Wednesday, February 29, 2012

New papers from the Social Science Research Network

"Home Production and Social Security Reform"
FRB of Philadelphia Working Paper No. 12-5

MICHAEL DOTSEY, Federal Reserve Bank of Philadelphia
WENLI LI, Federal Reserve Bank of Philadelphia

This paper incorporates home production into a dynamic general equilibrium model of overlapping generations with endogenous retirement to study Social Security reforms. As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, we find that eliminating the current pay-as-you-go Social Security system has important implications for both labor supply and consumption decisions and that these decisions are influenced by the presence of a home production technology. Comparing our benchmark economy to one with differentiated goods but no home production, we find that eliminating Social Security benefits generates larger welfare gains in the presence of home production. This result is due to the self insurance aspects generated by the presence of home production. Comparing our economy to a one-good economy without home production, we show that the welfare gains of eliminating Social Security are magnified even further. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production.

"Expenditure Patterns of Older Americans, 2001-2009" EBRI Issue Brief, No. 368, February 2012

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI)

This paper examines the consumption pattern of the older section of the U.S. population. The majority of the households studied here have either reached retirement age or are on the cusp of retirement. The data come from the Health and Retirement Study (HRS) and the Consumption and Activities Mail Survey (CAMS), which is a supplement of the HRS. CAMS contains detailed spending information on 26 nondurable and six durable categories, and it follows the same group of people over eight years. Using this information coupled with the income, wealth, health, and labor-market information available in the HRS, this study attempts to summarize the consumption behavior of the American elderly. It has three primary objectives: (1) To examine how consumption patterns evolve with age, income, and other demographic characteristics; (2) To study the income, expenditures, and wealth-holding patterns of the elderly to get a sense of how they are managing their finances and if they are at risk of outliving their assets; (3) To determine if long-term care (LTC) insurance and private health insurance affect the elderly’s consumption behavior. Household expenses steadily decline with age. With the age 65 expenditure as a benchmark, household expenditure falls by 19 percent by age 75, 34 percent by age 85, and 52 percent by age 95. Home and home-related expenses remain the single largest spending category for older Americans. On average, those over age 50 spend around 40-45 percent of their budget on home and home-related items. Health-related expenses are the second-largest component in the budget of older Americans. It is the only component which steadily increases with age. Health care expenses capture around 10 percent of the budget for those between 50-64, but increase to about 20 percent for those age 85 and over. The results show that while high-income households are managing their income and expenses well in retirement, low-income households are struggling. The high-income households maintain high levels of wealth, but whether these wealth levels will be sufficient to support them through very advanced ages or in case of catastrophic expenditure shocks is beyond the scope of this study. But for low-income households that are already struggling, such events will only make matters worse. There are several key demographic groups that are also not doing well in retirement, and they may be at risk of running short of wealth at some point in retirement. Demographic groups such as singles, blacks, and high school dropouts are outspending their resources in retirement. Not surprisingly, the lowest-income group (bottom-income quartile) which is generally overwhelmingly represented by the above groups, appears to be struggling the most. Long-term care and some form of private health insurance coverage have a significant effect on increased spending by older households.

"Labor-force Participation Rates of the Population Age 55 and Older, 2011: After the Economic Downturn" EBRI Notes, Vol. 33, No. 2, February 2012

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)

This paper examines the most recent U.S. Census Bureau data on labor-force participation among Americans age 55 and older in 2011, including the trends after the economic recession that started in late 2007-early 2008 and thereafter. The labor-force participation rate measures the fraction of individuals within a specific group (in this case those 55 or older) who are working or actively pursuing work. This rate reflects both the desire and/or the need of individuals to work in a particular group. The first section uses annualized data on labor-force participation from the Current Population Survey (CPS), available from the Bureau of Labor Statistics website. However, these data provide only an overall picture, with few specific demographic details. In order to examine additional demographic trends of the U.S. population, the second section uses data from the March 2011 Supplement to the CPS. The labor-force participation rate for those age 55 and older has remained above its level before the economic downturn. For those ages 55-64, this is almost exclusively due to the increase of women in the work force; the male participation rate is flat to declining. However, among those age 65 and older, labor-force participation increased for both males and females. This upward trend is not surprising and is likely to continue because of workers’ need for continued access to employment-based health insurance and for more earning years to accumulate savings in defined contribution (401(k)-type) plans. Older Americans, particularly those in the private sector, increasingly have less access to guaranteed levels of income (such as pensions) or health insurance benefits when they retire; consequently, they have a greater need to work to help make their assets last longer or to continue to build up (or to rebuild) the assets they had or were not able to accumulate previously. However, financial concerns are not the only incentives involved here -- there also is an increased desire among many Americans to work longer, particularly among those with more education, for whom more meaningful jobs are often available that can be done well into older ages. The recent economic downturn did not alter the trend of older workers increasingly being in the labor force; rather, it appears that this remains the trend, as more opportunities for older workers exist and there is a greater necessity for them to remain in the labor force to accumulate sufficient or adequate resources for retirement.
The PDF for the above title, published in the February 2012 issue of EBRI Notes, also contains the fulltext of another February 2012 EBRI Notes article abstracted on SSRN: “Employer and Worker Contributions to Health Savings Accounts and Health Reimbursement Arrangements, 2006-2011.”

"This is Not Your Parents’ Retirement: Comparing Retirement Income Across Generations"
Social Security Bulletin, Vol. 72, No. 1, pp. 37-58, 2012

BARBARA A. BUTRICA, The Urban Institute
KAREN E. SMITH, Urban Institute
HOWARD IAMS, U.S. Social Security Administration

This article examines how retirement income at age 67 is likely to change for baby boomers and persons born in generation X (GenX) compared with current retirees. We use the Social Security Administration’s Modeling Income in the Near Term (MINT) model to project retirement income and assets, poverty rates, and replacement rates for current and future retirees at age 67. We find that, in absolute terms, retirement incomes of future cohorts will increase over time, and poverty rates will fall. However, projected income gains are larger for higher than for lower socioeconomic groups, leading to increased income inequality among future retirees. Finally, because post retirement incomes are not expected to rise as much as pre-retirement incomes, baby boomers and GenXers are less likely to have enough post-retirement income to maintain their pre-retirement standard of living compared with current retirees.

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