Monday, March 27, 2017

Upcoming event: "Using Tax Panel Data to Examine the Transition to Retirement"


Please Join us for a meeting of the Savings and Retirement Foundation with Guest Speaker
Peter Brady
discussing his new paper on

"Using Tax Panel Data to Examine the Transition to Retirement"

Tuesday, March 28th, 2017

12:00 p.m. - 1:00 p.m.

RSVP


  Location:
Tax Foundation
1325 G St. NW
Suite 950
Washington, DC 20005


Lunch will be provided.
This is a widely attended event.

Featured Guest:
Peter Brady is is a Senior Economist in the Retirement and Investor Research Division at the Investment Company Institute (ICI). At the Institute, Mr. Brady focuses on pensions, retirement savings, and the taxation of capital income. Peter’s current research is focused on measuring changes in income in retirement and the tax treatment of retirement savings. His prior research includes work on retirement adequacy, replacement rates, pension coverage, and trends in pension income. Mr. Brady is currently President of the National Tax Association and is a member of the SOI Consultants Panel (for the Internal Revenue Service, Statistics of Income Division). Prior to joining the Institute, Mr. Brady worked as a financial economist in the Office of Tax Analysis at the U.S. Department of Treasury and, prior to working at the Treasury Department, as a staff economist in the Research Division at the Federal Reserve Board. Mr. Brady is a graduate of St. Lawrence University and holds a Ph.D. in economics from the University of Wisconsin.
Peter Brady
Senior Economist
Investment Company Institute


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Tuesday, March 21, 2017

New IMF paper: “Pension Reform Options in Chile : Some Tradeoffs”

Working Paper No. 17/53 : Pension Reform Options in Chile : Some Tradeoffs

Author/Editor: Marika Santoro

Summary:

In this paper, we study the macroeconomic impact of pension reform options in Chile, using a dynamic general equilibrium model. The main reform proposal considers raising contributions (employer side) and vehicle additional proceeds to individual accounts and to increase the support of solidarity pensions. We model increased contributions as a labor tax. We find the impact of this reform on GDP to be negative in the near to the medium run, with GDP declining by 0.5 percent by 2021, as a result of labor tax distortions which lead to a fall in labor supply, investment and to a loss in competitiveness. We also illustrate the main macroeconomics tradeoffs by analyzing alternative reforms, such as using revenues only to improve future pensions or a reform package funded by a mix of higher contributions and indirect taxes.

http://www.imf.org/en/Publications/WP/Issues/2017/03/13/Pension-Reform-Options-in-Chile-Some-Tradeoffs-44740

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Monday, March 20, 2017

New papers from the National Bureau of Economic Research

Annuity Options in Public Pension Plans: The Curious Case of Social Security Leveling

by Robert L. Clark, Robert G. Hammond, Melinda S. Morrill - #23262 (AG)

Abstract:

Social Security Leveling is an annuity option that allows participants to receive a level income before and after age 62. The retiree receives a larger pension benefit prior to age 62, but then the pension benefit is lowered at age 62 when the individual is expected to claim Social Security benefits. This option is not uncommon in public pension plans, yet little is known about how this option is used in practice and its impact on well-being in retirement. Our study uses a combination of administrative records and survey data from recent North Carolina public sector retirees.

We find that one-third of all retirees selecting a single life annuity between 2009 and 2014 opted for Social Security Leveling.

The evidence suggests that individuals are choosing this option in a way that is consistent with their stated preferences and a consumption smoothing motive. However, we also see higher rates of ex post "regret" in the annuity choice among those choosing the level income option.

http://papers.nber.org/papers/w23262?utm_campaign=ntw&utm_medium=email&utm_source=ntw

A Head-to-Head Comparison of Augmented Wealth in Germany and the United States

by Timm Boenke, Markus Grabka, Carsten Schroeder, Edward N. Wolff - #23244 (AG LS PE)

Abstract:

