New papers from the Social Science Research Network

"Great Recession-Induced Early Claimers: Who are They? How Much Do They Lose?"
Center for Retirement Research at Boston College Working Paper No. 2012-12

MATTHEW S. RUTLEDGE, Boston College
Email: rutledma@umich.edu
NORMA B. COE, Boston College - Center for Retirement Research
Email: norma.coe.1@bc.edu

During the Great Recession, more older workers have claimed Social Security retirement benefits early. This paper addresses two important policy questions: Who are these early claimers? How much retirement income have they lost as a result of claiming early? Using the Health and Retirement Study (HRS) we estimate a discrete-time hazard model that makes claiming Social Security benefits a function of age, personal characteristics, and the national unemployment rate. We project that high unemployment rates during the Great Recession led to a 5-percentage-point increase in the probability of claiming early relative to less severe recessions such as the 2001-2003 downturn, and this increase was nearly uniform across socioeconomic groups. Our estimates also suggest that while the Great Recession did impact the claiming decision, it did not cause a dramatic change in monthly benefits. Those individuals we label as “Great Recession Claimers” – whom we simulate were likely to claim their benefits early during the Great Recession but would not have claimed them in a milder downturn – filed for Social Security only 6 months earlier, on average, than they would have in a minor recession. This modest change in timing reduced their monthly Social Security benefit checks by $56, or 4.6 percent of average monthly benefits, and the Social Security replacement rate fell by 1.7 percentage points relative to a more typical recession. The benefit reduction resulted from the combined effect of the actuarial reduction for early claiming and the foregone opportunity to continue working and increase the wage base used for calculating benefits.

"How Important is Asset Allocation to Financial Security in Retirement?"
Center for Retirement Research at Boston College Working Paper No. 2012-13

ALICIA H. MUNNELL, Boston College - Center for Retirement Research
Email: MUNNELL@BC.EDU
NATALIA ORLOVA, affiliation not provided to SSRN
Email: nataliyaorlova@mail.ru
ANTHONY WEBB, Boston College - Center for Retirement Research
Email: webbaa@bc.edu

Financial advice tends to focus on financial assets, but other levers may be more important for most households. This paper proceeds in three stages. The first section reports a simple Excel spreadsheet exercise that provides a stylized example of the tradeoff between returns and time spent in the labor force. The second section uses data from the Health and Retirement Study (HRS) on pre-retirees aged 51-64 to see how the gap between retirement needs and retirement resources is affected by working longer, taking out a reverse mortgage, controlling spending, and shifting all assets to equities with no risk. The third section uses a simple dynamic programming model to calculate a risk-adjusted measure of the value for the average household of moving from a typical conservative portfolio to an optimal portfolio. The answer from all three exercises is the same: the focus on asset allocation is misplaced.

"Simulating Utah State Pension Reform"
Brigham Young University Macroeconomics and Computational Laboratory Working Paper Series No. 2012-01

RICHARD W. EVANS, Brigham Young University
Email: revans@byu.edu
KERK PHILLIPS, Brigham Young University - Department of Economics
Email: kerk_phillips@byu.edu

In 2008, the Utah Retirement System experienced a negative return of almost 25 percent on its portfolio. This resulted in an underfunding of the pension system. In 2010 the Utah legislature reformed state pension participation, placing all new employees hired after mid-2011 in a new hybrid pension system. Employees hired prior to July 2011 continue to participate in the previous defined benefits program. This paper models and simulates the effects of Utah's pension reform on the balance in the defined benefits fund. In our baseline simulations, we find that the recent reform has extended fund solvency, but not eliminated the threat. Our simulations show that there is at least a ten percent chance of pension fund insolvency sometime in the next two decades.