Monday, May 27, 2013

New papers from the NBER

Effects of Social Security Policies on Benefit Claiming, Retirement and Saving by Alan L. Gustman, Thomas L. Steinmeier - #19071 (AG LS PE)


An enhanced version of a structural model jointly explains benefit claiming, wealth and retirement, including reversals from states of lesser to greater work. The model includes stochastic returns on assets. Estimated with Health and Retirement Study data, it does a better job of predicting claiming than previous versions.

Alternative beliefs about the future of Social Security affect predicted outcomes. Effects of three potential policies are also examined: increasing the early entitlement age, increasing the full retirement age, and eliminating the payroll tax for seniors.

Predicted responses to increasing the full entitlement age are sensitive to beliefs.


Framing Lifetime Income by Jeffrey R. Brown, Jeffrey R. Kling, Sendhil Mullainathan, Marian V. Wrobel - #19063 (AG)


We provide evidence that individuals optimize imperfectly when making annuity decisions, and this result is not driven by loss aversion.

Life annuities are more attractive when presented in a consumption frame than in an investment frame. Highlighting the purchase price in the consumption frame does not alter this result. The level of habitual spending has little interaction with preferences for annuities in the consumption frame. In an investment frame, consumers prefer annuities with principal guarantees; this result is similar for guarantee amounts below, at, and above the purchase price. We discuss implications for the retirement services industry and its regulators.

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Upcoming event: Challenges Facing Social Security: A Discussion of the 2013 Trustees Report

Challenges Facing Social Security:

A Discussion of the 2013 Trustees Report


Tuesday, June 4th, 2013

8:00 a.m. - 10:00 a.m.

Hyatt Regency

400 New Jersey Avenue NW

Washington, DC 20002
Room: Columbia AB

Space is limited:

Please RSVP Here

Breakfast will be served. 

In anticipation of brand new Social Security projections, the Committee for a Responsible Federal Budget, the Mercatus Center at George Mason University, and Third Way invite you to attend a forum on the findings of the 2013 Social Security Trustees Report and the future of the Social Security program.

The event will feature a presentation from Social Security Public Trustee Charles Blahous, as well as a bipartisan panel moderated by CNNMoney's Jeanne Sahadi.

Prior to the event, we invite you to join us for a continental breakfast, where you will be able to try your own hand at improving Social Security's finances through a preview of "The Reformer: An Interactive Tool to Fix Social Security."

RSVP to join us at the event.


8:00 a.m. Breakfast and "Reformer" Interactive Tool Preview

8:30 a.m. Decoding the 2013 Trustees Report

Charles Blahous, Social Security Public Trustee; Senior Research Fellow, Mercatus Center

9:00 a.m.  Panel: What's Next for Social Security?

Charles Blahous, Social Security Public Trustee; Senior Research Fellow, Mercatus Center

Jim Kessler, Senior Vice President for Policy, Third Way

Virginia Reno, Vice President for Income Security, National Academy for Social Insurance

Nick Troiano, Co-founder, The Can Kicks Back

Moderator: Jeanne Sahadi, CNNMoney

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Friday, May 24, 2013

Testimony from May 23 Ways & Means Social Security hearing

B-318 Rayburn House Office Building 9:30 AM

May 23, 2013
Focus of the Hearing

The hearing will examine bipartisan proposals to adjust Social Security benefits and their impacts on the program’s finances, beneficiaries, workers, and the economy.

Hearing Advisory
Chairman Johnson Announces Hearing on the President’s and Other Bipartisan Entitlement Reform Proposals

tness List

Ed Lorenzen
Executive Director, The Moment of Truth Project, Committee for a Responsible Federal Budget

G. William Hoagland
Senior Vice President, Bipartisan Policy Center

Jason Fichtner, Ph.D.
Senior Research Fellow, Mercatus Center

Leticia Miranda
Senior Policy Advisor, Economic Security Policy, National Council of La Raza

Donald Fuerst
Senior Pension Fellow, American Academy of Actuaries

C. Eugene Steuerle, Ph.D.
Institute Fellow, Urban Institute

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Michigan Retirement Research Center Spring Newsletter

MRRC Newsletter:
Volume 13 Issue 3 - May 2013

Director’s Corner by John P. Laitner
The MRRC conducted its annual Research Workshop on Friday and Saturday, April 19-20, in Ann Arbor. Our lunchtime speaker on Friday, Charles Blahous spoke and took Q&A via videoconference.

MRRC Holds Ninth Annual Spring Research Workshop
The ninth annual MRRC Research Workshop was held at the University of Michigan’s Ross School of Business in Ann Arbor on April 19-20, 2013.

Trustee: Are We Seeing Shift in Policy Options for Social Security Financing?
We may be in the midst of a shift in thinking about how Social Security should be financed, according to Charles P. Blahous III, Public Trustee for the U.S. Social Security and Medicare Trust Funds.

MRRC’s New Look
This issue of the MRRC Quarterly Newsletter (PDF version) features MRRC’s new design...

MRRC Researchers in Publication
Michael Hurd and colleagues at the University of Michigan and RAND published the article ...

