New papers from the Social Science Research Network

"The Behavioral and Consumption Effects of Social Security Changes"
Center for Retirement Research, WP 2017-10, September 2017

WENLIANG HOU, Boston College - Center for Retirement Research
Email: crr43891@bc.edu
GEOFFREY SANZENBACHER, Boston College Economics Department
Email: geoffrey.sanzenbacher.1@bc.edu

Social Security’s Trust Fund is projected to be exhausted in 2034. A variety of changes to the program have been put forward that would either push this date out into the future or delay it indefinitely. Some of these changes would cut benefits – e.g., increasing the Full Retirement Age (FRA) to 69 – while others would increase program revenue – e.g., increasing the payroll tax. While Social Security’s Office of the Chief Actuary projects the financial impact on the program of a wide variety of changes, understanding the impact of these changes on recipients’ behavior and well-being is also a valuable exercise. This paper uses the Gustman and Steinmeier structural model to analyze the effects of four changes to the Social Security program on recipients’ retirement timing and household consumption.

This paper found that:
-The two policies that reduce benefits – an increase in the FRA to 69 and a reduction in the COLA of 0.5 percentage points – would increase the length of workers’ careers by delaying retirement.
-The two policies that increase revenues – an increase in the payroll tax to 7.75 percent and an increase in the cap to cover 90 percent of earnings – would have a negligible impact on retirement timing.
-For the benefit-based policies, the reduction in consumption relative to current policy is relatively high post-retirement, with the COLA adjustment having an increasing effect with time.
-Policies that increase revenue have little effect on consumption after retirement but have a consistent effect during the working life.
The policy implications of this paper are:
-Policymakers can expect individuals to delay retirement more in response to Social Security changes that reduce benefits than from changes that increase revenue.
-In terms of consumption, policymakers considering benefit cuts versus revenue increases face a tradeoff: a sharper reduction in consumption over the shorter span of retirement or a smaller, but more prolonged, reduction in consumption during the working life.

"Homeownership, Social Insurance, and Old-Age Security in the United States and Europe"
CRR WP 2017-15

STIPICA MUDRAZIJA, The Urban Institute
Email: smudrazija@yahoo.com
BARBARA A. BUTRICA, The Urban Institute
Email: bbutrica@ui.urban.org

Relatively few Americans have accumulated substantial savings outside of their employer-sponsored retirement plans, yet most own their homes. The traditional view of the retirement income system as a three-legged stool supported by Social Security, private pensions, and savings may be better viewed as being supported by Social Security, pensions, and homeownership.
Country-specific economic, social, and political developments throughout modern history mean that homeownership rates and the relative importance of homeownership for old-age security vary widely across developed countries. Many countries, however, are increasingly promoting homeownership as an effective way of building assets, a de facto self-insurance mechanism for old-age security, and a substitute for various social transfers.

This paper uses data from the Health and Retirement Study (HRS) and the Survey of Health, Ageing, and Retirement in Europe (SHARE) to better understand the role of homeownership in retirement before and after the Great Recession for the United States and nine Western European countries: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain, and Sweden. It begins by comparing trends in homeownership rates among older adults and the key characteristics of housing-related policies and regulations that potentially impact home acquisition. It then examines home equity trends, the prevalence and burden of housing debt, and the relative importance of housing as a source of retirement wealth. Next it provides an overview of equity release options and estimates how much older households could increase their incomes by fully monetizing their housing equity. Finally, the paper discusses the prospects for and limits of home equity release and asset-based welfare policies.

