Research, Statistics, & Policy Analysis
Retirement Research Consortium Publications Archive
Jump to: 2008
September 2009
Aging, Asset Markets, and Asset Returns: A View from Europe to Asia
by Axel Borsch-Supan and Alexander Ludwig
SSA Project # NB09-10 • Macroeconomic Analyses of Social Security
National Bureau of Economic Research
This study reports findings from the continuing enhancement and application of a multinational macroeconomic model that looks at effects of population aging, in conjunction with social security reform, on macroeconomic outcomes. A key emphasis of the current work is on the interactions between labor and capital markets. Another key addition to the model is the inclusion of emerging countries, and how the growth of emerging countries affects the models predicted macroeconomic implications. The direct effect of demographic change is that the number of employed persons will fall sharply from 2010 onwards, whereas the number of consumers will remain largely unchanged. Labor, at least in the highly skilled sector, will become increasingly scarce, so that demand for capital increases. This is where the inclusion in the model of emerging economies
becomes so important, as financing from the older, labor constrained countries is provided for production facilities abroad in "younger" countries, such as India. The implications of population aging on asset market returns are moderated in a world with such international mobility of capital. A number of labor-related factors are also part of the macroeconomic dynamic. For example, education and training will assume an increasingly important role in order to keep the returns of productive physical capital high. Aging will also precipitate labor market and pension reform which will, in turn, change labor supply and saving behavior.
Causes of Lagging Life Expectancy at Older Ages in the United States
by Samuel H. Preston, Jessica Ho, Dana A. Glei, and John R. Wilmouth
SSA Project # NB09-11 • Demographic Research
National Bureau of Economic Research
Life expectancy in the United States fares poorly in international comparisons, primarily because of high mortality rates above age 50. This paper evaluates two prominent explanations of its poor performance. One explanation is a poor performance by the health care system. We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where behavioral factors do not play a dominant role. We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system. In the second part of the paper, we argue that the history of heavy cigarette smoking in the United States is a major factor in its poor ranking. For example, we estimate that male life expectancy at age 50 would be 2.8 years higher if smoking-attributable deaths were eliminated, while female life expectancy at age 50 would be 2.6 years higher. Removing smoking attributable deaths for all countries would improve the age-50 life expectancy ranking of US women from 17th (out of 20) to 7th; and the men's ranking from 14th to 9th.
The Design of Retirement Saving Programs in the Presence of Competing Consumption Needs
by Andrew Samwick
SSA Project # NB09-09 • Wealth and Retirement Income
National Bureau of Economic Research
This project considers the optimal design of Social Security taxes when households' saving decisions include motives like housing, education, and uncertainty in addition to retirement. At issue is the timing, not the expected present value, of taxes over the working lifetime. A 10-year, revenue-neutral delay in the onset of payroll taxes generates a welfare gain equal to approximately 18 percent of one year of annualized income. This is equivalent to giving a typical worker $8,000 of assets upon entering the work force. Welfare gains from revenue-neutral payroll tax delays are larger when individuals must also save to overcome down payment constraints on housing purchases near the beginning of their work lives and slightly lower when they must save later in their work lives to finance college educations for their children.
Disability, Earnings, Income and Consumption
by Bruce D. Meyer and Wallace K.C. Mok
SSA Project # NB09-13 • Program Interactions
National Bureau of Economic Research
Using longitudinal data for the period 1968–2005 for a sample of male household heads, we determine the prevalence of disability during the working years and examine how the extent of disability affects a range of outcomes, including earnings, income, and consumption. We have seven main findings. First, disability rates are high. We divide the disabled along two dimensions based on the persistence and severity of their work-limiting condition. We estimate that a person reaching age 56 has a 53 percent chance of having been disabled at least once during his working years, and a 19 percent chance that he has begun a chronic and severe disability. Second, the economic consequences of disability are frequently profound. Ten years after disability onset, a person with a chronic and severe disability on average experiences a 68 percent decline in earnings, a 32 percent decline in after-tax income, a 22 percent decline in food and housing consumption and a 21 percent decline in food consumption. Third, the various economic consequences differ sharply across disability groups. The outcome declines for those with a chronic and severe disability are often more than twice as large as those for the average disabled. Fourth, our findings show the partial and incomplete roles that individual savings, family support and social insurance play in reducing the consumption drop that follows disability. Only about half of this most disabled group reports receiving Social Security Disability Insurance or Supplemental Security Income. Fifth, we find a noticeable fall in earnings and income prior to the onset of a reported disability. Consumption also falls somewhat, suggesting that future disability is partially but incompletely predictable in the short run. Sixth, time use and detailed consumption data further indicate that disability is associated with a decline in wellbeing. Seventh, the quantities we have estimated, combined with elasticities from the
literature, allow us to examine the optimality of current compensation for the disabled. We find that the current compensation for our most disabled group appears to be lower than is optimal.
The Displacement Effect of Public Pensions on the Accumulation of Financial Assets
by Michael Hurd, Pierre-Carl Michaud, and Susann Rohwedder
SSA Project # UM09-16 • International Research
Michigan Retirement Research Center Working Paper 2009-212
The generosity of public pensions may depress private savings and provide incentives to retire early. While there is plenty of evidence supporting the latter effect, there remains considerable controversy as whether or not public pensions crowd out private savings. This paper uses international micro-datasets collected over recent years to investigate whether public pensions displace private savings. The identification strategy relies on differences in the progressivity or non-linearity of pension formulas across countries. We also make use of large heterogeneity in earnings across education group and country. The evidence we present is consistent with previous studies using cross-sectional and time-series variation in savings and pensions. We estimate that an extra dollar of pension wealth depresses accumulated financial assets at the time of retirement by 23 to 44 cents and that an extra ten thousand dollars in pension wealth reduces the average retirement age by roughly 1 month.
Economic Well-Being of the Elderly Immigrant Population
by George J. Borjas
SSA Project # NB09-02 • Demographic Research
National Bureau of Economic Research
The study uses microdata from the 1970–2000 decennial censuses, as well as the 2005–2007 American Community Surveys, to document and examine the trends in the economic well being of the elderly immigrant population. The key empirical finding of the analysis is that there has been a significant drop in the relative income of elderly immigrants in the past few decades. In 1970, the average income of elderly immigrants was only about 5 percent below that of elderly natives. By 2007, the income gap had widened to 30 percent. This study examines the immigrant-native gap in the various sources of income that determine the economic well being of the elderly population, including investment income, retirement benefits, and public assistance. The analysis finds that a crucial factor in generating the growing immigrant disadvantage is that immigrants are much less likely to receive retirement benefits than natives, either through the Social Security system or through private sources. Moreover, even among those immigrants who do receive retirement benefits, there is a sizable gap in the level of benefits received.