MRRC Researchers in the Media

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Friday, May 17, 2013

New papers from the Social Science Research Network


"Retirement Plan Participation and Asset Allocation, 2010"
EBRI Notes, Vol. 34, No. 4 (April 2013)

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)

To establish current savings behavior, one necessary measurement of retirement preparation is identifying the percentage of workers with employment-based retirement plans, as well as understanding the characteristics of workers with and without access to such programs. The findings from this paper show that there has been a significant increase in the percentage of family heads with a defined contribution (DC) plan (typically a 401(k)-type plan) over time. The likelihood of a working family head participating in a retirement plan increased with the size of his or her employer. In 2010, among family heads working for employers with 10-19 employees, 22.4 percent participated in a plan, compared with 67.2 percent of family heads who worked for employers with 500 or more employees. In 2010, 18.9 percent of family heads who participated in an employment-based retirement plan had a defined benefit (DB) plan only, while 65.0 percent had a defined contribution (DC) plan only, and the remaining 16.1 percent had both a DB and a DC plan. This was a significant change from 1992, when 42.3 percent had a DB plan only, and 40.8 percent had a DC plan only. Asset allocation within a family head’s retirement plan seems to be affected by his or her ownership of other types of retirement plans. Those who own an IRA are more likely to be invested all in stocks if they also own a 401(k)-type of plan. Those who own a DB plan and a 401(k)-type plan are less likely to allocate their DC plan to all interest-earning assets. Due to the increased participation in DC plans, the manner in which participants allocate assets within these plans could have a significant effect upon the financial resources they ultimately will have available in retirement. The distribution of participants invested in each proportion of stocks was found not to vary significantly with age between ages 35-64, although higher educational attainment, income, and net worth were correlated with more investment in stocks. Taken together, this suggests that, even with increased experience, availability, and use of these types of plans, there remains a need for more financial education of participants.
The PDF for the above title, published in the April 2013 issue of EBRI Notes, also contains the fulltext of another April 2013 EBRI Notes article abstracted on SSRN: “Characteristics of the Population With Consumer-Driven and High-Deductible Health Plans, 2005-2012.”

"Social Policy and Program: From Principles to Design"

DAVID STANTON, Australian National University (ANU) - Crawford School of Public Policy
ANDREW HERSCOVITCH, Australian Government Department of Families, Housing, Community Services and Indigenous Affairs

The paper outlines an approach to the assessment of policy options and program design. The core concepts of equity, effectiveness, employment, efficiency and economy are discussed. Real-world examples from Australian social policy are considered, including from areas such as retirement incomes; family allowances; dependency to work; disability support and health insurance. The delivery of social programs through the taxation system is also discussed.
There clearly is no one template for turning policy principles into programs. Many processes and players may be involved and unpredictability is ever-present. Most governments are interested in achieving policy as well as political outcomes. They are also more constrained by economic and social realities than is often assumed. This imposes some order and logic on program development.
From a policy adviser’s perspective, the key is ‘preparation meeting opportunity’. It is possible to insert rigour into the process if the issues have been anticipated, the research and analysis done, and the arguments assembled for ministers to consider.

"Superannuation Policies and Behavioural Effects: How Much Age Pension?"

JIE DING, Macquarie University

This paper presents long term projections of the cost of public pensions in Australia, taking into account behavioural effects. I assume retirees will make financial decisions to maximise their lifetime utilities, and that their consumption and asset allocation would react to policy changes. I find that the future cost of the Age Pension is likely to be higher than estimated by Australian Treasury in 2010's Intergenerational Report. As future cohorts retire with more savings, they can allocate more money into owner-occupied properties while preparing for retirement and draw down their savings faster, to optimise their Age Pension entitlements. This paper also examines how projected future Age Pension costs are affected by various policy changes, including the legislated increase of superannuation guarantee from 9% to 12%, the possible changes of including the value of family home in the asset test, and indexing Age Pension payments to price inflation instead of wage inflation.

"CalPERS Funding Woes: Don't Blame the Stock Market"

MICHAEL J. SABIN, Consultant

Public-sector pension plans administered by CalPERS face scrutiny because of large unfunded liabilities. The current underfunding is usually blamed on investment losses that occurred during the recent economic downturn. This paper finds that the true culprit is inaccurate actuarial forecasting, not investment performance. The paper looks specifically at the history of the City of Sunnyvale's pension plans over the past seventeen years. It finds that the normal rate of contribution was too small to keep up with the growth in liabilities, even under the assumption that investments earn their anticipated return.