The paper found that:
-Most older adults are homeowners, and homeownership rates generally increased between 2006 and 2012; however, there is substantial variation across countries.
-Housing-related policies in the Netherlands, Sweden, and Denmark provide comparatively high levels of support to both homeowners and non-homeowners, while those in Italy and Spain provide little support to either group. In contrast, housing policies in the United States provide some of the highest levels of support for homeowners and lowest levels of support for non-homeowners.
-Older American homeowners have substantial housing wealth, but compared with their European peers, housing represents a somewhat smaller part of their net total wealth.
-While the prevalence of housing debt among older adults is somewhat lower in the United States than in the Netherlands, Denmark, and Sweden, among older homeowners with housing debt, Americans have the highest loan-to-value ratios and the highest proportion of homeowners whose homes may be at risk of going underwater.
-If the housing equity of older Americans were completely monetized, median household income would increase by over a third – more than in countries like Sweden and Denmark, but well below countries like Spain and Italy. Across all countries in this study, tapping into housing equity could substantially reduce the share of older adults with household incomes below 50 percent of the median – the threshold for relative poverty.
-However, even after annuitizing housing wealth, the share of poor older Americans would remain as high as, or higher than, the share of poor older Europeans before accounting for annuitized housing wealth.
-Despite the potentially large impact of monetizing home equity on household incomes and the economic security of older Americans and Europeans, there remain impediments to tapping into home equity that may explain its low use. Objective obstacles include the high costs of withdrawing housing equity, uncertainty about life expectancy and the amount of financial resources required to support retirement, the adverse impact on eligibility for social benefits, and the concentration of housing wealth among (upper) middle- and higher-income individuals who are less likely to need additional resources in old age. Subjective obstacles include an aversion toward assuming additional debt in old age, different (often emotional) attitudes to housing compared with other types of wealth, bequest motives, and a lack of trust in financial institutions.
The policy implications of the findings are:
-Home equity has a potentially important yet limited role in supporting old-age security. Even if objective obstacles related to the design and pricing of home equity release products were fully addressed, subjective reasons for avoiding home equity withdrawal and compositional differences in the concentration of housing wealth would still limit the scope of asset-based welfare.
-These limitations notwithstanding, using home equity to supplement retirement incomes and improve retirement security remains a potentially attractive option for a substantial number of older adults who have built housing wealth over their life course, but may either have insufficient retirement incomes or face unexpected and expensive life events (e.g. long-term care needs).
-What remains more uncertain and difficult to predict, though, are the long-run prospects for using home equity to support old-age security since younger generations of Americans and Europeans may find it more difficult to build home equity than their parents’ generation.

"Generational Wealth Accounts"

DAVID MCCARTHY, University of Georgia - Department of Insurance, Legal Studies, Real Estate
Email: dmccarth@uga.edu
JAMES A. SEFTON, Imperial College London
Email: j.sefton@imperial.ac.uk
RONALD D. LEE, University of California, Berkeley - Department of Demography, National Bureau of Economic Research (NBER)
Email: rlee@demog.berkeley.edu
JOZE SAMBT, University of Ljubljana - Faculty of Economics
Email: joze.sambt@ef.uni-lj.si

Rigorous discussion of inter-generational equity has been hampered by the lack of a comprehensive measure of generational wealth that includes labour income, consumption, private financial wealth and the value of future public and private transfers. We construct the first such measure by extending generational accounting using results from the National Transfer Accounts (NTA) project. We call these generational wealth accounts (GWAs). These accounts have three main uses. First, they provide a comprehensive picture of the composition and level of aggregate resources available to each generation, as well as the uses to which those resources are put. Second, they allow the measurement of the sustainability and inter-generational equity of aggregate consumption paths of different generations, as well as of the public and private-sector transfer systems. Finally, our accounts provide an independent, forward-looking estimate of the relative importance of life-cycle wealth and wealth held for other purposes.

We compile a set of GWAs for the UK in 2012. Older generations appear to consume far less than the aggregate value of resources available to them, giving rise to significant bequests to younger generations. Younger generations will need to rely on these bequests in addition to inter vivos transfers to sustain their consumption paths. We show that the private sector is in surplus, that the sum of bequests and inter vivos transfers to the unborn is more than is required to fund their consumption plans. However, we confirm previous findings that the public sector is on an unsustainable deficit path. This public sector shortfall is greater than the private sector surplus and so aggregate consumption plans are unsustainable. We assess the generational equity of various approaches – including the UK government’s proposal as detailed in the Office for Budget Responsibility (OBR) forecasts – to restoring sustainability. Further, we estimate that only around 20% of the aggregate resources of living generations comprises financial and other forms of tradeable wealth, and that 40-50% of this is held to finance future consumption, taxes and inter vivos transfers, with the remainder financing bequests.

"Life Events and Participant Engagement in Pension Plans"

MATTHEW BLAKSTAD, NEST Corporation
Email: Matthew.Blakstad@nestcorporation.org.uk
ELISABETH BRÜGGEN, Maastricht University
Email: e.bruggen@maastrichtuniversity.nl
THOMAS POST, Maastricht University - School of Business and Economics - Department of Finance, Netspar
Email: T.Post@maastrichtuniversity.nl

We study the use of life events (e.g., getting married, starting a new job) for effective pension communication. Pension plan participants are often not open to pension communication, nor do they engage in pension planning. Overcoming this lack of engagement is important: participants should form realistic expectations about their retirement finances, discover pension gaps early enough to be able to take appropriate action, and experience less negative emotions and retirement anxiety in case of unwarranted pessimistic expectations. Sending pension-related information when important life events take place is often suggested to enhance the effectiveness of communication. Life events may represent teachable moments and thus lead to more openness to pension communication and planning. In this paper, we first review the literature on life events as teachable moments. Second, we provide an overview of life events that are especially suited to increase engagement. Third, we present empirical evidence on life events and participant engagement. Finally, we derive implications for theory as well as practice. Overall, we find that in theory life events appear to be good points to improve communications. The evidence from in-depth interviews with experts and pension plan participants, as well as survey data from participants, shows mixed results. It seems that several major challenges need to be addressed for successful use of life events.