Estimating Work Capacity Among Near Elderly and Elderly Men
by David Cutler
SSA Project # NB09-18 • Social Security and Retirement
National Bureau of Economic Research
As the population ages, labor force growth will fall, and demand for labor will increasingly have to be met by older workers. At the same time, pressures on Social Security and Medicare finances mean that older people may be required or incentivized to work to older ages—if they are able to do so. The goal of this paper is to measure the work capacity of near elderly and elderly men. First, I show that work capacity declines only slowly through the mid-70s, and then declines more rapidly thereafter. Relative to men in their late 50s, work capacity is about 90 percent as high at age 65, and 70 percent as high at age 75. Second, I estimate that an additional 31 million men between ages 55 and 74 would be working if actual employment tracked changes in predicted work capacity by age. This is roughly 25 percent of the men in that age group and 22 percent of total employment. Thus, the United States could substantially meet a coming demand for workers with increased labor force participation among the 'young elderly.' Third, I compare work capacity across demographic groups, finding that less educated workers have 10–20 percent lower labor force capacity at older ages than better educated workers, on average, and that blacks have 10–15 percent lower work capacity than whites.
Family Status Transitions, Latent Health, and the Post-Retirement Evolution of Assets
by James Poterba, Steven Venti, and David A. Wise
SSA Project # NB09-03 • Wealth and Retirement Income
National Bureau of Economic Research
This study explores the evolution of assets after retirement. It focuses on two questions: first, whether the drawdown of assets is triggered by shocks to family status, and second, how the evolution of assets is related to health status. It uses longitudinal HRS data from 1992 to 2006, following households across two-year intervals between waves, and evaluating how their asset balances change as they age from one survey wave to the next.
One major finding is that households without major family status transitions tend to conserve their assets, even allowing them to grow further into older age. By contrast, people in households that experience a family status transition during an interval—by becoming widowed or divorced—often experience a large decline or no increase in total assets. Both the level and evolution of household assets is strongly related to health. People in better health have more assets to begin with, and more continuing growth of those assets into older ages. For continuing two-person HRS households age 56 to 61 in 1992, for example, the ratio of assets of persons in the top health quintile to the assets of persons in the bottom quintile is 1.7 in 1992. By the end of 2006 the ratio of assets in the top quintile to assets in the bottom quintile was over 2.2.
One major finding is that households without major family status transitions tend to conserve their assets, even allowing them to grow further into older age. By contrast, people in households that experience a family status transition during an interval—by becoming widowed or divorced—often experience a large decline or no increase in total assets. Both the level and evolution of household assets is strongly related to health. People in better health have more assets to begin with, and more continuing growth of those assets into older ages. For continuing two-person HRS households age 56 to 61 in 1992, for example, the ratio of assets of persons in the top health quintile to the assets of persons in the bottom quintile is 1.7 in 1992. By the end of 2006 the ratio of assets in the top quintile to assets in the bottom quintile was over 2.2.
Fettered Consumers and Information Mandates: Evidence from Mexico's Privatized Social Security Market
by Fabian Duarte and Justine Hastings
SSA Project # NB09-04 • International Research
National Bureau of Economic Research
This study analyzes data on investment decisions and personal account management in Mexico's privatized social security system. In this system, workers freely allocate their savings between the investment options of 15–20 approved fund managers. A key finding is that management fees play little role in workers' investment decisions. Also, workers switch fund managers infrequently, despite frequent changes in the relative expense of the different fund managers. Demand for different investment managers is price inelastic for workers from most income and educational backgrounds. For low-income workers, peer and employer effects, advertising exposure and brand name are larger determinants of fund manager choice than management fees. Higher-income and higher-educated workers are more likely to chase past returns. Changes in employment are the single largest determinant of when workers switch fund managers.
Gain and Loss: Marriage and Wealth Changes Over Time
by Julie M. Zissimopoulos
SSA Project # UM09-19 • Demographic Research
Michigan Retirement Research Center Working Paper 2009-213
Family composition has changed dramatically over the past 25 years. Divorce rates increased and remarriage rates declined. While considerable research established a link between marriage and earnings, far less is empirically understood about the effect of marriage on wealth although wealth is an important measure for older individuals because it represents resources available for consumption in retirement. In this paper we employ eight waves of panel data from the Health and Retirement Study to study the relationship between wealth changes and marital status among individuals over age 50. This research advances understanding of the relationship by first, incorporating measures of current and lifetime earnings, mortality risk and other characteristics that vary by marital status into models of wealth change; second, measuring the magnitude of wealth loss and gain associated with divorce, widowing and remarriage and third, estimating wealth change before and after marital status change so the change in wealth change is not the result of individuals entering or leaving the household and other sources of unobserved differences are removed from estimates of the effect of marriage on wealth. Our results suggest no differences in wealth change over time among individuals that remain married, divorced, widowed, never married and partnered over 7 years. In the short-run there are substantial wealth changes associated with marital status changes. Divorce at older ages is costly, remarriage is wealth enhancing and people appear to change their savings in response to changes in marital status.
How Well Are Social Security Recipients Protected from Inflation?
by Gopi Shah Goda, John B. Shoven, and Sita Nataraj Slavov
SSA Project # NB09-14 • Wealth and Retirement Income
National Bureau of Economic Research
Social Security is widely believed to protect its recipients from inflation because benefits are indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, the CPI-W may not accurately reflect the experience of retirees for two reasons. First, retirees generally have higher medical expenses than workers, and medical costs, in recent years, have tended to rise faster than the prices of other goods. Second, even if medical costs did not rise faster than the prices of other goods, as retirees aged, their medical spending would still tend to increase as a share of income; that is, each cohort of retirees would still see a decline in the real income left over for non-medical spending. We show that Social Security benefits net of average out-of-pocket medical expenses have declined relative to a price index for non-medical goods by almost 20 percent for men, and almost 27 percent for women, in the 1918 birth cohort. We also explore the extent to which indexing Social Security benefits to the CPI-E, an experimental measure of inflation for the elderly, would change these results.
Income, Material Hardship, and the Use of Public Programs among the Elderly
by Helen Levy
SSA Project # UM09-14 • Program Interactions
Michigan Retirement Research Center Working Paper 2009-208
I use data from the 2006 Health and Retirement Study to analyze the determinants of material hardship among individuals ages 65 and older. Ten percent of the elderly report hardship—defined here as cutting back on food or medications because of cost—in 2006. Although hardship is more likely for poorer individuals and, to some extent, for recipients of public transfer programs (Medicaid, Food Stamps, and/or Supplemental Security Income), the majority of those experiencing hardship are not poor and do not participate in these programs. In multivariate models, I find that self-reported health and activity limitations are significant predictors of hardship.
