New papers from the Social Science Research Network

"Do Retired Americans Annuitize Too Little? Trends in the Share of Annuitized Income" 

BARRY BOSWORTH, Brookings Institution - Economic Studies Program
Email: bbosworth@brookings.edu
GARY BURTLESS, Brookings Institution, Boston College - Retirement Research Center
Email: GBURTLESS@BROOK.EDU
MATTAN ALALOUF, Independent
Email: malalouf@brookings.edu

This paper examines the importance of annuity-like income as a share of total money income received by aged families. The analysis considers the aged (62) population as a whole as well as different parts of the aged families’ income distribution during the period from the early 1980s through 2009. We use survey data from 1983 through 2009 from the March Current Population Survey (March CPS) and the Survey of Consumer Finances (SCF). The total income amounts reported in the files are compared with data in the National Income and Product Accounts (NIPA). We calculate the family income consisting of annuitized income flows (primarily Social Security and pensions) and measure it as a share of families’ total money income. We also expand the definition of both annuitized and non-annuitized income to include income flows not captured in the surveys, namely, health insurance subsidies and the housing services received by homeowners. Finally, we consider the potential impact on aged families if they were to convert their wealth into private annuities.

The paper finds that:

-- Despite the shift from defined benefit (DB) to defined contribution (DC) retirement plans, there is little evidence that the annuity-like income share of total income has fallen for aged families – and, in particular, for low-income aged families – over the past three decades.

-- This basic result remains unchanged when we consider more comprehensive income definitions and when we focus on aged families with retired heads of family.

-- Nonetheless, many middle- and high-income aged families would experience a sizeable increase in monthly income if they annuitized their wealth.

The policy implications of the findings are:

-- Concerns that reduced rates of annuitization will lead retirees to spend down their assets at a too-rapid rate seem overblown or at least premature; there is little evidence that the share of income derived from annuity-like income sources has declined.

-- Contrary to a widespread fear, the shift from DB to DC workplace pensions has not reduced the share of retirement income that consists of relatively secure, annuity-like income flows that will last as long as aged breadwinners and their spouses survive.

"Sources of Increasing Differential Mortality Among the Aged by Socioeconomic Status" 

BARRY BOSWORTH, Brookings Institution - Economic Studies Program
Email: bbosworth@brookings.edu
GARY BURTLESS, Brookings Institution, Boston College - Retirement Research Center
Email: GBURTLESS@BROOK.EDU
KAN ZHANG, Brookings Institution
Email: KZhang@brookings.edu

This paper uses data from the Health and Retirement Study (HRS) to explore the extent and causes of widening differences in life expectancy by socioeconomic status (SES) for older persons. We construct alternative measures of SES using educational attainment and average (career) earnings in the prime working ages of 41-50. We also use information on causes of death, health status and various behavioral indicators (smoking, drinking, and obesity) that are believed to be predictors of premature death in an effort to explain the causes of the growing disparities in life expectancy between people of high and low SES.

The paper finds that:

-- There is strong statistical evidence in the HRS of a growing inequality of mortality risk by SES among more recent birth cohorts compared with cohorts born before 1930.

-- Both educational attainment and career earnings as constructed from Social Security records are equally useful indicators of SES, although the distinction in mortality risk by education is greatest for those with and without a college degree.

-- There has been a significant decline in the risk of dying from cancer or heart conditions for older Americans in the top half of the income distribution, but we find no such reduction of mortality risk in the bottom half of the distribution.

-- The inclusion of the behavioral variables and health status result in substantial improvement in the predictions of mortality, but they do not identify the sources of the increase in differential mortality.

The policy implications of the findings are:

-- Indexing the retirement age to increases in average life expectancy to stabilize OASDI finances may have unintended distributional consequences, because most mortality gains have been concentrated among workers in the top half of the earnings distribution.

-- The fact that we cannot identify the sources of the increase in differential mortality contributes to uncertainty about the distributional effects of increases in the retirement age in future years.

"Optimal Equity Glidepaths in Retirement" 

CHRISTOPHER J. ROOK, Stevens Institute of Technology
Email: rookchrj@gmail.com

Dynamic retirement glidepaths evolve over time based on some measure such as the retiree’s funded status or current market valuations. Conversely, static glidepaths are fixed at a starting point and selected under the assumption that they will not change. In practice, new static glidepaths may be derived periodically making them more flexible. The optimal static retirement glidepath would be the one that performs better than all others with respect to some metric. When systematic withdrawals are made from a retirement portfolio, glidepaths are often assessed via the probability of ruin (or success). Our goal here is to derive the optimal static glidepath with respect to this metric. It is a result new to the literature and the shape will be of special interest to retirees, financial advisors, retirement researchers, and target-date fund providers.

