Friday, November 18, 2011

New papers from the Social Science Research Network


"Optimal Discrete Ratchet Consumption" 

JOHN G. WATSON, Financial Engines, Inc., Stanford University - Graduate School of Business
JASON S. SCOTT, Financial Engines, Inc.

Philip Dybvig (1995) found optimal spending and investment strategies for endowments with zero tolerance for spending declines. His spending rule is a ratchet - spending never decreases, but has a substantial chance of increasing. Many retirees find this strategy appealing, and in this paper, we find an optimal consumption rule for them. In particular, we solve a discrete-time, finite-horizon version of the ratchet problem. Further, we generalize the utility's felicity and time preference functions, so that we can tailor a solution to a retiree's specific preferences. For optimality, a spending rule must be paired with an investment rule. Here, we investigate dynamic investment strategies - we treat consumption as a derivative security and derive formulas for its delta-hedge.

"The 2006 Earnings Public-Use Microdata File: An Introduction" 
Social Security Bulletin, Vol. 71, No. 4, pp. 33-59, 2011

MICHAEL COMPSON, Office of Research, Evaluation and Statistics

This article introduces the 2006 Earnings Public-Use File (EPUF) and provides important background information on the file's data fields. The EPUF contains selected demographic and earnings information for 4.3 million individuals drawn from a 1-percent sample of all Social Security numbers issued before January 2007. The data file provides aggregate earnings for 1937 to 1950 and annual earnings data for 1951 to 2006. The article focuses on four key items: (1) the Social Security Administration's experiences collecting earnings data over the years and their effect on the data fields included in EPUF; (2) the steps taken to "clean" the underlying administrative data and to minimize the risk of personal data disclosure; (3) the potential limitations of using EPUF data to estimate Social Security benefits for some individuals; and (4) frequency distributions and statistical tabulations of the data in the file, to provide a point of reference for EPUF users.

"What Can We Learn from Analyzing Historical Data on Social Security Entitlements?" 
Social Security Bulletin, Vol. 71, No. 4, pp. 1-13, 2011

JOYCE MANCHESTER, Government of the United States of America - Congressional Budget Office (CBO)
JAE SONG, U.S. Social Security Administration

We use data from Social Security administrative records to examine the lifetime patterns of initial entitlement to retired-worker and Disability Insurance (DI) benefits across cohorts born in different years. Breaking out age-at-entitlement patterns for different birth-year cohorts reveals close adherence in entitlement ages to changes in program rules, such as increasing the full retirement age. The proportion of a cohort that becomes newly entitled to DI benefits rises noticeably during recessions and at ages 50 and 55, and cumulative entitlement rate patterns show that more recent cohorts rely increasingly on DI benefits in their late 30s and 40s.

"Behavioral and Psychological Aspects of the Retirement Decision" 
Social Security Bulletin, Vol. 71, No. 4, pp. 15-32, 2011

MELISSA KNOLL, Social Security Administration - Office of Retirement Policy

The majority of research on the retirement decision has focused on the health and wealth aspects of retirement. Such research concludes that people in better health and those enjoying a higher socioeconomic status tend to work longer than their less healthy and less wealthy counterparts. While financial and health concerns are a major part of the retirement decision, there are other issues that may affect the decision to retire that are unrelated to an individual's financial and health status. Judgment and decision-making and behavioral-economics research suggests that there may be a number of behavioral factors influencing the retirement decision. The author reviews and highlights such factors and offers a unique perspective on potential determinants of retirement behavior, including anchoring and framing effects, affective forecasting, hyperbolic discounting, and the planning fallacy. The author then describes findings from previous research and draws novel connections between existing decision-making research and the retirement decision.

"Caregiver Credits in France, Germany, and Sweden: Lessons for the United States" 
Social Security Bulletin, Vol. 71, No. 4, pp. 61-76, 2011

JOHN JANKOWSKI, Government of the United States of America - Social Security Administration

Recently, analysts in the United States (US) have proposed adopting caregiver credits, or pension credits, provided to individuals for time spent out of the workforce while caring for dependent children and sick or elderly relatives. The primary objective of these credits, used in almost all public pension systems in the European Union, is to improve the adequacy of old-age benefits for women whose gaps in workforce participation typically lead to fewer years of contributions, lower lifetime average earnings, and consequently lower pensions. This article examines caregiver credits in the context of future reforms to the US Social Security system, with attention given to the adequacy of current spouse and survivor benefits and how changing marital patterns and family structures have increased the risk of old-age poverty among certain groups of women. It then analyzes caregiver credit programs in selected countries, with particular focus on design, administration, and cost.

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