Monday, April 21, 2014

New papers from the NBER

Bequests and Heterogeneity in Retirement Wealth,” by Mariacristina De Nardi, Fang Yang - #20058 (EFG PE)


Households hold vastly heterogenous amounts of wealth when they reach retirement, and differences in lifetime earnings explain only part of this variation. This paper studies the role of intergenerational transmission of ability, voluntary bequest motives, and the recipiency of accidental and intended bequests (both in terms of timing and size), in generating wealth dispersion at retirement, in the context of a rich quantitative model. Modeling voluntary bequests, and realistically calibrating them, not only generates more wealth dispersion at retirement and reduces the correlation between retirement wealth and lifetime income, but also generates a skewed bequest distribution that is close to the one in the observed data.

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Thursday, April 17, 2014

Upcoming event: American Academy of Actuaries, “Measuring for Success.”


News from the American Academy of Actuaries

Orange bullet FORUM

Invitation—Retirement for the AGES: Measuring for Success



Forum—Retirement for the AGES: Measuring for Success


April 28, 2014
9:30 A.M.–4:30 P.M. Eastern
Breakfast and Lunch provided


Ronald Reagan International Trade Center


Click here to register


The American Academy of Actuaries cordially invites you to a forum, Retirement for the AGES: Measuring for Success, on April 28 at the Ronald Reagan International Trade Center Pavilion in Washington. The forum, sponsored by the Academy’s Pension Practice Council, will bring together retirement community leaders, policymakers, and other stakeholders for a discussion and application of the AGES framework, and how closely certain plans and proposals adhere to the four AGES principles (Alignment, Governance, Efficiency, and Sustainability) that were outlined in the Academy monograph.

Attendees will have an opportunity to observe stakeholder panel discussions and engage with panelists for a lively discussion. Breakfast and lunch will be provided. Click here to view the agenda.

April 28, 2014
9:30 A.M.–4:30 P.M. Eastern

Registration begins at 8:30 A.M.
Breakfast and Lunch will be Served.
Click Here for More Information and to Register

Ronald Reagan International Trade Center

All are encouraged to attend. Space is limited, so please RSVP by Friday April 25, 2014.

For more information about this forum, please contact Kyla Ruiz at or 202-223-8196.

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Friday, April 11, 2014

New papers from the Social Science Research Network

"How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey"
EBRI Notes, Vol. 35, No. 3 (March 2014)

JACK VANDERHEI, Employee Benefit Research Institute (EBRI)

In May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Since the concept of lifetime income illustrations on 401(k) statements is a relatively new innovation, little empirical evidence exists regarding how plan participants would respond. To find out, the Employee Benefit Research Institute’s new 2014 Retirement Confidence Survey (RCS) included a series of questions concerning monthly income illustrations similar in many respects to those provided by the EBSA’s online Lifetime Income Calculator. This paper presents an analysis of these survey results, which indicated that the vast majority of respondents (for this analysis, only workers who were currently contributing to an employer plan were included) found the information useful; more than 1 in 3 (36 percent) of the respondents thought that it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49 percent thought it was somewhat useful. More than half (58 percent) thought the estimated monthly income was in line with their expectations. Perhaps because of that, relatively few (only 17 percent of the respondents) said they would increase their retirement savings contributions as a result of hearing the monthly income estimate. However, of those responding that their illustrated value was much less or somewhat less than expected, more than a third (35 percent) indicated they would increase their contributions. It is, of course, possible that these respondents’ current participation in employment-based plans has already provided them the education and information necessary for an appreciation both of the projected total and the monthly income estimate, and thus a greater alignment of those projections with their expectations.
The PDF for the above title, published in the March 2014 issue of EBRI Notes, also contains the fulltext of another March 2014 EBRI Notes article abstracted on SSRN: "Brand-Name and Generic Prescription Drug Use After Adoption of a Full-Replacement, Consumer-Directed Health Plan With a Health Savings Account."

