Monday, January 28, 2013

Ghilarducci: Raising retirement age a terrible idea

PBS’s Paul Solmon interviewed pension expert Theresa Ghilarducci regarding plans to fix Social Security by raising the retirement age. As you might expect, she’s opposed – but she puts forward some interesting new research backing her point of view.

Read more!

New papers from the Social Science Research Network

"Reducing Disparities and Enhancing Sustainability in Asian Pension Systems"
Asian Development Bank Economics Working Paper Series No. 313

YVES GUERARD, Guerard Consultants Inc
MUKUL G. ASHER, National University of Singapore - Lee Kuan Yew School of Public Policy
DONGHYUN PARK, Asian Development Bank - Economic Research
GEMMA BOLOTAULO ESTRADA, Asian Development Bank - Economic Research

Population aging is a global phenomenon but what sets Asia apart is the sheer scale and speed of its aging. Pension systems will have to play a bigger role but in most Asian countries pension systems are still underdeveloped, fragmented, and poorly financed. Asian countries need to embark on systematic pension reform now to meet the challenge of delivering affordable, adequate, and sustainable economic security to their fast-growing elderly population.

"Are Retirement Decisions Vulnerable to Framing Effects? Empirical Evidence from NL and the US"
De Nederlandsche Bank Working Paper No. 366

FEDERICA TEPPA, De Nederlandsche Bank
MAARTEN VAN ROOIJ, De Nederlandsche Bank, Netspar

This study investigates whether individual choices in the pension domain are vulnerable to the way alternatives are communicated to respondents. The analysis is based on a set of hypothetical questions posed in the DNB Household Survey as well as in the RAND American Life Panel on pension premium contributions and pension savings investment profiles. The design of the questions presented to the respondent in several alternative ways allows to test for the potential role of framing effects, as well as order and choice set effects. We find that framing has a significant and robust impact on individuals decisions. The effect is particularly strong for the alternative labeled as ‘standard’ option. In contrast, the answer categories order does not seem to be always significantly relevant. We also find that hypothetical preferences are consistent with the individual risk profile and actual portfolio allocations. The findings suggest that the presence of framing effects is strongly correlated with the complexity of decisions to be made and highlight the importance of communication with respect to retirement decisions.

"Optimal Rules for Defined Contribution Plans: What Can We Learn from the U.S. and Australian Pension Systems?"
Tax Lawyer, Vol. 66, No. 3, 2013

JONATHAN BARRY FORMAN, University of Oklahoma College of Law
GORDON MACKENZIE, University of New South Wales - Australian Taxation Studies Program (ATAX)

Both the United States and Australia have multi-pillar retirement systems that include a public component and a private component. Increasingly, the private component consists of a defined contribution plan. At the outset, this paper provides an overview of the retirement systems of the U.S. and Australia. Next, this paper compares the rules governing defined contribution plans in the U.S. and Australia. In particular, this paper focuses on the rules governing the contribution, accumulation, and distribution stages; and it discusses which public policies will best help workers maximize their defined contribution plan accumulations and, consequently, the retirement income that they will eventually receive. Ultimately, this paper develops recommendations for the optimal rules for defined contribution plans in the U.S., Australia, and around the world.

"Economic Consequences of Pension Accounting Rules"

JAMES P. NAUGHTON, Northwestern University - Kellogg School of Management
REINING PETACCHI, Massachusetts Institute of Technology (MIT)
JOSEPH WEBER, Massachusetts Institute of Technology (MIT) - Sloan School of Management

A growing stream of accounting research suggests that managers use the data reported in an entity’s financial reports to make real investment decisions. Most of this research focuses on decisions made in the private sector. We extend this idea to the public sector, investigating whether the employment decisions made by governmental entities are influenced by the accounting choices they make for pension obligations. These research questions are particularly important as there is currently an increased focus on the fiscal health of governmental entities, and in particular, a focus on the extent to which pensions (and the accounting for pensions) are contributing to the declining fiscal performance of governmental entities. In this paper, we first provide evidence that, depending on the discounting approach we use, states net-pension obligations are understated between $250 billion to over $1 trillion. We then provide evidence that the larger a state’s pension deficit understatement the more likely that state is to hire additional workers, incur larger payrolls, incur larger expenditures, and grant more generous retirement packages. Thus, the state’s accounting decisions to understate pension obligations leads to over investment in employees, potentially exacerbating future fiscal problems. Jointly these results should be of interest to both accounting academics and policymakers. First, our paper adds to the accounting literature on whether the financial reporting choices influence real business decisions. Second, our paper highlights one of the potential problems with the GASB approach to valuing pension obligations. We find that under reporting pension deficits as allowed under the current GASB regime poses both distributional fairness issues and leads to policy choices that increase current and future state level employee costs.