"Does Social Security Continue to Favor Couples?" 
Center for Retirement Research Working Paper No. 2015-11

NADIA S. KARAMCHEVA, Urban Institute, Boston College - Center for Retirement Research
Email: karamcheva@gmail.com
APRIL YANYUAN WU, Boston College - Center for Retirement Research
Email: wuuv@bc.edu
ALICIA H. MUNNELL, Boston College - Carroll School of Management
Email: crr4381@bc.edu

While dramatic increases in women’s labor supply and earnings have led to a substantial decline in the fraction of women eligible for spouse benefits at retirement, most wives still receive a survivor benefit, as wives still typically have lower earnings than their husbands and live longer. Using the MINT microsimulation model and the HRS data linked with Social Security administrative earnings records, this paper examines the extent to which Social Security continues to favor couples and will do so in the future.

The paper found that: While the Old-Age and Survivors Insurance program still distributes lifetime income from singles to couples, the transfers appear to be shrinking over time. Nevertheless, couples are still projected to have a higher benefit/tax ratio, a lower median net tax rate, and a greater likelihood of receiving positive net transfers from the system compared to those who are never married or divorced. The increased labor force participation and earnings of women have contributed significantly to the decline in redistribution from men to women, and from singles to couples, while the effect of declining marriage rates has only a modest effect.

The policy implications of the findings are: Family benefit provisions within the Social Security program can have a significant impact on various measures of redistribution. Policymakers may find the results of this paper helpful in evaluating any reform proposals that would change these provisions.

"Slowed or Sidelined? The Effect of 'Normal' Cognitive Decline on Job Performance Among the Elderly" 
Center for Retirement Research at Boston College Working Paper No. 2015-12

ANEK BELBASE, Center for Retirement Research at Boston College
Email: anbelbas@gmail.com
MASHFIQUR KHAN, Boston College - Center for Retirement Research
Email: khanmf@bc.edu
ALICIA H. MUNNELL, Boston College - Carroll School of Management
Email: crr4381@bc.edu
ANTHONY WEBB, Boston College - Center for Retirement Research
Email: webbaa@bc.edu

This paper examines the relationship between age-related cognitive decline and three potential workplace outcomes: 1) coping with increased job difficulty; 2) shifting to a less cognitively demanding job; and 3) retiring early. It uses data from the Health and Retirement Study (HRS) and the O*NET database. Critical components of the analysis are the metric used to measure cognitive decline, inclusion of cognitive reserve as an independent variable, and the use of overlapping 10-year observation windows. A key limitation is that the study cannot conclusively discern a causal relationship between cognitive decline and workforce exit.

The paper found that: About 10 percent of workers between the ages of 55 and 69 experienced steep cognitive decline over a 10-year period. Workers experiencing steep cognitive decline were more likely to “downshift” to a less demanding job or retire than workers experiencing no cognitive decline. Workers experiencing steep cognitive decline retired significantly earlier than planned, compared to workers who experienced no change in cognitive ability. Workers without cognitive reserves were more likely to exit the workforce and retire earlier than planned, compared to workers with cognitive reserves.

The policy implications of the findings are: Cognitive decline might prevent a significant minority of older individuals from working to their planned retirement ages, and thus should be considered when assessing reforms that incent delayed retirement. Policies that support “downshifting” to a cognitively less demanding job might help workers at risk of steep cognitive decline to remain in the labor force. Further research is needed to identify whether workers in specific occupations are more susceptible to age-related decline than others, and whether anything can be done to moderate the effect of age-related decline in work ability.

"Pension Scheme Redesign and Wealth Redistribution Between the Members and Sponsor: The USS Rule Change in October 2011" 

EMMANOUIL PLATANAKIS, University of Reading - ICMA Centre
Email: e.platanakis@icmacentre.ac.uk
CHARLES SUTCLIFFE, University of Reading - ICMA Centre
Email: C.M.S.Sutcliffe@rdg.ac.uk

The redesign of defined benefit pension schemes usually results in a substantial redistribution of wealth between age cohorts of members, pensioners, and the sponsor. This is the first study to quantify the redistributive effects of a rule change by a real world scheme (the Universities Superannuation Scheme, USS) where the sponsor underwrites the pension promise. In October 2011 USS closed its final salary scheme to new members, opened a career average revalued earnings (CARE) section, and moved to ‘cap and share’ contribution rates. We find that the pre-October 2011 scheme was not viable in the long run, while the post-October 2011 scheme is probably viable in the long run, but faces medium term problems. In October 2011 future members of USS lost 65% of their pension wealth (or roughly £100,000 per head), equivalent to a reduction of roughly 11% in their total compensation, while those aged over 57 years lost almost nothing. The riskiness of the pension wealth of future members increased by a third, while the riskiness of the present value of the sponsor’s future contributions reduced by 10%. Finally, the sponsor’s wealth increased by about £32.5 billion, equivalent to a reduction of 26% in their pension costs.