"Measuring Adequacy of Retirement Savings"
Melbourne Institute Working Paper No. 5/14

JOHN BURNETT, Towers Watson
KEVIN THOMAS DAVIS, University of Melbourne - Department of Finance, Financial Research Network (FIRN)
CARSTEN MURAWSKI, University of Melbourne - Department of Finance, Financial Research Network (FIRN)
ROGER WILKINS, University of Melbourne - Melbourne Institute of Applied Economic and Social Research

This article introduces four metrics quantifying the adequacy of retirement savings taking into account all major sources of retirement income. The metrics are applied to a representative sample of the Australian population aged 40 and above. Employers in Australia currently make compulsory contributions of 9.25 percent of wages and salaries to tax-advantaged defined-contribution employee retirement savings accounts. Our analysis reveals that compulsory retirement savings, even when supplemented by the means-tested government pension and private wealth accumulation, are not in general sufficient to fund a comfortable lifestyle during retirement. We further find that omitting one or more 'pillars' of saving will significantly bias estimates of retirement savings adequacy. Our analysis also points to several shortcomings of the widely-used income replacement ratio as an indicator of savings adequacy.

"Time-Inconsistent Preferences and the Mandatory Saving Role of Social Security"

T. SCOTT FINDLEY, Utah State University
FRANK CALIENDO, Utah State University

We investigate the mandatory saving role of social security as a potential remedy to time-inconsistent saving behavior. Our model incorporates a "generalized" credit market that nests the extremes of missing credit markets and perfect credit markets, and it also includes the broad spectrum of possibilities in between. We prove that a fully-funded social security arrangement is irrelevant only at the knife edge of perfect credit markets. In other words, if there is a market imperfection of any degree then social security can improve the welfare of individuals with time-inconsistent preferences. We conclude that non-standard preferences provide a more compelling justification for the mandatory saving role of social security than previously supposed.

"An Integrated Notional Defined Contribution (NDC) Model with Retirement and Permanent Disability"

MANUEL VENTURA-MARCO, University of Valencia - Faculty of Economics
CARLOS VIDAL-MELIƁ, University of Valencia - Faculty of Economics

This paper develops an actuarial overlapping generations model (AOLG) that integrates old-age and permanent disability into a generic NDC framework. In the model, the account balances of participants who do not survive are distributed as inheritance capital to the accounts of the (non-disabled) active survivors on a birth cohort basis. The model includes realistic demography insofar as it takes into account an age schedule of mortality and the uncertainty concerning the timing of disability, and allows for changes in the economically active population and for a large number of generations of contributors and pensioners to coexist at each moment in time. The results achieved in the numerical example we present endorse the fact that the model really works and show an optimal integration of both contingencies into the NDC framework. The model can easily be linked to real practices in social security policies because, to mention just a few positive features, it could be implemented without much difficulty, it would help to improve actuarial fairness, it would uncover the real cost of disability and minimize the political risk of disability insurance being used as a vote-buying mechanism.

"Federalism and Fiduciaries: A New Framework for Protecting State Benefit Fund"
62 Drake Law Review 503 (2014)

RICHARD E. MENDALES, Charleston School of Law

The financial crisis has underlined the difficulties states and localities face in paying benefits to their employees. The most spectacular example is Detroit's bankruptcy, but across the country, state and local employees face sharp cuts in benefits, as their employers fight for solvency. A federal solution such as the Employment Retirement Income Security Act (ERISA), which protects private pensions, is precluded both by considerations of federalism and the practical impossibility of getting major legislation through Congress. This Article proposes an alternative: a uniform state code, like other uniform state laws such as the Uniform Commercial Code, that states could adopt to govern both state and local benefit plans. The proposed uniform code is based on common statewide financing. Funds would be administered by a nonpolitical council that would employ actuaries and inspectors to protect the integrity of funds inspected and disbursed according to standards set by the code. Statewide funding for state and local plans has advantages already enjoyed by states such as New York, including more sophisticated fiduciaries to supervise investments, reduced costs imposed by financial intermediaries, and greater diversification of investments. The code would go beyond existing state and local plans in creating state emergency funds paralleling the federal Pension Benefit Guaranty Corporation to ensure payment of benefits during unforeseen crises. Making the code uniform would enable adopting states to follow each others' practices and interpretation of code provisions. Moreover, with congressional approval, it would facilitate compacts among groups of states to pool benefit and emergency funds, giving them greater overall safety, ability to diversify, and leverage over financial intermediaries.

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