"Retirement, Recessions and Older Small Business Owners"

TAMI GURLEY-CALVEZ, University of Kansas Medical Center
KANDICE A. KAPINOSDONALD BRUCE, University of Tennessee, Knoxville

Retirement planning is fraught with uncertainty including preparing for future health needs, longevity, taxes, and inflation. This planning is further complicated in recessions, when short-term financial needs might trump longer-term savings, and particularly in the last recession when different types of assets (e.g. housing) were impacted more by the economic downturn. This report examines how older small business owners prepare for retirement and how they fare financially during recessions compared to their wage and salary counterparts. We use a publicly available panel data set to examine the retirement savings decisions of self-employed and non-self-employed individuals nearing retirement age with particular emphasis on the role of economic downturns.
We examine specific elements of retirement wealth, preparation, and financial literacy for self-employed relative to wage and salary workers. Previous research suggests that small businesses ( fewer than 10 employees) are less likely to offer pension plans and that business owners have low rates of retirement account ownership and contributions (Dushi, Iams, and Lichtenstein 2011; Lichtenstein 2010). Additionally, we assess whether recent recessions impacted the retirement preparation of business owners to a greater or lesser degree than non-business owning households. Finally, we explore several possible causes for differences in retirement preparation between older small business owning households and their non-business owning household counterparts, including their degree of financial literacy.
Given our focus on older Americans, we utilize the Health and Retirement Study (HRS), a longitudinal, nationally representative dataset of the US population of individuals over age 50 that includes a rich set of data on labor force status and history, income, assets, pension plans and other health and psychosocial measures collected biennially from 1992 to 2010. We use several methods to address whether small business owners save differently for retirement and how recessions affect their behavior. First, we present a comprehensive set of summary statistics in which we compare business owners and non-business owners as well as examining trends over time, with particular attention to recessionary time periods. Next, we use repeated cross-section regression techniques to assess whether self-employment experience (either currently or in the past, i.e., over the 1992 to 2010 HRS sample period) affects savings behavior. This approach allows us to test whether differences remain after controlling for other factors that may influence savings and retirement behavior. Finally, we compare regression results across time in order to investigate the extent to which the impact of self-employment experience varies over the business cycle, including the recessionary years 2001 and 2009.
Our results suggest that the self-employed are significantly less likely to have an employer provided pension (including basic pension or retirement plans and 401(k)s), consistent with the literature. However, some of this difference is offset as the self-employed have significantly greater amounts in IRA/Keogh savings vehicles. We find that the probability of having a pension and the value of IRA/Keogh accounts are largely stable during recessionary years. The results also suggest that the self-employed invest similarly to their wage and salary counter-parts when covered by private plans over which they have some control over portfolio allocation. In other words, self-employed individuals do not seem to be more likely to choose equities over bonds as compared to non-self-employed individuals. This might seem counter to the general notion that small business owners are risk-takers, but is consistent with recent re-search. The finding that older self-employed behave similarly to their wage and salary counter-parts and that there is stability in behavior through recessionary periods suggests that older self-employed and non-self-employed households have similar retirement preparation concerns and needs.
One area where the older self-employed are significantly different is in their level of financial knowledge. The self-employed are generally more informed about concepts such as inflation, interest calculations, and general financial literacy than their non-self-employed counterparts. In some models, these differences are quite small and not statistically significant, but still suggestive. While these findings are not surprising if we think that self-employed individuals, especially when they are older, are more likely to be exposed to this knowledge through the day-to-day tasks associated with running a business, more years of data are needed to understand fully the causal path and to determine whether this increased financial knowledge translates into better retirement preparation.
These findings add support in favor of small business assistance programs as a way for individuals to gain valuable financial skills. More research is certainly needed, but by this line of reasoning, it is possible that facilitating small business ownership could lead to greater retirement preparation and greater retirement income security.
In general our research indicates that the self-employed over age 50 expect to retire at older ages and have larger balances in their retirement savings accounts than their wage and salary counterparts. While these characteristics might make it easier for these older self-employed to weather recessionary financial storms, our analysis does not reveal key differences in outcome variables during recessionary years. That is, we find that older self-employed differ from their wage and salary counterparts in important ways including financial literacy, but these differences are not exacerbated or lessened during recessionary periods. A key area for further re-search is a closer examination of wealth portfolio allocations over time to see if the increased levels of financial literacy among the self-employed lead to fewer financial losses during recessions or different rates of financial recovery following a recession.

