New papers from the Social Science Research Network

"Multiemployer Defined Benefit Pension Plans' Liability Spillovers: Important Connections in U.S. Unionized Industries"

BARBARA CHAMBERS, University of Utah
Email: barbara.chambers@utah.edu

A Multiemployer Defined Benefit Pension Plan (MDBP) is a collectively bargained pension plan maintained by two or more employers and a labor union. MDBPs pool risks, contributions, assets and liabilities. Bankruptcy by MDBP firms generally results in essentially constant MDBP total liabilities but a shrinking pool of contributing MDBP employers, thus increasing MDBP liabilities for the remaining MDBP employers and exposing them to “liability spillover risks”. I document the economic magnitudes of public firms’ MDBP liabilities and expected MDBP liability spillovers from other public companies, information relevant to both finance academics and policy makers. I find that nine public companies have MDBP liabilities exceeding 10% of their market value of equity and in a few cases expected liability spillovers are bigger than 30% of a firm’s market value of equity. On average, leverage ratios increase by 6% once MDBP liabilities and expected liability spillovers are consolidated into capital structure.

"Reverse Mortgages: What Homeowners (Don’t) Know and How It Matters"

THOMAS DAVIDOFF, University of British Columbia (UBC) - Sauder School of Business
Email: thomas.davidoff@sauder.ubc.ca
PATRICK GERHARD, Maastricht University
Email: p.gerhard@maastrichtuniversity.nl
THOMAS POST, Maastricht University - School of Business and Economics - Department of Finance, Netspar
Email: T.Post@maastrichtuniversity.nl

Reverse mortgages help elderly homeowners to unlock and consume home equity while continuing residing in their homes. Demand for reverse mortgage is far behind predictions. Based on a representative survey of U.S. homeowners aged 58 we assess the role of product knowledge (literacy) for reverse mortgage demand. We find that awareness of the product is very high while knowledge is fairly low. Lack of product knowledge relates to low demand. Respondents that would benefit most from reverse mortgages (lower income, insufficient savings) are more likely to accept a reverse mortgage. But, those respondents do not have good knowledge about the product. They may not make an informed decision and fail to evaluate alternative retirement planning options. We find no effect of knowledge transfer on reverse mortgage demand. This result suggests that a way to increase reverse mortgage demand might be the reduction of the product’s inherent complexity.

"Do Tax Incentives Increase 401(K) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions"
CRR WP 2014-17

MATTHEW S. RUTLEDGE, Boston College
Email: rutledma@umich.edu
APRIL YANYUAN WU, Boston College - Center for Retirement Research
Email: wuuv@bc.edu
FRANCIS M. VITAGLIANO, Boston College - Center for Retirement Research
Email: vitaglif@bc.edu

The U.S. government subsidizes retirement saving through 401(k) plans with $61.4 billion in tax expenditures annually, but the question of whether these tax incentives are effective in increasing saving remains unanswered. Using longitudinal U.S. Social Security Administration data on tax-deferred earnings linked to the Survey of Income and Program Participation, the project examines whether the “catch-up provision,” which was enacted in 2001 and allows workers over age 50 to contribute more to their 401(k) plans, has been effective in increasing earnings deferrals. Compared with similar workers under age 50, the study finds that contributions increased by $540 more among age-50-plus individuals who had approached the 401(k) tax-deferral limits prior to turning 50, suggesting that the older individuals respond to the expanded tax incentives. For this group, the elasticity of retirement savings to the tax incentive is quite high: a one-dollar increase in the tax-deferred limit leads to an immediate 49-cent increase in 401(k) contributions.