Memo to Trump: There Is No Looming ‘Retirement Crisis’

I have a piece in today’s Wall Street Journal looking at new research showing that retiree’s incomes are substantially higher than previously thought. I’ve argued in other pieces that household surveys, in which respondents are asked how much income they receive from various sources, significantly underestimate the incomes retirees receive from private retirement plans like DB pensions and 401(k)s. As a result, incomes seem lower, poverty rates higher, and retirees more dependent on Social Security benefits.

But new research from two Census Bureau economists instead uses IRS tax data, which is much more accurate. They find a number of very interesting facts with regard to retirement incomes:

• Incomes are substantially higher you’d think from relying on the usual household survey data.
• The percentage of Americans who are receiving private retirement plans benefits is increasing, and those benefits are rising.
• Most retirees have incomes that very closely match their pre-retirement incomes, far exceeding the 70% “replacement rate” that financial advisors recommend.

You can find some of the article here at AEI’s webpage; the full piece will be posted there in a few days.

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New papers from the Social Science Research Network

"Welfare Implications of a Flexible Retirement Policy"

ZHENHUA FENG, Tsinghua University - Institute of Economics
Email: fengzhh.13@sem.tsinghua.edu.cn
JAIMIE W. LIEN, The Chinese University of Hong Kong (CUHK) - Department of Decision Sciences & Managerial Economics
Email: jaimie.academic@gmail.com
JIE ZHENG, Tsinghua University - School of Economics & Management
Email: jie.academic@gmail.com

Facing lengthening lifespans and economic concerns, workers and governments are increasingly considering the possibility of delayed retirement ages. However, the postponement of retirement may not be universally feasible, since not all workers may be willing and able to continue working past the standard retirement age, due to health status and other factors. We model this uncertain retirement problem in an overlapping generations general equilibrium framework with flexible retirement, where members of the older generation continue working with some probability, and otherwise retire. Comparing the policies of flexible retirement and mandatory retirement, we find that the consumption and welfare consequences depend largely on the labor intensity of the production function. Higher labor intensity of production tends to yield favorable social welfare results for the flexible retirement policy compared to the mandatory policy. We discuss policy insights and possible implications in China and other demographically shifting countries.

"Funding Life Insurance Contracts with Guarantees: How Can We Optimally Respond to the Policyholder's Needs?"

AN CHEN, University of Ulm
Email: an.chen@uni-ulm.de
PETER HIEBER, University of Ulm - Department of Mathematics and Economics
Email: peter.hieber@uni-ulm.de
THAI NGUYEN, University of Ulm - Institute of Insurance Science
Email: thai.nguyen@uni-ulm.de

Due to the increasing solvency requirements for return guarantees and a general decrease in interest rate levels, the attractiveness of equity-linked life insurance contracts with guarantee has recently substantially decreased. To regain competitiveness for these products, insurance companies need to be more flexible in their contract design and think of tailor-made retirement products that still satisfy the policyholder's needs. One such possibility is to adapt the investment strategy of the premium pool according to the policyholder's preferences. In this article, we determine the investment strategy that maximizes the expected utility of the policyholder's insurance contract payoff. Taking into account that retirement products are usually tax-privileged, we find that fairly priced guarantee contracts that follow this optimal investment strategy lead to a higher expected utility than asset investments.

"What Happens When Investors Have More Choices?"

CLAIRE YURONG HONG, Hong Kong University of Science & Technology (HKUST) - Department of Finance
Email: clairehong.ust@outlook.com

This paper studies pension funds' responses when investors are given more choices. Hong Kong launched the Employee Choice Arrangement in November 2012, which dramatically expanded investors' choice set. I find that funds charge lower fees, exhibit lower fee dispersion, and are less active after the reform. Further analysis suggests that a fund's decision to reduce fee or be active is driven by investors' demand – funds cater to investors by reducing fees when flows are less sensitive to activeness but more sensitive to fee. Importantly, a larger investor choice set improves investors' wealth mainly indirectly through endogenous fund responses, rather than through participants' better capital allocations.