The Investment Behavior of State Pension Plans
by Jeffrey R. Brown, Joshua Pollet, and Scott J. Weisbenner
SSA Project # NB09-12 • Program Interactions
National Bureau of Economic Research
This paper provides evidence on the investment behavior of 20 state pension plans that actively manage their own equity portfolios. We find that while these states tend to hold a diversified portfolio that approximates the overall market, they nonetheless substantially overweight the holdings of stocks of companies that are headquartered in-state. The extent of this over-weighting of within-state stocks by state pension plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias, including familiarity bias, information-based investing, and non-financial/political considerations. State boundaries are important for predicting state pension plan holdings—while there is a significant preference for instate stocks, there is no similar tilt toward holding stocks from neighboring stocks. We find evidence that states are able to generate excess returns through their in-state investment activities, particularly among smaller stocks in the primary industry in the state. However, we also find evidence that is at least suggestive of political influence playing a role in the stock selection process, as state pension plans of corrupt states are more likely to hold within state stocks. The difference in performance between within-state and out-of-state stock investments is strongest for the state pension plans located in more corrupt states.
by Elena Krasnokutskaya and Petra Todd
SSA Project # UM09-17 • International Research
Michigan Retirement Research Center Working Paper 2009-209
In the U.S. and in Chile, there have been heated debates about the relative merits of a decentralized privatized pension system relative to a more traditional social security system. On the firm side, there are concerns that pension funds engage in anticompetitive behavior and take advantage of consumers' by charging high fees and account maintenance changes. On the consumer side, there are concerns that consumers do not select wisely among funds and take on too much risk. Any pension system with insurance features to protect against low levels of pension accumulations is potentially subject to moral hazard problems, in the form of consumers' taking on too much risk. In the case of Chile, the government provides a minimum pension benefit to those with low pension accumulations, which can make some consumers more willing to take risks. For these reasons, the Chilean government introduced regulations on pension fund firms' investments designed to limit risk. This paper analyzes the determinants of consumers' choices of pension fund and of pension fund characteristics (performance and fees), taking into account governmental regulations. In particular, it estimates a demand and supply model of the pension fund investment market using a longitudinal household dataset gathered in 2002 and 2004 in Chile, administrative data on fund choices, and longitudinal data on cost determinants of pension funds. We find that the existing regulation actually increases the level of risk in the market, reduces heterogeneity across firms, and reduces incentives for consumers to participate in the pension fund program. We suggest alternative more effective forms of regulation.
Is Retiree Demand for Life Annuities Rational? Evidence from Public Employees
by John Chalmers and Jonathan Reuter
SSA Project # NB09-15 • Wealth and Retirement Income
National Bureau of Economic Research
Economists advise retirees to convert the majority of their retirement assets into life annuities. Yet, the voluntary market for life annuities is small. Explanations for this "under-annuitization puzzle" center on poor financial-decision making. Using data from Oregon's Public Employee Retirement System (PERS) from 1990 to 2003, we study the extent to which individual demand for life annuities versus partial and full lump sum payouts is consistent with rational financial decision-making. The evidence is mixed. On the one hand, as predicted, demand for the full lump sum payout is negatively correlated with its opportunity cost. In addition, demand for partial lump sums is higher when retirees have higher ex post mortality rates or greater tolerance for risk. On the other hand, demand for the partial lump sum payout is positively correlated with its opportunity cost. It is also positively correlated with recent returns on the S&P 500 index, which is consistent with retirees chasing equity returns. Finally, we find evidence of an income effect in the demand for partial lump sum payouts. While higher levels of life annuity payments should be associated with lower demand for incremental life annuity payments, in our setting, the median retiree forfeits $1.50 in expected present discounted value per $1.00 in partial lump sum payout. Overall, our findings suggest that retirees respond rationally to tradeoffs that are easily observed or understood—like health status—but less-than-rationally to tradeoffs that require an understanding of finance to measure—like the opportunity cost of the partial lump sum option.
The Long-Term Financial and Health Outcomes of Disability Insurance Applicants
by Kathleen McGarry and Jonathan Skinner
SSA Project # NB09-07 • Program Interactions
National Bureau of Economic Research
In this study, we quantify the long-term financial and health circumstances of those receiving SSDI or SSI benefits, and of those who applied to these programs, but were rejected. We compare their economic and health outcomes to people who never applied to these programs. Our exploratory results suggest dramatically lower levels of income and wealth among those receiving SSDI and SSI, even when controlling for differences in socioeconomic status and self-reported health. As has been found in other studies, mortality rates are higher among this group compared to those who never applied, and self-reported health is much worse. Perhaps more surprisingly, those who applied for SSDI/SSI, but who were rejected, experienced nearly identical adverse effects as those who received benefits. Indeed for some measures (such as income and wealth pre-retirement), rejected applicants were worse off than the SSDI/SSI recipients. For people over age 65, there was nearly complete convergence between those who received benefits and those who simply applied but never got benefits—they all experienced much lower levels of income and wealth that could not apparently be explained by education, race, ethnicity, or self-reported health. Whether these adverse effects reflect selection into the process of just applying for SSDI or SSI, or whether there are causal adverse effects of
these programs are not entirely clear.
Optimal Portfolio Choice with Fat Tails
by Jialun Li and Kent Smetters
SSA Project # NB09-16 • Wealth and Retirement Income
National Bureau of Economic Research
The recent financial crisis has highlighted the importance of modeling and managing extreme risk, especially retirement savings. Virtually all standard optimal stock-bond portfolio allocation models, however, assume that risk is normally distributed (bell shape). In reality, stock market risk exhibits "fat tails." Allowing for "fat tails" can add considerable computational complexity to standard optimization framework, which is already quite complicated. This paper demonstrates how to model fat tails using a g-and-h distribution that allows for skewness and kurtosis of arbitrary degree. Unlike alternative extreme value and other coupla approaches, the g-and-h distribution has a well defined pdf, is smooth and satisfies certain regularity conditions that allow for tractable integration. It also appears to fit the data the best. We hope that our modeling approach will open the door for more realistic modeling of retirement income risk in the future. Our own SSA grant proposal for next year will extend the current research by adding a greater degree of fiscal policy institutions that materially can affect saving for retirement.
