affect those with high income. However, EBRI also found the cap would cause a significant reduction in retirement savings by the lowest-income workers as well, and younger cohorts would experience larger reductions given their increased exposure to the proposal. A key factor in future retirement income security is whether a worker has access to a retirement plan at work. EBRI has found that voluntary enrollment in 401(k) plans under the current set of tax incentives has the potential to generate a sum that, when combined with Social Security benefits, would replace a sizeable portion of a worker's preretirement income, and that auto-enrollment could produce even larger retirement accumulations. The potential increase of at-risk percentages resulting from (1) employer modifications to existing plans, and (2) a substantial portion of low-income households decreasing or eliminating future contributions to savings plans as a reaction to the proposed elimination of the exclusion of employee contributions for retirement savings plans from taxable income, needs to be analyzed carefully when considering the overall impact of proposals to change existing tax incentives for retirement savings.

"How Prepared are State and Local Workers for Retirement?" 

JEAN-PIERRE AUBRY, Center for Retirement Research at Boston College
Email: aubryj@bc.edu
LAURA QUINBY, Boston College - Center for Retirement Research
Email: quinbyl@bc.edu
ALICIA MUNNELL, Boston College - Center for Retirement Research
Email: MUNNELL@BC.EDU
JOSH HURWITZ, affiliation not provided to SSRN

A widespread perception is that state-local government workers receive high pension benefits which, combined with Social Security, provide more than adequate retirement income. This study uses the Health and Retirement Study (HRS) and actuarial reports to test this hypothesis. The major finding from the HRS analysis is that most households with state-local employment end up with replacement rates that, while on average higher than those in the private sector, are well below the 80 percent needed to maintain pre-retirement living standards. Even those households with a long-service state-local worker – those who spend more than half of their careers in public employment – have a median replacement rate, including Social Security, of only 72 percent. And this group accounts for less than 30 percent of state-local households. The remaining 70 percent of households with a short- or medium-tenure state-local worker have replacement rates of 48 percent and 57 percent, respectively. Adding income from financial assets still leaves most state-local households short of the target.

"Do Couples Self-Insure? The Effect of Informal Care on a Couple's Labor Supply" 

NORMA B. COE, Boston College - Center for Retirement Research
Email: norma.coe.1@bc.edu
MEGHAN SKIRA, Boston College - Center for Retirement Research
Email: skira@bc.edu
COURTNEY VAN HOUTVEN, Duke University
Email: courtney.vanhoutven@duke.edu

How does informal care provision to an elderly parent affect the labor supply outcomes of a couple? Previous work examines the relationship between caregiving and the labor market decisions of the care provider, but ignores any labor supply response of the spouse to such decisions. Using data from the Health and Retirement Survey, we examine how informal care provision affects the labor supply of both members of a couple, at both the intensive and extensive margins. Such analysis is especially important for evaluating informal care's potential effect on retirement timing and household wealth accumulation. We find that providing personal care to an elderly parent reduces a married man's chance of working by 3.2 percentage points, but providing such care does not affect a married woman's chance of working. Additionally, male labor force decisions remain inelastic in response to the wife's caregiving behavior. Working married women do adjust their hours of work in response to caregiving, but in the opposite direction that within-couple insurance would suggest. Instead, the woman increases her work by one hour a week if she is the only care provider, and decreases her work when the husband is the only care provider. When both members of the couple provide informal care these effects cancel out.

"Spending Flexibility and Safe Withdrawal Rates" 

MICHAEL S. FINKE, Texas Tech University, University of Missouri at Columbia - Department of Finance
Email: michael.finke@ttu.edu
WADE PFAU, National Graduate Institute for Policy Studies (GRIPS)
Email: wpfau@grips.ac.jp
DUNCAN WILLIAMS, affiliation not provided to SSRN
Email: Duncan.Williams@ttu.edu

Shortfall risk retirement income analyses offer little insight into how much risk is optimal, and how risk tolerance affects retirement income decisions. This study models retirement income risk in a manner consistent with risk tolerance in portfolio selection in order to estimate optimal asset allocations and withdrawal rates for retirees with different risk attitudes. We find that the 4 percent retirement withdrawal rate strategy may only be appropriate for risk averse clients with moderate guaranteed income sources. The ability to accept greater shortfall probabilities means that risk tolerant investors will prefer a higher withdrawal rate and a riskier retirement portfolio. A risk tolerant client may prefer a withdrawal rate of between 5 and 7 percent with a guaranteed income of $20,000. The optimal retirement portfolio allocation to stock increases by between 10 and 30 percentage points and the optimal withdrawal rate increases by between 1 and 2 percentage points for clients with a guaranteed income of $60,000 instead of $20,000.

"The Demand for Social Insurance: Does Culture Matter?" 
University of Zurich Department of Economics Working Paper No. 41

BEATRIX BRÜGGER, University of Lausanne
Email: beatrix.bruegger@unil.ch
RAFAEL LALIVE, University of Lausanne - Department of Economics (DEEP), Institute for the Study of Labor (IZA), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email: Rafael.Lalive@unil.ch
ANDREAS STEINHAUER, University of Zurich
Email: steinhauer@iew.uzh.ch
JOSEF ZWEIMUELLER, University of Zurich - Department of Economics, Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Institute for the Study of Labor (IZA)
Email: zweim@iew.unizh.ch

Can different social groups develop different demands for social insurance of risks to health and work? We study this issue across language groups in Switzerland. Language defines social groups and Swiss language groups are separated by a clear geographic border. Actual levels of social insurance are identical on either side of the within state segments of the language border. We can therefore study the role of culture in shaping the demand for social insurance. Specifically, we contrast at the language border actual voting decisions on country-wide changes to social insurance programs. Key results indicate substantially higher support for expansions of social insurance among residents of Latin-speaking (i.e. French, Italian, or Romansh) border municipalities compared to their German-speaking neighbors in adjacent municipalities. We consider three possible explanations for this finding: informal insurance, ideology, and the media. We find that informal insurance does not vary enough to explain stark differences in social insurance. However, differences in ideology and segmented media markets are potentially important explanatory factors.

"Diversity and Defined Contribution Plans: The Role of Automatic Plan Features" 

STEPHEN P. UTKUS, Vanguard Group, Inc.
Email: steve_utkus@vanguard.com
CYNTHIA A. PAGLIARO, The Vanguard Group, Inc.
Email: cynthia_a_pagliaro@vanguard.com

In a sample of seven large defined contribution (DC) plans, automatic enrollment reduces differences in savings and investment behavior associated with race and ethnicity. Participation rates rise across the board with automatic enrollment, but particularly for blacks and Hispanics. Automatically enrolled whites and Asians are more likely to override the default deferral rate than blacks and Hispanics, leading to a difference in deferral rates. Automatic enrollment to a default target-date fund equalizes risk-taking and reduces extreme portfolio allocations for all groups.