Monday, February 12, 2018

New paper: "How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior"

How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior

by Vanya Horneff, Raimond Maurer, Olivia S. Mitchell

This paper explores how an environment of persistent low returns 
influences saving, investing, and retirement behaviors, as compared to what in the past had been thought of as more "normal" financial conditions.  Our calibrated lifecycle dynamic model with realistic tax, minimum distribution, and Social Security benefit rules produces results that agree with observed saving, work, and claiming age behavior of U.S. households. In particular, our model generates a large peak at the earliest claiming age at 62, as in the data.  Also in line with the evidence, our baseline results show a smaller second peak at the (system-defined) Full Retirement Age of 66. In the context of a zero return environment, we show that workers will optimally devote more of their savings to non-retirement accounts and less to 401(k) accounts, since the relative appeal of investing in taxable versus tax-qualified retirement accounts is lower in a low return setting. Finally, we show that people claim Social Security benefits later in a low interest rate environment. Read more!

New paper: "Intergenerational Spillovers in Disability Insurance"

Intergenerational Spillovers in Disability Insurance

by Gordon B. Dahl, Anne C. Gielen  -  #24296 (CH LS PE)

Does participation in a social assistance program by parents have
spillovers on their children's own participation, future labor
market attachment, and human capital investments? While
intergenerational concerns have figured prominently in policy
debates for decades, causal evidence is scarce due to nonrandom
participation and data limitations.  In this paper we exploit a
1993 policy reform in the Netherlands which tightened disability
insurance (DI) criteria for existing claimants, and use rich
panel data to link parents to children's long-run outcomes.  The
key to our regression discontinuity design is that the reform
applied to younger cohorts, while older cohorts were exempted
from the new rules.  We find that children of parents who were
pushed out of DI or had their benefits reduced are 11% less
likely to participate in DI themselves, do not alter their use of
other government safety net programs, and earn 2% more in the
labor market as adults.  The combination of reduced government
transfers and increased tax revenue results in a fiscal gain of
5,900 euros per treated parent due to child spillovers by 2014. 
Moreover, children of treated parents complete an extra 0.12
years of schooling on average, an investment consistent with an
anticipated future with less reliance on DI.  Our findings have
important implications for the evaluation of this and other
policy reforms:  ignoring parent-to-child spillovers understates
the long-run cost savings of the Dutch reform by between 21 and
40% in present discounted value terms. Read more!

New paper: "Earnings Test, Non-actuarial Adjustments and Flexible Retirement"

Earnings Test, Non-actuarial Adjustments and Flexible Retirement

by Axel H. Boersch-Supan, Klaus Haertl, Duarte N. Leite  -  #24294 (AG PE)

In response to the challenges of increasing longevity, an obvious policy response is to gradually increase the statutory eligibility age for public pension benefits and to shut down pathways to early retirement such as special rules for women. This is, however, very unpopular. As an alternative, many countries have introduced "flexibility reforms" which allow combining part-time work and partial retirement.  A key measure of these reforms is the abolishment of earnings tests.  It is claimed that these reforms increase labor supply and therefore, also the sustainability of pension systems.  We show that these claims may not be true in the circumstances of most European countries.

To this end, we employ a life-cycle model of consumption and labor supply where the choices of labor force exit and benefit claiming age are endogenous and potentially separate.  Earnings tests force workers to exit the labor market when claiming a pension.  After abolishing the earnings test, workers can claim their benefits and can keep on working, potentially increasing labor supply.  Our key result is that the
difference between exit and claiming age strongly depends on the actuarial neutrality of the pension system and can become very large.  Abolishing an earnings test as part of a "flexibility reform" may therefore create more labor supply but at the same time, reduce the average claiming age when adjustments remain less than actuarial, thereby worsening rather than improving the sustainability of public pension systems. Read more!