Pension Buyouts: What Can We Learn From the UK Experience?
by Ashby H.B. Monk
SSA Project # BC09-17 • International Research
Center for Retirement Research at Boston College Working Paper 2009-19
Managing (or at least slowing) the decline of private defined benefit (DB) pensions has been a top priority for US policymakers. Any market-related developments or regulatory changes that alter the provision or sustainability of private DB pensions in other countries are thus relevant to policy and worth understanding. One such development taking place in the United Kingdom, pension fund buyouts, has enjoyed measured success. A DB pension bulk buyout refers to a transaction in which a pension plan sponsor pays another company a fee to take over the assets and liabilities of the pension plan. Clearly such transactions are relevant to the provision and long-term sustainability of this institution. So, while the increasing popularity of these transactions is restricted to the UK, the market has garnered the attention of US financial services firms, plan sponsors and policymakers. This paper thus analyzes the growing market for DB pension buyouts in the UK and considers its implications for the US. It contributes to our understanding of the future prospects for employer sponsored defined benefit pensions, and how they will contribute to retirement income over time.
Using various qualitative methodologies, this paper traces the evolution of the buyout from a transaction for insolvent plan sponsors to a transaction for solvent plan sponsors with funded pensions. While certain types of solvent buyouts have fallen out of favor, such as non-insured buyouts, the paper concludes that buyouts of the insured variety have a bright future. The increasingly burdensome nature of the DB pension plan will sustain this market over the long-term.
Using various qualitative methodologies, this paper traces the evolution of the buyout from a transaction for insolvent plan sponsors to a transaction for solvent plan sponsors with funded pensions. While certain types of solvent buyouts have fallen out of favor, such as non-insured buyouts, the paper concludes that buyouts of the insured variety have a bright future. The increasingly burdensome nature of the DB pension plan will sustain this market over the long-term.
Social Security Literacy and Retirement Well-Being
by Hugo Benitez-Silva, Berna Demiralp, and Zhen Liu
SSA Project # UM09-11 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-210
We build upon the growing literature on financial literacy, which studies the prevalence of lack of knowledge about various financial issues, and analyze how much people know about the Social Security rules using a small pilot survey conducted in 2007, and a follow-up and extended survey funded by MRRC conducted in December of 2008. We then assess the consequences of the apparent prevalence of lack of information by individuals about the rules governing the Social Security system using a realistic and empirically-based life-cycle model of retirement behavior under uncertainty. We investigate the individual's retirement and savings decisions under incomplete information and unawareness, in which a portion of the population does not know some or all of the rules of the system. We compare the outcomes in these cases to the outcome under full information, computing the welfare gain resulting from the acquisition of information regarding the Social Security system. Our analysis can illuminate the need for policies that foster knowledge of the system, which can improve welfare, and can result in better policy outcomes.
Trends in Earnings Instability of Couples: How Important is Marital Sorting?
by Chinhui Juhn and Kristin McCue
SSA Project # NB09-21 • Social Security and Retirement
National Bureau of Economic Research
Using the matched March Current Population Surveys for 1968–2008 and 1978–2006 Social Security earnings data matched to several Survey of Income and Program Participation panels, this paper examines the volatility of individual and couples' year-to-year earnings, and whether earnings volatility is changing over time. We find couples' earnings instability remained fairly stable over time due to offsetting trends in men's and women's earnings instability. While men's earnings instability increased, particularly during the 1970s, women's earnings instability declined dramatically. We find some evidence that the correlation of spouses' earnings changes became more positively related over time, but we generally find these correlations to be small. Comparing actual couples to simulated couples who are randomly matched, we find similar trends in earnings instability, suggesting that marital coordination of work and marital sorting (choosing a spouse with similar characteristics to yourself) are relatively unimportant for instability measures.
What Replace Rates Should Households Use?
by John Karl Scholz and Ananth Seshardi
SSA Project # UM09-04 • Macroeconomic Analyses of Social Security
Michigan Retirement Research Center Working Paper 2009-214
Common financial planning advice calls for households to ensure that retirement income exceeds 70 percent of average pre-retirement income. We use an augmented life-cycle model of household behavior to examine optimal replacement rates for a representative set of retired American households. We relate optimal replacement rates to observable household characteristics and in doing so, make progress in developing a set oftheory-based, but readily understandable financial guidelines. Our work should be a useful building block for efforts to assess the adequacy of retirement wealth preparation and efforts to promote financial literacy and well-being.
When They're Sixty-Four: Peer Effects and the Timing of Retirement
by Kristine Brown and Ron Laschever
SSA Project # NB09-17 • Social Security and Retirement
National Bureau of Economic Research
This paper examines the effect of peers on an individual's likelihood of retirement using data from the Los Angeles United School District. We show that two large pension reforms differentially impacted the financial incentives for retirement within and across schools. This created a natural experiment that allows us to identify the effect of peers on retirement behavior. Using an administrative dataset of the full population of district teachers ages 55 and over, covering the years 1997–2003 (n=46,542), we construct school-level peer groups and calculate the impact of the reforms on pension financial incentives. We use a measure of the unexpected (reform-induced) change in the pension wealth of teachers in a school to instrument for retirements at that school. After controlling for individual and school characteristics, and including individual fixed effects, our IV estimates of the effect of colleagues' retirement on a teacher's own likelihood of retirement are sizable and statistically significant. For example, we find that the retirement of an additional teacher in the previous year at the same school increases a teacher's own likelihood of retirement by an additional 1.5 percentage points.
Work Disability, Work, and Justification Bias in Europe and the U.S.
by Arie Kapteyn, James P. Smith, and Arthur van Soest
SSA Project # UM09-15 • International Research
Michigan Retirement Research Center Working Paper 2009-207
To analyze the effect of health on work, many studies use a simple self-assessed health measure based upon a question such as "do you have an impairment or health problem limiting the kind or amount of work you can do?" A possible drawback of such a measure is the possibility that different groups of respondents may use different response scales. This is commonly referred to as "differential item functioning" (DIF). A specific form of DIF is justification bias: to justify the fact that they don't work, non-working respondents may classify a given health problem as a more serious work limitation than working respondents. In this paper we use anchoring vignettes to identify justification bias and other forms of DIF across countries and socio-economic groups among older workers in the U.S. and Europe. Generally, we find differences in response scales across countries, partly related to social insurance generosity and employment protection. Furthermore, we find significant evidence of justification bias in the U.S. but not in Europe, suggesting differences in social norms concerning work.
August 2009
Determinants and Consequences of Moving Decisions for Older Americans
by Esteban Calvo, Kelly Haverstick, and Natalia A. Zhivan
SSA Project # BC09-20 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2009-16
The lore on whether older Americans move is mixed. While the familiar stereotype is that retirees flock to Florida or Arizona, prior studies have found that their home equity rises modestly over time, suggesting that they tend to stay put. This paper examines moving trends, determinants, and consequences using
the original cohort of the Health and Retirement Study (HRS). We find that a full 30 percent of homeowners in the HRS cohort move over the 1992–2004 period, but most moves occur close to home. Overall, two types of movers emerge from the analysis—those who affirmatively plan to move and those who react to changing circumstances. As proxies for these two types, this study uses the presence or absence of a negative shock, such as death of a spouse or entry into a nursing home. Our results show that the factors that help determine a move are similar for both groups, while the consequences of a move vary. Homeowners with shocks are more likely to discontinue homeownership and reduce net equity, supporting the hypothesis that households may view housing wealth as insurance against catastrophic events. Finally, while movers in both groups of home owners experience improvements in psychological well-being, movers with shocks are impacted most by the shocks themselves.
The Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions
by Olivia S. Mitchell, Gary Mottola, Ning Tang, and Steve Utkus
SSA Project # UM09-07 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-203
Though millions of US workers have 401(k) plans, few studies evaluate participant investment performance. Using data on over 1,000 401(k) plans and their participants, we identify key portfolio investment inefficiencies and attribute them to offered investment menus versus individual portfolio choices. We show that the vast majority of 401(k) plans offers reasonable investment menus. Nevertheless, participants "undo" the efficient menu and make substantial mistakes: in a 20-year career it will reduce retirement wealth by one-fifth, in fact, more than what a naive allocation strategy would yield. We outline implications for plan sponsors and participants seeking to enhance portfolio efficiency: don't just offer or choose more funds, but help people invest smarter.
by Jingjing Chai, Wolfram Horneff, Raimond Maurer, and Olivia S. Mitchell
SSA Project # UM09-12 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2009-204
This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples' equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, when we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.
Financial Literacy among the Young: Evidence and Implications for Consumer Policy
by Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto
SSA Project # UM08-12 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-191
We examined financial literacy among the young using data from the 1997 National Longitudinal Survey of Youth. We showed that financial literacy is low among the young; fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy is strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a
college-educated male whose parents had stocks and retirement savings is about 50 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy. These findings have implications for consumer policy.
The Implications of Declining Retiree Health Insurance
by Courtney Monk and Alicia H. Munnell
SSA Project # BC09-16 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-15
A large number of retirees have employer-sponsored retiree health insurance (RHI). While RHI is a common source of supplemental coverage for Medicare beneficiaries, it is also the only affordable source of health insurance for many retirees under age 65 who have no access to Medicare. However, employers are scaling back their RHI benefits in response to rising health costs and changes in accounting rules, by either eliminating benefits which shifts costs to retirees, or tightening vesting requirements. Using data from the Health and Retirement Study, this paper examines the potential consequences of eliminating RHI for both pre-Medicare and Medicare-eligible retirees. For younger retirees the likely primary response is to work longer, and we find that number of workers age 55 to 64 would increase by 7 percent, as some of those who have their access to RHI eliminated would work rather than retire. Of those who still choose to retire, most lack any employer-sponsored health insurance option and would need to find an alternative source of coverage or go uninsured. For Medicare beneficiaries over 65, we estimate that about three quarters would replace RHI with another form of supplemental coverage. This shift would slightly reduce total spending and utilization for individuals who choose basic Medicare or a Medicare HMO as opposed to a Medigap plan, but health outcomes would probably be unaffected no matter which supplemental option is chosen. In short, a full elimination of RHI would primarily impact early retirees who must face the cost of much more expensive insurance or of financing illness without insurance. Policymakers may want to consider encouraging insurers to step in to provide more affordable plans for these early pre-Medicare retirees.
Retirement in a Life Cycle Model of Labor Supply with Home Production
by Richard Rogerson and Johanna Wallenius
SSA Project # UM09-06 • Macroeconomic Analyses of Social Security
Michigan Retirement Research Center Working Paper 2009-205
We analyze the forces that can generate retirement in different versions of standard life cycle models of labor supply. While non-convexities in production can generate retirement, we show that the size of non-convexities needed increases sharply as the intertemporal elasticity of substitution for labor decreases. In a model with home production, we show that these models imply a large increase in time devoted to home production at retirement. This is contrary to what is found in the ATUS data. We suggest that non-convexities in the enjoyment of leisure time may be a promising alternative feature to generate retirement.
Unusual Social Security Claiming Strategies: Costs and Distributional Effects
by Alicia H. Munnell, Steven A. Sass, Alex Golub-Sass, and Nadia Karamcheva
SSA Project # BC09-02 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-17
When to claim Social Security is one of the most important decisions Americans face when approaching retirement. Recently, several unconventional claiming strategies have come to light—"Free Loan," "Claim and Suspend," and "Claim Now, Claim More Later"—that have the potential to pay higher lifetime benefits to some individuals, increasing system costs. In the "Free Loan" strategy, an individual can claim benefits at a given age and later repay them and file again, obtaining an increased benefit from the delayed filing. This strategy is equivalent to a "no interest" loan from Social Security and could potentially cost the program as much as $11 billion a year. "Claim and Suspend" allows an individual to claim benefits and then immediately suspend them, either to put his own benefits on hold if he reenters the workforce or to allow his spouse to claim a spousal benefit while he continues to work and earn delayed retirement credits. The potential cost of allowing couples the option of "Claim and Suspend" is about $0.5 billion dollars a year. In the "Claim Now, Claim More Later" strategy, a married individual claims a spousal benefit while delaying claiming his own retired worker benefit in order to build up delayed retirement credits. This option could potentially cost Social Security $10 billion a year. Of the three strategies, "Claim and Suspend" appears to have the clearest policy rationale as it provides an incentive for individuals to work longer.
July 2009
Are Age-62/63 Retired Worker Beneficiaries At Risk?
by Eric R. Kingson and Maria T. Brown
SSA Project # BC08-06 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-13
This paper provides a longitudinal view, spanning 10 to 12 years, of persons first accepting retired worker benefits at ages 62 or 63 in 1994 or 1996. Using HRS data, matched to Social Security administrative files, we present: 1) findings of variation in income, wealth, health insurance coverage and employability, along such dimensions as race, Hispanic ethnicity, gender, reported health status and functional ability; 2) findings of economic, health and survival outcomes in 2006 for the 1994/1996 pooled sample, paying special attention to variations within the sub-sample of persons who accepted Social Security early retirement benefits by 1996; and 3) estimates of the proportion of persons accepting such benefits who are at risk. The findings indicate that persons first accepting Social Security retired worker benefits at ages 62 and 63 experience varying degrees of risk to their well being at these ages, and that these risks condition their well-being in retirement and survival probabilities. The major policy implication is that consideration should be given to providing a health insurance option for persons first accepting retired worker benefits prior to age 65. The major research implication is that retirement researchers should consider utilizing a range of measures—as opposed to a singular and potentially narrow measure—of risk when assessing the magnitude of risks existing for those accepting retired worker benefits at early ages.