"Human Capital, Social Security, and Asset Allocation"

GORDON IRLAM, Independent
Email: gordoni@gordoni.com

Numerical stochastic dynamic programming is used to explore the effects of stochastic human capital and Social Security on optimal asset allocation and consumption decisions over the lifecycle for typical individuals. Optimal asset allocations are very stock heavy pre-retirement, and quite stock heavy post retirement. Individuals should adopt declining equity allocations while employed, and level to slightly rising equity allocations during a stochastic retirement. Early in the working years almost the entire income should be consumed. Consumption should typically continue to increase until late in retirement, when it will be forced to fall.

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New papers from the Social Security Bulletin

Hispanics' Understanding of Social Security and the Implications for Retirement Security: A Qualitative Study

by Lila Rabinovich, Janice Peterson, and Barbara A. Smith

This article discusses why effective outreach to Hispanics is important to improve their understanding of Social Security and enhance their retirement security. It examines Social Security literacy and preferred ways of receiving information about the program by using focus groups of three ancestries (Mexican, Puerto Rican, and Cuban) and of English and Spanish speakers. This article is one of the first to research between-group differences and discuss their implications.

Exits from the Disability Insurance Rolls: Estimates from a Competing-Risks Model

by Lakshmi K. Raut

This article explores the causes of growth in the number of disabled workers on the Social Security Disability Insurance (DI) rolls from 1980 through 2010 by estimating the probability of a DI beneficiary's program exit because of recovery, death, or conversion to retired-worker beneficiary. The author uses Social Security administrative data and a competing-risks model to estimate DI exit probabilities by cause and beneficiary sex, age, and disability type. Cumulative exit probabilities are calculated for beneficiaries over their first 9 years on the DI rolls. The author also examines possible changes over time by comparing outcomes for the 1980s with those for the 1990s.

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New paper: “Nudging Retirement Savings: A Field Experiment on Supplemental Plans”

Nudging Retirement Savings: A Field Experiment on Supplemental
Plans

by Robert L. Clark, Robert G. Hammond, Melinda Sandler Morrill, Christelle Khalaf  -  #23679 (AG)

Abstract:

Although supplemental saving plans can be an important part of an
individual's financial security in retirement, contribution rates
remain low, particularly among those with lower salaries and less
education.  We report findings from a field experiment that
distributed an informational nudge containing information on key
aspects of the employer-provided supplemental saving plans of older
public employees in North Carolina.  Among workers participating in a
supplemental plan, individuals who received an informational nudge
increased their contributions in the months following the
intervention relative to the control group.  Moreover, those that
received the nudge reported in a subsequent survey that they were
more likely to have developed a retirement plan and report more
confidence in their retirement preparedness.  In contrast,
individuals who were not enrolled in a retirement saving plan were
not moved to begin contributing to a supplemental plan.

http://papers.nber.org/papers/w23679?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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New paper: "Debt and Financial Vulnerability on the Verge of Retirement"

Debt and Financial Vulnerability on the Verge of Retirement
by Annamaria Lusardi, Olivia S. Mitchell, Noemi Oggero  -  #23664 (AG)

Abstract:

We analyze older individuals' debt and financial vulnerability using
data from the Health and Retirement Study (HRS) and the National
Financial Capability Study (NFCS).  Specifically, in the HRS we
examine three different cohorts (individuals age 56-61) in 1992,
2004, and 2010 to evaluate cross-cohort changes in debt over time. 
We also use two waves of the NFCS (2012 and 2015) to gain additional
insights into debt management and older individuals' capacity to
shield themselves against shocks.  We show that recent cohorts have
taken on more debt and face more financial insecurity, mostly due to
having purchased more expensive homes with smaller down payments.

http://papers.nber.org/papers/w23664?utm_campaign=ntw&utm_medium=email&utm_source=ntw Read more!