We provide levels of, compositions of, and inequalities in household augmented wealth - defined as the sum of net worth and pension wealth - for two countries: the United States and Germany. Pension wealth makes up a considerable portion of household wealth: about 48% in the United States and 61% in Germany. The higher share in Germany narrows the wealth gap between the two countries: While average net worth in the United States (US$337,000 in 2013) is about 1.8 times higher than in Germany, augmented wealth (US$651,000) is only 1.4 times higher. Further, the inclusion of pension wealth in household wealth reduces the Gini coefficient from 0.892 to 0.701 in the United States and from 0.765 to 0.511 in Germany.

http://papers.nber.org/papers/w23244?utm_campaign=ntw&utm_medium=email&utm_source=ntw

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Friday, March 3, 2017

New papers from the Social Science Research Network

"The Emergence of Redistributive Pensions in the Developing World"

ACHIM KEMMERLING, Central European University (CEU)
Email: Kemmerlinga@ceu.hu
MICHAEL NEUGART, Technische Universit├Ąt Darmstadt
Email: neugart@vwl.tu-darmstadt.de

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)

SUDIPTO BANERJEE, Employee Benefit Research Institute (EBRI)
Email: banerjee@ebri.org

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.

"Report to the New Leadership and the American People on Social Insurance and Inequality"

BENJAMIN VEGHTE, National Academy of Social Insurance
Email: bveghte@nasi.org
ELLIOT SCHREUR, National Academy of Social Insurance (NASI)
Email: elliot.jcs@gmail.com
ALEXANDRA L. BRADLEY, National Academy of Social Insurance
Email: abradley@nasi.org

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.

"Pensions, Retirement, and the Disutility of Labor: Bunching in Brazil"

BENJAMIN THOMPSON, University of Michigan at Ann Arbor
Email: bpthomp@umich.edu

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.

"Legacy Savings Organizations: Beating Deferred Annuity Insurance Benefits by Over 50%; Practical Plan for Funding Extra-Long Retirement"

M. A. GUMPORT, MG Holdings/SIP
Email: magumport@att.net

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

Read more!

Wednesday, March 1, 2017

New papers from the Social Science Research Network

"The Effect of Job Mobility on Retirement Timing by Education"
Boston College Center for Retirement Research WP No. 2017-1

GEOFFREY SANZENBACHER, Boston College Economics Department
Email: geoffrey.sanzenbacher.1@bc.edu
STEVEN A. SASS, Boston College - Center for Retirement Research
Email: steven.sass@bc.edu
CHRISTOPHER M. GILLIS, Boston College, Center for Retirement Research
Email: gillisch@bc.edu

Job-changing among late-career workers increased steadily from the 1980s through the mid-2000s before declining somewhat in recent years. This study asks how the rise in job-changing – which seems largely voluntary – affects retirement timing and whether this effect varies by a key measure of socioeconomic status: educational attainment. Workers presumably change jobs voluntarily to improve their well-being through gains in the economic or non-economic rewards of work or better working conditions. As a result, workers switching jobs late in their careers might retire later than they otherwise would have. Retiring later would be especially beneficial to less educated workers, who are generally less prepared financially to retire than better educated workers. Changing jobs, however, sheds the protection that tenure provides against involuntary job loss, which often leads to earlier retirements for older workers. This study seeks to understand which effect dominates, while dealing with the fact that job changing could be endogenous to retirement – that workers willing to bear the cost of a job search could intend to remain in the workforce longer. The analysis does so by controlling for each individual’s planned retirement age. The results show that the benefits of job changing are widely distributed and are associated with later retirements for men and women and for better and less educated workers.

"Report to the New Leadership and the American People on Social Insurance and Inequality"

BENJAMIN VEGHTE, National Academy of Social Insurance
Email: bveghte@nasi.org
ELLIOT SCHREUR, National Academy of Social Insurance (NASI)
Email: elliot.jcs@gmail.com
ALEXANDRA L. BRADLEY, National Academy of Social Insurance
Email: abradley@nasi.org

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.

Read more!