Getting to the Top of Mind: Limited Attention, Borrowing, and Saving
by Dean Karlan, Margaret McConnell, Sendhil Mullainathan, and Jonathan Zinman
SSA Project # BC08-S1 • Wealth and Retirement Income
Center for Retirement Research at Boston College
Economists have begun to understand the importance of self-control on consumption and savings decisions. In this paper, we propose that a different psychology—that of attention—also plays an important role. Consumption decisions depend crucially on what future needs are salient at the time of choice. We develop a simple model where individuals fail to attend to all future needs and show how it implies a variety of phenomena. Some of these overlap with the self-control model—such as under-saving and over-borrowing. Others however are unique. We show for example that debt is salience advantaged over savings and that, consistent with some data, savings accounts which with salience benefits will help consumers even if they have no commitment benefits. We test these predictions by working with three banks to randomly assign reminders to save in a large sample of savings account holders in Bolivia, Peru, and the Philippines. Reminders increase savings balances by 6% and goal attainment by 3%. Reminders that draw attention to a specific savings goal are especially effective. In all, our results suggest that limited attention can help to explain inter-temporal choice.
Low Life Expectancy in the United States: Is the Health Care System at Fault?
by Samuel Preston and Jessica Ho
SSA Project # NB09-11 • Demographic Research
National Bureau of Economic Research Working Paper 15213
Life expectancy in the United States fares poorly in international comparisons, primarily because of high mortality rates above age 50. Its low ranking is often blamed on a poor performance by the health care system rather than on behavioral or social factors. This paper presents evidence on the relative performance of the US health care system using death avoidance as the sole criterion. We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where behavioral factors do not play a dominant role. We show that the US has had significantly faster declines in mortality from these two diseases than comparison countries. We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system.
June 2009
Capital Income Taxes with Heterogeneous Discount Rates
by Peter Diamond and Johannes Spinnewijn
SSA Project # BC09-13 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-14
With heterogeneity in both skills and preferences for the future, the Atkinson-Stiglitz result that savings should not be taxed with optimal taxation of earnings does not hold. Empirical evidence shows that on average people with higher skills save at higher rates. Saez (2002) suggests that with such positive correlation taxing savings can increase welfare. This paper analyzes this issue in a model with less than perfect correlation between ability and preference for the future. To have multiple types at the same earnings level, the number of types of jobs in the economy is restricted. Key to the analysis is that types who value future consumption less are more tempted to switch to a lower earning job. We show that introducing both a small savings tax on the high earners and a small savings subsidy on the low earners increase welfare, regardless of the correlation between ability and preferences for the future. This can be implemented by earnings varying rules on contributions to tax-favored retirement accounts. However, introducing a uniform savings tax, as in the Nordic dual income tax, increases welfare only if that correlation is succinctly high. There are also some results on optimal taxes that parallel the results on introducing small taxes.
May 2009
by Peter Diamond
SSA Project # BC09-13 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2009-12
Pension benefit rules depend on individual history far more than taxes do, and age plays a much larger role in pension determination than in tax determination. Apart from some simulation studies, theoretical studies of optimal tax design typically contain neither a mandatory pension system nor the behavioral dimensions that lie behind justifications commonly offered for mandatory pensions. Conversely, optimizing models of pension design typically do not include annual taxation of labor and capital incomes. After spelling out this contrast and reviewing (and rejecting) zero taxation of capital income based on the Atkinson-Stiglitz and Chamley-Judd results, this article raises the issue of tax-favored retirement savings, a topic where the two subjects come together.
Understanding Inflation-Indexed Bond Markets
by John Y. Campbell, Robert J. Shiller, and Luis M. Viceira
SSA Project # NB09-20 • Wealth and Retirement Income
National Bureau of Economic Research Working Paper 15014
This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990s until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.
April 2009
How Much Do Households Really Lose By Claiming Social Security at Age 62?
by Wei Sun and Anthony Webb
SSA Project # BC09-01 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-11
Individuals can claim Social Security at any age from 62 to 70 although most claim at 62 or soon thereafter. Those who delay claiming receive increases that are approximately actuarially fair. We show that expected present value calculations substantially understate both the optimal claim age and the losses resulting from early claiming because they ignore the value of the additional longevity insurance acquired as a result of delay. Using numerical optimization techniques, we illustrate that for plausible preference parameters, the optimal age for non-liquidity constrained single individuals and married men to claim benefit is between 67 and 70. We calculate that Social Security Equivalent Income, the amount by which benefits payable at suboptimal ages must be increased so that a household is indifferent between claiming at those ages and the optimal combination of ages, can be as high as 19.0 percent.
February 2009
Do Health Problems Reduce Consumption At Older Ages?
by Barbara A. Butrica, Richard W. Johnson, and Gordon B.T. Mermin
SSA Project # BC08-07 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-09
High out-of-pocket health care costs may have serious repercussions for older people and their families. If their incomes are not sufficient to cover these expenses, older adults with health problems may have to deplete their savings, turn to family and friends for financial help, or forego necessary care. Or they may be forced to reduce their consumption of other goods and services to pay their medical bills. This paper uses data from the Health and Retirement Study (HRS) and the related Consumption and Activities Mail Survey (CAMS) to examine the impact of health problems at older ages on out-of-pocket health care spending and other types of expenditures. The analysis estimates fixed effects models of total out-of-pocket health care spending, out-of-pocket health care spending exclusive of premiums, total spending on all items except health care, and total spending on all items except health care and housing. The models are estimated separately for households ages 65 and older and those ages 51 to 64. The results show that medical conditions increase health spending, particularly for house holds ages 51 to 64, but that health conditions do not generally reduce non-health spending. Medical conditions do, however, reduce non-health spending for low-income house holds ages 51 to 64, suggesting that holes in the health safety net before the Medicare eligibility age force some low-income people to lower their living standards to cover medical expenses.
Evaluating Micro-Survey Estimates of Wealth and Saving
by Barry P. Bosworth and Rosanna Smart
SSA Project # BC08-04 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-04
This paper presents an overview of changes in household wealth accumulation and saving using wealth data from three micro-level surveys: Survey of Consumer Finances (SCF), Panel Study of Income Dynamics (PSID), and Health and Retirement Study (HRS). We provide comparisons to the macroeconomic estimates of wealth accumulation and saving, explore problems in constructing household-level valuations of wealth, and assess the value of using household-level datasets to examine wealth accumulation and saving behavior in the United States. Our first analysis compares the macroeconomic estimates of wealth from the Flow of Funds to comparable measures from the SCF, PSID and HRS. The Flow of Funds and SCF valuations of net worth correspond closely up to 1998. Yet, after 1998, the SCF reports a much more rapid acceleration of wealth, concentrated in equity-type assets. The estimates of wealth in the PSID and HRS are very similar to the SCF for the bottom 95 percent of the wealth distribution, diverging only for the top 5 percent of households. Second, we evaluate the extent of bias in the wealth estimates that may have developed in the longitudinal surveys due to attrition. We conclude that both surveys remain very representative of the underlying population as judged by a comparison with the lower 95 percent of households in the SCF. We also use the longitudinal data to estimate the relationship between wealth and mortality, and adjustment factors for differential mortality that can be used to adjust the age-wealth profile obtained from cross-sectional surveys, such as the SCF. The result is greater evidence of wealth decumulation at older ages. Finally, we use the panel nature of the PSID and HRS to construct household-level measures of wealth accumulation and partition those changes between the contribution of new saving and valuation changes. The overall changes in wealth match the macroeconomic data closely, showing a secular rise in wealth-income ratios. Although the measures of saving do demonstrate consistent differences in saving among major socio-economic groups, they do not reflect the general decline in saving rates that is apparent in the aggregate data for the past two decades.
