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.
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.
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.
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 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.