"Property Transfers to Caregivers: A Comparative Analysis"
Forthcoming, 103 Iowa Law Review (2018)
Hebrew University of Jerusalem Legal Research Paper No. 17-45

ADAM S. HOFRI-WINOGRADOW, Hebrew University of Jerusalem, University of Connecticut - School of Law, Western Ontario University, Faculty of Law
Email: adam.hofri@mail.huji.ac.il
RICHARD L. KAPLAN, University of Illinois College of Law
Email: rkaplan@illinois.edu

Caregivers are key recipients of property transfers, both inter vivos and testamentary. The law's treatment of property transfers to caregivers changes according to the caregiver's relationship to the person cared for. Where caregivers are related to care recipients, the law generally favors the structuring of property transfers to caregivers as capital, rather than income transfers: while the law accepts that the daily work of care, done by people for their relatives, is often uncompensated, many family caregivers receive bequests larger than their intestate shares of the care recipient’s estate. Where, on the other hand, caregivers are not related to care recipients, the law approaches the care relationship using the terminology and frame of labor law. Bequests to non-family caregivers can raise a presumption of undue influence.

In this Article, we examine the approaches taken to property transfers to caregivers by the U.S., Israel and the U.K. The U.S. authorizes the payment of public benefits to family caregivers only in very restricted situations, relying on family caregivers working for free or being compensated by the care recipients. The U.K. provides modest public benefits to many family caregivers. Israel incentivizes the employment of non-family caregivers but will pay family caregivers indirectly when assistance from non-relatives is unavailable. We examine the pros and cons of several approaches to compensating family caregivers, including bequests from the care recipient, public benefits, tax incentives, private salaries paid by the care recipient and claims raised against the recipient’s estate. We conclude that while the provision of public benefits to family caregivers clearly needs to be increased, at least in the U.S., a fully publicly funded model is probably impossible.

"How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income?"
CRR WP 2013-13

MELISSA MCINERNEY, Tufts University
MATTHEW S. RUTLEDGE, Boston College, Center for Retirement Research
Email: rutledma@umich.edu
SARA ELLEN KING, Boston College - Center for Retirement Research
Email: kingnn@bc.edu

The adequacy of retirement income – from Social Security benefits and other sources – is substantially reduced by Medicare’s high out-of-pocket (OOP) costs. This project uses the 2002-2014 Health and Retirement Study to calculate post-OOP benefit ratios, defined as the share of either Social Security benefits or total income available for non-medical spending. The project decomposes the share of income that is going toward premium payments and services delivered and examines how these post-OOP benefit ratios differ by age, gender, income, supplemental insurance coverage, and health status. The project also updates previous studies’ estimates to document how OOP spending and the post-OOP income ratios changed following the introduction of Medicare Part D prescription drug coverage in 2006 and the closing of the “donut hole” coverage gap in 2010, which decreased OOP costs under Part D for those spending moderate amounts on prescriptions.

The paper found that:
-Average OOP spending (excluding long-term care) was $4,274 per year in 2014, with approximately two-thirds ($2,965) spent on premiums.
-In 2014, the average retiree had only 65.7 percent of his Social Security benefits remaining after OOP spending and only 82.2 percent of total income.
-Nearly one-fifth (18 percent) of retirees had less than 50 percent of their 2014 Social Security income remaining after OOP spending, with 6 percent of retirees falling below 50 percent of total income.
-Post-OOP benefit ratios increased concurrently with the introduction of Medicare Part D for retirees who lacked prescription drug coverage prior to 2006. This group also saw a small increase after the donut hole began closing in 2010.
The policy implications of the findings are:
-With less than two-thirds of their Social Security benefits available for non-medical consumption, and limited income outside of Social Security for much of the elderly population, many retirees likely feel that making ends meet is difficult.
-Medicare spending per beneficiary is expected to resume its decades-long rise by the end of the decade which will put even more pressure on retirees’ budgets.