Financial Hardship Before and After Social Security's Early Eligibility Age
by Richard W. Johnson and Gordon B.T. Mermin
SSA Project # BC08-02 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-08
Although poverty rates for Americans ages 65 and older have plunged over the past half century, many people continue to fall into poverty in their late fifties and early sixties. This study examines financial hardship rates in the years before qualifying for Social Security retirement benefits at age 62 and investigates how the availability of Social Security improves economic well-being at later ages. The analysis follows a sample of adults from the 1937–39 birth cohorts for 14 years, tracking their employment, disability status, and income as they age from their early 50s until their late 60s. It measures the share of older adults who appear to have been forced into retirement by health or employment shocks and the apparent impact of involuntary retirement on low-income rates. The study also estimates models of the likelihood that older adults experience financial hardship before reaching Social Security's early eligibility age. The results show that the likelihood of experiencing financial hardship increases significantly as people approach Social Security's early eligibility age. The increase in hardship rates is concentrated among workers with limited education and health problems. For example, among those who did not complete high school, hardship rates increase from 23 percent at ages 52 to 54 to 31 percent at ages 60 to 61, a relative increase of 36 percent. Hardship rates decline after age 62, when most people qualify for Social Security retirement benefits. These findings highlight the fragility of the income support system for Americans in their fifties and early sixties.
Health Care, Health Insurance, and the Relative Income of the Elderly and Non-Elderly
by Gary Burtless and Pavel Svaton
SSA Project # BC08-11 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-10
Cash income offers an incomplete picture of the resources available to finance household consumption. Most American families are covered by an insurance plan that pays for some or all of the health care they consume. Only a comparatively small percentage of families pays for the full cost of this insurance out of their cash incomes. As health care has claimed a growing share of consumption, the percentage of care that is financed out of household incomes has declined. Because health care consumption is more important for some groups in the population than others, the growth in spending and changes in the payment system for medical care have reduced the value of standard income measures for assessing relative incomes across age groups and across the income distribution. More than a seventh of total personal consumption now consists of health care that is purchased with government insurance and employer contributions to employee health plans. In this paper we combine health care spending and insurance reimbursement data in the Medical Expenditure Panel Study with cash and non-cash income data in the Current Population Survey to assess the impact of health insurance on the distribution of income and, in particular, on the age profile of income. Our estimates imply that gross money income and disposable cash and near-cash income significantly understate the resources available to finance household purchases. The estimates imply that a more complete measure of resources would show less inequality than the income measures that are currently used. The addition of estimates of the value of health insurance to countable incomes reduces measured inequality in the population and the income gap between young and old. Standard income measures imply that households with an aged household head have significantly lower average and median incomes than households with a head who is less than 55. In contrast, an income definition that includes value of health insurance implies that aged households have higher incomes than households with a non-aged head.
by Melissa M. Favreault
SSA Project # BC08-03 • Macroeconomic Analyses of Social Security
Center for Retirement Research at Boston College Working Paper 2009-07
Recent growth in wage inequality has important implications for Social Security solvency and the distribution of benefits. Because only earnings below the taxable maximum are subject to Social Security payroll taxes, wage growth that is concentrated among very high earners will generate lower tax receipts than wage growth that is more evenly distributed. The progressivity of the Social Security benefit formula increases benefit payouts when the share of workers with low wages grows. This study uses a dynamic microsimulation model to examine the aggregate and distributional consequences of alternative scenarios about the distribution of future wage growth among workers. We find fairly marked changes in projected Social Security benefit distributions, poverty, and long-term financing status with relatively modest changes in assumptions about wage differentials.
January 2009
Accounting for the Heterogeneity in Retirement Wealth
by Fang Yang
SSA Project # BC07-S5 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-06
This paper studies a quantitative dynamic general equilibrium life-cycle model where parents and their children are linked by bequests, both voluntary and accidental, and by the transmission of earnings ability. This model is able to match very well the empirical observation that households with similar lifetime earnings hold very different amounts of wealth at retirement. Earnings heterogeneity and borrowing constraints are essential in generating the variation in wealth at retirement among low lifetime earnings households, while inheritance heterogeneity helps to generate the heterogeneity in wealth at retirement among high lifetime earnings households.
by Barbara A. Butrica, Howard M. Iams, Karen E. Smith, and Eric J. Toder
SSA Project # BC08-09 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-02
The long-term shift in coverage from defined benefit (DB) pensions to defined contribution (DC) plans may accelerate rapidly as more large companies freeze their DB pensions and replace them with new or enhanced DC plans. This paper uses the Model of Income in the Near Term to simulate the impact of an accelerated transition from DB to DC pensions on the distribution of retirement income among boomers. A scenario in which employers freeze all remaining private sector DB plans and a third of all state and local plans over the next five years will on balance produce more losers than winners among boomers and reduce their average incomes at age 67. Income changes will be largest among higher-income boomers, who have the highest DB coverage rates and projected pension incomes. Furthermore, the numbers of winners and losers and net income changes are much greater for the last wave of boomers (born between 1961 and 1965) than for earlier boomers. Younger boomers are most likely to have their DB pensions frozen with relatively little job tenure and to lose their high accrual years for DB pension wealth, but also to have relatively more years to accumulate DC pension wealth before retirement. More than any other birth cohort, the boomer cohorts face increased risks from an accelerated shift from DB to DC pensions. Individual outcomes will depend on the magnitude of DB pension losses, participation and contribution rates in the new DC pension plans, and investment returns on retirement account assets. While most boomers will experience modest changes in income, an accelerated decline in DB coverage will reduce incomes by at least 5 percent for about 10 percent of last wave boomers.