Read more!

Thursday, January 24, 2013

New paper: “Don’t raise Social Security taxes: But if it’s necessary, here’s how.”

I have a new paper in AEI’s Retirement Policy Outlook series, titled “Don’t raise Social Security taxes: But if it’s necessary, here’s how.”

The basic take is this: Social Security is the entitlement where it makes most sense to reduce benefits rather than raise taxes. Unlike Medicare or Medicaid, cuts to future Social Security benefits can (by middle and high earners, at least) easily be replaced through higher retirement saving.

However, political compromise may mean that revenues will have to be on the table as part of any package deal to fix Social Security. If so, it would be preferable to raises taxes the old fashioned way – by increasing the payroll tax rate – than by raising the payroll tax ceiling.

Read more!

Monday, January 21, 2013

SSA actuaries respond on life expectancies

In a recent New York Times article, demographers Gary King and Samir Soneji argued that out-moded methods caused the SSA actuaries to underestimate increases in life spans, thereby overestimating the financial health of Social Security. Better forecasts, Kind and Soneji argue, would conclude that Social Security will become insolvent earlier than projected and face larger long-term deficits.

However, SSA’s Office of the Chief Actuary has published an analysis of King and Soneji’s claims, arguing that they use faulty data and don’t fully understand the actuaries’ methods.

Read and judge for yourself!

Read more!

Paul Krugman on climate change and Social Security

The New York Times Paul Krugman blogs that, despite seeming similarities, the policy choices we face on Social Security’s aren’t similar to those on global warming.

In a speech back in 2007, I argued that entitlements and global warming are similar in two important respects: “Both climate change and entitlements are a relatively benign issue for current generations but potentially severe for future ones, with considerable uncertainty regarding the potential effects.”

I don’t find Krugman’s counter arguments all that persuasive. First, he says, Social Security might not turn out to be all that big a problem. Sure, but it also might turn out to be a REALLY big problem. People value bad outcomes more than good ones, which is why we take out insurance on everything from our houses to our TV sets. Early action on entitlements is like an insurance policy.

Second, Krugman says, if the risk is that Social Security will run out of money and force large benefit cuts, we don’t ameliorate that risk by cutting benefits today. But actually we do: under current law, benefit cuts could both be large and focused on distinct groups of people, including the very poor and the very old. By implementing benefit cuts (or tax increases) gradually, we smooth the problem over larger numbers of people and can impose larger cuts on those better able to handle them. One of the policy merits of pre-funding Social Security, such as through personal accounts, was a greater ability to smooth funding costs over time and among people.

Read more!

New York Times: Chained CPI “Misguided.”

The New York Times editorializes against using the chain-weighted CPI to calculate Social Security COLAs:

“As the next round of deficit reduction talks gets under way, the administration seems determined to include the COLA cut in any new package of spending reductions. Rather than using the issue as a bargaining ploy, the administration appears to have embraced it as a worthy end in itself.”

“Is it? In a word, no.”

“That is not to say that Social Security should be off the table. There are reforms that are eminently sensible, if only the political will could be found to enact them. But reducing the COLA is not a sound idea now and may never be.”

Click here to read the whole editorial.

Read more!

Thursday, January 10, 2013

New paper: “Sticky Ages: Why is Age 65 Still a Retirement Peak?"