"The 401(k) Blame Game"

MARC FANDETTI, Meketa Investment Group

Critics of excessive and opaque 401(k) fees, conflicts of interest, and poor plan design may be right as far as their argument goes; but the reason that 50 million Americans may ultimately be betrayed by their 401(k) is not that mutual fund managers are overpaid, and that some advisors receive commissions. Rather it is that the 401(k) idea “works” when incomes and stock prices are rising, and does not work when income growth and stock returns stall for a prolonged period.
The assumptions used by individuals and advisors in solving the “when can I retire” problem at the height of 401(k) euphoria were, in retrospect, far too optimistic. Stock returns have, until recently, been negative in real terms for a not insignificant period, median family income has regressed, and savings rates languish in the low single digits. It was not just amateur investors that planned poorly – many professionally managed pension funds also extrapolated naively from the experience of the second half of the twentieth century.
If the financial services industry is guilty of anything, it is the abetting and aiding of plan participants in their employment of unrealistic return expectations. It is well established equities have higher expected returns than bonds because their cash flows are less certain; returns are expected to be high, but they could be low, as in the 2000s. Advisors and participants seem to have forgotten about this last part.
On average, 401(k)s are a cheaper, more transparent, and better structured vehicle than at any point in their history. And while more can and should be done to improve them, regulatory reforms cannot salvage the retirement plans of millions of Americans.

"Participation to Pension Funds in Italy: The Role of Expectations and Financial Literacy"


This paper seeks to assess the role of expectations on pension income and financial literacy in the decision of joining a pension fund, using a large household survey for Italy. The results confirm past evidence on the role of income and education, and find a strong role played by financial literacy. Forward looking thinking about the sources of income after retirement and forming not overly optimistic expectations on replacement rate are tightly related to enrollment. Finally participation to pension funds is found to depend strongly on the industry of employment. The results provide further evidence for the role of public powers in enhancing participation by providing information and financial education.

Read more!

Wednesday, May 15, 2013

New articles from the Social Security Bulletin

Social Security Bulletin, Vol. 73 No. 2 (released May 2013)

Download entire publication

Subsequent Program Participation of Former Social Security Disability Insurance Beneficiaries and Supplemental Security Income Recipients Whose Eligibility Ceased Because of Medical Improvement

by Jeffrey Hemmeter and Michelle Stegman

This article examines subsequent participation in the Social Security Disability Insurance and Supplemental Security Income programs by individuals whose eligibility for those programs ceased because of medical improvement. The authors follow individuals whose eligibility ceased between 2003 and 2008 and calculate rates of program return for up to 8 years after the cessation decision. They also explore how return rates vary by certain personal and programmatic characteristics.

Outcome Variation in the Social Security Disability Insurance Program: The Role of Primary Diagnoses

by Javier Meseguer

This article investigates the role that primary impairments play in explaining heterogeneity in disability decisions. Using claimant-level data within a hierarchical framework, the author explores variation in outcomes along three dimensions: state of origin, adjudicative stage, and primary diagnosis. The findings indicate that the impairments account for a substantial portion of claimant-level variation in initial allowances. Furthermore, the author finds that the predictions of an initial and a final allowance are highly correlated when applicants are grouped by impairment. In other words, diagnoses that are more likely to result in an initial allowance also tend to be more likely to receive a final allowance.

The Impact of Retirement Account Distributions on Measures of Family Income

by Howard M. Iams and Patrick J. Purcell

The income of the aged is composed largely of Social Security benefits, asset income, and pension income. Over the past three decades, the primary form of employer-sponsored pension has shifted from the traditional defined benefit plan to defined contribution plans, such as the 401(k). That trend creates problems for measuring the income of the aged because most household surveys of income either do not collect information about distributions from defined contribution retirement accounts or do not include those distributions in their summary measures of income. This article examines the impact of including distributions from retirement accounts on the estimated income of families headed by persons aged 65 or older.

Contribution Dynamics in Defined Contribution Pension Plans During the Great Recession of 2007–2009

by Irena Dushi, Howard M. Iams, and Christopher R. Tamborini

The authors investigate the extent of changes in workers' participation and contributions to defined contribution (DC) plans during the Great Recession of 2007–2009. Using longitudinal information from Social Security W-2 tax records matched to a nationally representative sample of respondents from the Survey of Income and Program Participation, they find that the recent economic downturn had a considerable impact on workers' participation and contributions to DC plans. A sizable segment of 2007 participants (39 percent) decreased their contributions to DCplans by more than 10 percent during the Great Recession. The findings also highlight the interrelationship between the dynamics in DC contributions and earnings changes.

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Friday, May 10, 2013

Matt Miller: Expand Social Security

Wiring for the Washington Post, Matt Miller speaks favorably of the New America Foundation proposal for expanded Social Security, an additional flat dollar benefit that would increase the size and cost of the program by around 75 percent.

I’m not a fan of the idea – as I discuss here, I think it will cost too much while hurting the economy – but Miller hits on a second issue, of how to pay for it. Miller says,

One way to fund it would be through a chunk of the proceeds from the value-added tax that’s almost certainly coming in an aging America.

This highlights Washington’s perennial problem: starting a new program before you’ve paid for the ones you’ve already got. We’re already well short of the revenues we need to pay for the Social Security, Medicare and Medicaid programs we’ve got, and the shortfalls in those entitlements would be enough to swallow up pretty much the whole of any politically-palatable VAT plan. To start allocating the proceeds of a tax we don’t even have to a new entitlement before sorting out how to pay for the underfunded entitlements already on the books seems ill-advised.

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