In recent decades, redistributive pension schemes have seen a remarkable surge in developing countries, particularly in the form of so-called social or non-contributory pension schemes. We note that many of these redistributive schemes target the rural elderly and correlate with higher urban population density, and weaker social norms about parent-children relationships. We use this stylized evidence to motivate a political economy model for a Beveridgean social security system which shows trade-offs between four different segments in the population: the (poorer) rural old and young, and the (richer) urban old and young. We show under which conditions governments will install a pension system and increase its generosity as the share of the urban population rises, productivity differentials between urban and rural workers widen, or if the social norm erodes. We conclude that the role of the rural-urban divide in shaping redistribution merits more scholarly attention, as in many developing countries the gap between cities and the countryside widens.
"How Does the Level of Household Savings Affect Preference for Immediate Annuities?"
EBRI Issue Brief, Number 430 (February 8, 2017)
With the decline of defined benefit (DB) pension plans, there has been some renewed interest in providing other annuity income options to American workers, but demand for annuities has remained low in the United States. To develop future annuity income solutions, it is important to understand the public’s preferences for such products. This paper uses a unique experiment in the Health and Retirement Study (HRS) to assess the effect of savings on the preference for immediate annuities (which begin paying out a regular stream of income as soon as they are purchased). Regression results show that people at the bottom- and top-ends of the savings distribution (those with the least and most assets) are more likely to buy annuities than people in the middle of the savings distribution. Also, savings has a large positive effect on preference for annuities only for those in the highest savings category. Possible explanations for such behavior follow. People at the bottom of the savings distribution are very likely to run out of money in retirement and thus are inclined to select annuities. People at the top end of the savings distribution expect longer lifespans and can afford annuities even after leaving a financial legacy for their heirs. People in the middle generally face more uncertainty about their retirement adequacy and so they are more likely to hold on to their savings for precautionary purposes and perhaps also for some hope of leaving a financial legacy for their heirs. The results also show clear preference for annuitizing smaller shares of assets or partial annuitization. When compared to their current financial situation, only 16.5 percent of retirees (ages 65 and above) preferred full annuitization compared to 43.0 percent who preferred a one-quarter annuitization. A large majority (70.2 percent) of the current Social Security recipient households receive at least three-quarters of their income in annuities from Social Security, employer-provided pensions, and other annuity contracts. The fact that most retirees are already highly annuitized might help explain the lack of demand for additional annuity income.
BENJAMIN VEGHTE, National Academy of Social Insurance
ELLIOT SCHREUR, National Academy of Social Insurance (NASI)
ALEXANDRA L. BRADLEY, National Academy of Social Insurance
Our nation’s social insurance infrastructure forms the foundation of economic and health security for American workers and their families. Like all infrastructure, it must be periodically strengthened and modernized if it is to continue to meet the needs of a changing economy and society. This Report presents the new Administration and Congress with a range of evidence-based policy options, developed by the nation’s top social insurance experts, for doing so.
The first part of the Report takes stock of the policy challenges facing existing social insurance programs: Social Security, the major health insurance programs, and Unemployment Insurance. The second part discusses potential new directions for social insurance in coping with emerging needs in the areas of long-term services and supports, caregiving supports, and nonstandard work.
Elderly workers in developing countries face certain frictions, such as credit constraints, in their retirement decisions that may not be as common among their counterparts in the developed world, and these concerns may lead workers to work more or less than their preferred number of years. In this study, I firstly use regression discontinuity methods to show that a large fraction of urban male heads of households in Brazil (roughly 45%) react contemporaneously to pension eligibility by retiring. Because retirement is not required to receive the pension and because the return to working does not change discontinuously at the eligibility cutoff, workers should not react contemporaneously unless optimization frictions, such as credit constraints, are at work. Secondly, I develop a model of retirement decisions that explores how pensions in the face of credit constraints can influence such decisions, and I discuss applications of this model to determine how the observed behavior in conjunction with the model can be used to make inferences about welfare and labor supply decisions in the face of different pension values.
Longevity insurance pays cash benefits to an insured individual who attains a defined age. Thereafter, benefits may continue throughout the insured’s life. For anyone concerned that living too long might become an economic hardship, longevity insurance, at the right price, can make sense. Yet, due to cost, few people purchase it.
Longevity insurance’s high price reflects three factors: 1) lingering effects of a 1905 government investigation which pushed the insurance industry to bundle costly, counterproductive features with its longevity products, 2) the corporate structure of the underwriting business which shoulders risk, requires remuneration and itself interposes an additional risk factor (potential insurer default) and, 3) most importantly, inequitable taxation.
A legacy savings organization (LSO) is an organizational structure that enables a group of individuals to self-insure far more cost effectively and at lower risk than through a commercial insurer. For instance, through such an organization, a typical 65 year old man, in return for a $100,000 payment placed in risk-free Treasury securities, could expect to receive beginning at age 85 roughly a $50,000 annual, after tax benefit, easily 50% more than most commercial insurers now offer.
Today, commercial insurers are engines that turn the principal of one insured into the taxable income of another. An LSO avoids this onerous tax treatment.
This report briefly reviews current, commercially available longevity insurance products, describes the construction and delivery of a more attractive alternative through LSO’s and briefly relates the history of similar alternatives