New papers from the Social Science Research Network

"The Effect of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts"

JACOB A. MORTENSON, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress
Email: jm849@georgetown.edu
HEIDI R. SCHRAMM, Joint Committee on Taxation, U.S. Congress
Email: heidi.schramm@jct.gov
ANDREW WHITTEN, Georgetown University - Department of Economics, Joint Committee on Taxation, US Congress
Email: raw65@georgetown.edu

Traditional Individual Retirement Accounts (IRAs) are a substantial source of retirement savings. In 2013, individuals age 60 or older held $3.8 trillion in wealth in IRAs. Under current law, some fraction of these funds must be withdrawn each year beginning the year one turns 70.5 years of age, with the required fraction increasing in age. We study the effects of these Required Minimum Distribution (RMD) rules on the decumulation behavior of retirees using a 16-year panel of administrative tax data. Our data consist of a 5% random sample of individuals age 60 or older from 1999 to 2014, with approximately 2.6 million individuals per year. This period encompasses a unique policy change that we exploit for identification: a one-year suspension of the RMD rules in 2009. Though the RMD rules are modest – leaving one third of the original balance intact by age 90 even if investments generate zero returns – our empirical analysis shows they have large effects on behavior. We estimate that 52% of individuals subject to the rules would prefer to take an IRA distribution less than their required minimum. However, our estimate for the proportion of constrained individuals who took advantage of the RMD suspension in 2009 is 62%. The remaining 38% did not re-optimize, perhaps due to inattention or other optimization frictions. In addition, we document an extensive margin effect among 70.5-year olds: individuals newly subject to the rules are 28% more likely to close their IRAs relative to other age groups. The findings suggest that there are costs associated with paying attention to the RMD rules and that the rules represent a binding constraint for the majority of retirees with IRAs.

"Who is Saving Privately for Retirement and How Much? - New Evidence for Germany"
FZG Discussion Papers 57 (2015), University of Freiburg, Research Center for Generational Contracts (FZG)

CHRISTOPH METZGER, University of Freiburg - Institute of Public Finance
Email: chrisipissi@hotmail.com

Due to demographic change the replacement rates of the German statutory pension scheme will decrease over the next decades. Voluntary savings for retirement will therefore gain more and more relevance in order to maintain one’s standard of living during retirement. This article examines the savings behavior for retirement on an individual level in Germany. As a first step the decision to save at all is analyzed, showing that the main determinants for saving are personal income as well as the disposable household income. Furthermore migrants and individuals living in the Eastern part of Germany turn out to be less likely to save additionally privately for retirement. In a second step the chosen gross saving rates are analyzed using a Tobit, a lognormal hurdle model and a Type II Tobit Model. The results suggest that the decisions to save at all and about the saving rate are independent of each other leading to a loss of information if only a standard Tobit model is used. For example personal income increases the probability to save for retirement but decreases the resulting saving rate. Modelling both decisions separately therefore leads to a better understanding of the determinants of saving for old-age.

"'Death Tax' Politics"
Boston College Law Review, Vol. 57, No. 3, 2016, Forthcoming

MICHAEL J. GRAETZ, Columbia Law School, Yale Law School
Email: michael.graetz@yale.edu

In his Keynote Address “Death Tax” Politics at the October 2, 2015 Boston College Law School and American College of Trust and Estate Counsel Symposium, The Centennial of the Estate and Gift Tax: Perspectives and Recommendations, Michael Graetz describes the fight over the repeal of the estate tax and its current diminished state. Graetz argues that the political battle over the repeal of the estate tax reflects a fundamental challenge to our nation’s progressive tax system. This Address concludes that a revitalized estate tax is important for managing the national debt and reducing massive inequalities in wealth.

"Influencing Retirement Saving: Smart Beta in Defined Contribution Default Options"
Journal of Index Investing, Forthcoming

MANUELA SPERANDEO, Blackrock
Email: Manuela.Sperandeo@blackrock.com
MARCO CORSI, Blackrock
Email: marco.corsi@blackrock.com
SARA SHORES, Blackrock
Email: sara.shores@blackrock.com

Concerns over the adequacy of lifetime retirement income are, more than ever before, a global phenomenon. Issues around participants’ engagement and retirement security seem to be present across countries with different macroeconomic and cultural backgrounds, saving and social security setups. The traditional focus on fiduciary responsibilities, such as selecting managers and monitoring fees, has been expanded to cover areas such as participant usage and successful outcome, which are now some of the main areas of interest for industry practitioners. Prevailing academic research on the topic is grounded in the concept of the experiential learning cycle, namely that people learn from experience (see Goby and Lewis, 2000). The question then becomes how to improve participants’ experience within existing Defined Contribution (DC) plans so to encourage them to save more and save regularly. In this paper we take a look at some of the features of smart beta strategies, (i.e. passively managed portfolios that move away from market capitalization weighted indexes), which make these strategies an interesting potential tool for DC plans. We then test this by using existing smart beta indexes in the context of a traditional lifestyle fund, where market capitalization indexes are replaced with smart beta indexes on pre-defined allocations.

"The Influence of Time Preferences on Retirement Timing"

PHILIPP SCHREIBER, University of Mannheim - Department of Banking and Finance
Email: schreiber@bank.bwl.uni-mannheim.de
MARTIN WEBER, University of Mannheim - Department of Banking and Finance
Email: weber@bank.bwl.uni-mannheim.de

This study analyzes the empirical relation between the decision when to retire and individuals time preferences. Theoretical models predict that hyperbolic discounting leads to dynamic inconsistent retirement timing. Conducting an online survey with more than 3,000 participants, we confirm this prediction. The analysis shows, that time inconsistent participants decrease their planned retirement age with increasing age. The temptation of early retirement seems to become stronger the closer retirement comes. We show that the negative effect of age is between 1.5 and 3 times stronger for participants who can be classified as hyperbolic discounters. In addition, we find that time inconsistent participants actually retire earlier. On average, the most time inconsistent participants retire about 2.2 years earlier. The time inconsistent behavior has severe consequences: Time inconsistent participants are ex post more likely to regret their retirement timing decision. Also, the unplanned early retirement leads to a constant decrease of retirement benefits of about 13%.