"Sticky Ages: Why is Age 65 Still a Retirement Peak?"
Center for Retirement Research at Boston College CRR WP 2013-2

NORMA B. COE, Boston College - Center for Retirement Research
MASHFIQUR KHAN, Boston College - Center for Retirement Research

When Social Security’s Full Retirement Age (FRA) increased to age 66 for recent retirees, the peak retirement age increased with it. However, a large share of people continue to claim their Social Security benefits at age 65. This paper explores two potential explanations for the “stickiness” of age 65 as a claiming age: Medicare eligibility and workers’ lack of knowledge about their future Social Security benefits. First, we analyze the impact of Medicare eligibility by comparing two groups – one has an FRA of exactly 65; the other, between age 65 and 2 months and age 66. We find that the group with later FRAs who do not have access to retiree health benefits through their employer are more likely to claim Social Security at age 65. We interpret this finding as evidence that Medicare eligibility persuades more people to retire, because they can begin receiving federal health coverage. Individuals without access to retiree health insurance at work are 7.5 percentage points more likely to retire soon after their 65th birthdays and are 5.8 percentage points less likely to delay retirement until the FRA than those with that insurance. This result fits into extensive research showing that access to health insurance is an important component of the retirement decision. On the question of whether misinformation about Social Security benefits may drive individuals to claim at age 65, we find that some individuals are unable to accurately forecast their retirement benefits. However, our analysis suggests that there is no relationship between this confusion and the age 65 peak for claiming Social Security.

Read more!

Upcoming event: San Diego public pension reforms: A road map for the nation?

Tuesday, January 15, 2013 | 8:30 a.m. – 9:30 a.m.

AEI, Twelfth Floor
1150 Seventeenth Street, NW
Washington, DC 20036

About This Event

Across America, state and local governments are wrestling with the rising costs of public employee pensions, which have cut into funding for police, fire, education, and other public services. The most ambitious public pension reforms have occurred in San Diego.
The Comprehensive Pension Reform Initiative, passed in June 2012, shifted newly hired San Diego city employees into 401(k)-type pensions that are benchmarked against private-sector plans, while reforming abuses such as “pension spiking” and ensuring that public employees pay an equal share of the costs of their pensions. Total savings from the initiative will reach $1 to $2 billion over the next 20 years.

This event will feature a presentation from Carl DeMaio, who — as a member of the San Diego City Council — championed the pension initiative and now seeks to apply its lessons nationwide.

If you are unable to attend, we welcome you to watch the event live on this page. Full video will be posted within 24 hours.


8:00 AM
Registration and Breakfast
8:30 AM
Carl DeMaio, California Reform Council, Reason Foundation
Andrew G. Biggs, AEI
9:30 AM

Read more!

Upcoming event: Savings and Retirement Forum

Happy New Year! Savings and Retirement is switching up in 2013 by starting with a lunch forum at the Investment Company Institute. Don't forget to RSVP.

Join us on Thursday January 17, 2013 at the Urban Institute

For a Lunch Meeting with Guest Speaker:

Kenneth Solow

Chief Investment Officer

Pinnacle Advisory Group

“Chasing Returns Won’t End Well for Public Pensions”

The Investment Company Institute

1401 H Street, NW, Suite 1200
Washington, DC 20005

January 17, 2013

Noon – 1pm

We’ll need you to:


Kenneth R. Solow, CFP®, CLU, ChFC is a founding partner and Chief Investment Officer with Pinnacle Advisory Group, Inc., a Registered Investment Advisor providing Private Wealth Management services to more than 700 families around the world. As Chief Investment Officer, he is responsible for the direction and management of Pinnacle’s investment analysts, as well as the philosophy, tactics, and trading strategy for over a billion dollars in assets. Solow is nationally known for his views on active portfolio management, and his 2009 book, “Buy and Hold is Dead (Again)” is considered the definitive work on Tactical Asset Allocation.

Solow is a popular speaker and writer and has been published in The Journal of Financial Planning, Smart Money, Financial Planning Magazine, The Baltimore Sun, and the Wall Street Transcript.

Read more!

Thursday, January 3, 2013

Should Social Security Be “On The Table”?

I’m one of several contributors to the New York Times’ Room for Debate blog. Check them all out here.

Read more!