New papers from the Social Science Research Network

Some very interesting new papers from the Social Science Research Network this week.

"Optimal Pension Design in General Equilibrium"
Netspar Discussion Paper No. 08/2012-022

HANS FEHR, University of Würzburg - Institute of Economics and Social Sciences
Email: hans.fehr@mail.uni-wuerzburg.de
JOHANNES UHDE, University of Wuerzburg
Email: johannes.uhde@uni-wuerzburg.de

The present paper aims to quantify efficiency properties of real world social security systems of various institutional designs in order to identify an optimal pension design. Starting from a benchmark economy without social security, we introduce alternative pension systems and compare the costs arising from liquidity constraints as well as labor and savings distortions versus the benefits from insurance provision against income and lifespan uncertainty. Our findings highlight strong efficiency losses arising from both means-testing pension benefits against private assets and restricting the contribution base while indicating a positive impact of means-testing flat benefits against earnings-related benefits within pension systems resting on several tiers. Furthermore, our results suggest that the negative correlation between pension progressivity and pension generosity may be justified on efficiency grounds. In our model a single-tier universal earnings-related pension system yields the highest efficiency gains dominating flat benefits as well as two-tier systems of any form.

"Employee Market Risk and Retirement Cyclicality: A Natural Experiment"

MATTHEW GUSTAFSON, University of Rochester - William E. Simon Graduate School of Business Administration
Email: matthew.gustafson@simon.rochester.edu

A 1984 federal government retirement system shift to defined contribution (DC) pensions quasi-randomly exposes retirement income to the financial markets. The amount of additional exposure is increasing with income and amounts to an estimated 20% of retirement income for the highest income tercile. During the financial crisis, this exposure translates to an additional 2.4 percent loss in retirement income. I exploit this exogenous wealth shock to show how the market risk brought on by DC pensions affects retirement patterns.
I find that DC exposure causes retirement age federal employees to delay retirement approximately 50 percent longer during the first year of the crisis. The treatment effect is largest for high income employees, a result that is expected because of the larger treatment. Within this subsample, the DC treatment causes employees planning to retire anytime between July 2009 and July 2011 to delay retirement by an average of 3 months. In addition, as of July 2011 3 months worth of retirees continue to work because of their DC losses. This lingering effect is concentrated in employees between 60 and 65 years old as opposed to older employees for whom the effect of market losses on retirement has fully reversed.

"Shifting Income Sources of the Aged"
Social Security Bulletin 72(3): 59-68

CHRISTOPHER ANGUELOV, U.S. Social Security Administration
Email: chris.anguelov@ssa.gov
HOWARD IAMS, U.S. Social Security Administration
Email: Howard.m.iams@ssa.gov
PATRICK PURCELL, Social Security Administration
Email: patrick.purcell@ssa.gov

Traditional defined benefit pensions, once a major source of retirement income, are increasingly giving way to tax-qualified defined contribution (DC) plans and individual retirement accounts (IRAs). This trend is likely to continue among future retirees who have worked in the private sector. This article discusses the implications of those trends for the measurement of retirement income. We conclude that Census Bureau’s Current Population Survey (CPS), one of the primary sources of income data, greatly underreports distributions from DC plans and IRAs, posing an increasing problem for measuring retirement income in the future. The CPS and other data sources need to revise their measures of retirement income to account for periodic (irregular) distributions from DC plans and IRAs.

"Changes in Labor Force Participation of Older Americans and Their Pension Structures: A Policy Perspective"
Boston College Center for Retirement Research Working Paper No. 2012-18

FRANK HEILAND, City University of New York (CUNY) - School of Public Affairs
Email: frank.heiland@cuny.baruch.edu
ZHE LI, Framingham State College
Email: zli@framingham.edu

We investigate how the shift in private pension coverage from defined benefit (DB) to defined contribution (DC) retirement plans since the 1980s has contributed to the substantial rise in labor force participation of older Americans. We develop a life cycle model of retirement that captures important aspects of private (DB and DC) and public (Social Security Old-Age) pensions. We demonstrate how this novel framework can assist policy makers and researchers in analyzing the complex interrelations of labor supply decisions, retirement behavior, and wealth accumulation. We begin by illustrating important differences in the incentives for labor supply and retirement behavior provided by DB and DC pensions. We show that the timing of the exit from the labor force is closely tied to wealth accrual in DB plans, while wealth accrual in DC plans does not provide similar incentives for the timing of retirement. We then use the model to conduct a cohort-based simulation analysis of labor force participation for the period 1977 to 2010. The results illustrate the potential significance of the rise in employer-sponsored DC pensions in explaining the increase in labor force participation of older Americans. We estimate that, holding the share of individuals with employer-sponsored pensions constant, the shift from DB to DC pension coverage increased the labor force participation rate of workers age 60 to 64 by 4.9 percentage points (1.7 points for ages 65-69). Finally, we show that DC pension holders are more concentrated at the earliest take-up age for Social Security old-age retirement benefits and are less responsive to changes in Social Security retirement age policy than DB pension holders.

"Job Demand and Early Retirement"
Boston College Center for Retirement Research Working Paper No. 2012-19

SEPIDEH MODREK, affiliation not provided to SSRN
Email: smodrek@berkeley.edu
MARK R. CULLEN, Stanford University
Email: mrcullen@stanford.edu

Policy initiatives such as increases in the full retirement age implicitly reduce benefits for early retirement. Yet research suggests that those in physically demanding jobs may be particularly adversely affected by such policies. We examine to what extent physical job demand relates to early retirement decisions in a population of aging manufacturing workers. We follow a cohort of approximately 1,500 stably employed male Alcoa employees aged 51-58 in 2001 followed forward to 2008. We use a variety of models to examine whether externally rated physical job demand at middle age is related to early retirement. We also examine whether pension eligibility and payouts induce earlier retirement, especially for those with more physically demanding jobs, while accounting for wage differentials, injury history, and underlying health. Our results suggest that workers whose jobs have high physical demand retire earlier after accounting for the wage differential and health. We also find that the minority of workers who transition to lower demand jobs, due to previous injury or health issues, are less likely to retire early. Finally, while we find evidence that pension eligibility and wealth accumulation induce earlier retirement, there was limited evidence of a difference by job demand.