Economic Restructuring and Retirement in Urban China
by John Giles
SSA Project # BC06-S2 • International Research
Center for Retirement Research at Boston College Working Paper 2008-24
In its gradual approach to economic transition, China deferred the difficult process of restructuring state owned enterprises (SOEs) until the mid-1990s. When restructuring of large scale SOEs accelerated after 1997, China witnessed sharp declines in the employment of urban residents. While some dislocated state sector workers made a transition to work in the non-state sector, large shares of laid off workers spent long periods unemployed or out of the labor force. Much of the transition out of the state sector occurred through early retirement and exit from the labor force of older workers. While earlier work suggested that the sharp decrease in labor force participation of older women is driven by reappearance of discrimination in the labor market, analysis of reemployment decisions suggests that exit from the labor force reflects a choice. Women exited the labor force in great numbers after 1996, but women with adult children of college age are 60 percent more likely than other women to be re-employed within a year. We also find weak evidence that women who provide care for elderly family members are less likely to be employed. An increase in the labor supply of older women after 2004, however, suggests that the exit of older women from the labor force between 1996 and 2002 was driven primarily by generous early retirement pensions offered during the process of restructuring.
Elderly Immigrants' Labor Supply Response to Supplemental Security Income
by Neeraj Kaushal
SSA Project # BC07-S7 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-25
This paper examines the effect of changes in immigrant eligibility for Supplemental Security Income in 1996 on the employment and retirement behaviors of foreign-born elderly persons. I find that denial of SSI was associated with a 5 percentage point (15 percent) increase in the employment of non-citizen elderly men and a 5.6 percentage point (11 percent) decrease in their retirement rate. The estimated effects were higher for recent arrivals, a group most likely to be affected by the policy change. Further, while recent arrivals were more likely to increase part-time work, the earlier arrivals responded to the policy by increasing full-time employment. I find no consistent evidence that denial of SSI affected the employment of elderly immigrant women, but some evidence that it raised their retirement rate, specifically among those who immigrated in recent years.
Labor Supply Elasticity and Social Security Reform
by Selahattin Imrohoroglu and Sagiri Kitao
SSA Project # BC08-S2 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-05
Previous literature on social security reform has used a variety of period utility functions and calibrated values for the intertemporal elasticity of substitution (IES) in labor. In this paper, we extensively study various preferences and values for IES in a general equilibrium model with overlapping generations. We calibrate the model to key U.S. macroeconomic indicators and document how social security reform impacts the economy under different preferences. We find that aggregate effects are surprisingly similar, regardless of the wide range of the values of IES used. However, reform leads to a life-cycle reallocation of work hours from early years to later working years and the size of this reallocation significantly increases with the IES.
Portfolio Choice in Retirement: Health Risk and the Demand for Annuities, Housing and Risky Assets
by Motohiro Yogo
SSA Project # BC08-S8 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2009-03
This paper develops a consumption and portfolio-choice model of a retiree who allocates wealth among four assets: a riskless bond, a risky asset, a real annuity, and housing. Unlike previous studies that treat health expenditures as exogenous negative income shocks, this paper builds on the Grossman model to endogenize health expenditures as investments in health. I calibrate the model to explain the joint evolution of health status and the composition of wealth for retirees, aged 65 to 96, in the Health and Retirement Study. I use the calibrated model to assess the welfare gains of an actuarially fair annuity market. The welfare gain is less than 1 percent of wealth for the median-health retiree at age 65, and the welfare gain is about 10 percent of wealth for the healthiest.
Retirement and Social Security: A Time Series Approach
by Brendan Cushing-Daniels and C. Eugene Steuerle
SSA Project # BC08-01 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2009-01
Traditional analyses of retirement decisions focus on the age, from birth, of the individual making choices about how much to work, consume, and save for old age. However, remaining life expectancy is arguably a better way of examining these issues. As mortality rates decline, people at a given age now have more remaining years of life expectancy than they did in the past. If participation rates at older ages remain constant (or decline), then average time spent in retirement will increase. Additionally, because health status and mortality are correlated, adults with more expected years of life are generally in better health (and better able to work) than those with fewer years of remaining life. This paper examines labor force participation rates of older workers considering both chronological age and remaining life expectancy. Results show that participation by remaining life expectancy declines for men through the early 1990s, leveling off in the next decade. However, participation by age have been rising for men in their sixties since the mid-1990s. Whether we specify the empirical model by age or by remaining life expectancy, ages 62 and 65 both have strong negative effects on participation, confirming a major role in retirement decisions for Social Security. Finally, we find that controlling for other factors—education, marital status, and business cycle effects—magnifies the decline in participation attributable to cohort effects for men born between 1900 and 1960, but reduces the importance of cohort effects for women born in these years.
December 2008
by Irena Dushi and Marjorie Honig
SSA Project # UM08-05 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-201
We use information from Social Security earnings records to examine the accuracy of employee reports of annual contributions to tax-deferred pension plans. As employer defined benefit pensions are replaced by voluntary contribution plans, employee understanding of the link between annual contribution decisions and post-retirement wealth is becoming increasingly important. We compare the accuracy of employee reports of annual contributions in a sample of respondents in the original HRS cohort and in a sample of two younger cohorts, the War Babies and Early Baby Boomers. Tax-deferred plans are more common among the younger cohorts and we expected that they would be better informed about their annual contributions. We find that, among respondents for whom SSA administrative records are available, those in the younger cohorts were more likely to report accurately that they were included in a tax-deferred plan. Contrary to our expectation, identical proportions (70 percent) of respondents in both the older and the younger cohorts accurately reported whether they made a contribution during the interview year. Furthermore, we find no significant difference between the older and younger cohorts in the degree of reporting accuracy of contribution amounts, with approximately one-half of respondents in each cohort reporting contributions within plus/minus 25 percent of the true value. Both cohorts' self-reported contributions are systematically larger than the true values. Finally, both self-reported and W-2 contributions are significantly larger among respondents in the WB/EBB cohort.
Identifying Local Differences in Retirement Patterns
by Leora Friedberg, Michael Owyang, and Anthony Webb
SSA Project # BC08-14 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2008-18
The ability to retire at an age and in a manner of one's choosing depends on one's ability to retain or find employment at older ages, which depends in turn on local labor market conditions. We investigate how local labor markets affect retirement transitions. We match households from the Health and Retirement Study to MSA unemployment rates and estimate multinomial logit regressions on annual job transitions. We find that the MSA unemployment rate has large and statistically significant effects on job transitions. The estimated effects are stronger for men than women and tend to be stronger for semi-skilled workers. The unemployment rate has a negative effect on the likelihood of voluntary exit to either a new job (especially part-time) or retirement, and a positive effect on involuntary exit to retirement. A one percentage point increase in the MSA unemployment rate raises the likelihood of voluntary exit to a new job by 8.5 percent, reduces the likelihood of voluntary exit to retirement by 1.9 percent, and raises the likelihood of involuntary exit to retirement by 5.7 percent. Thus, high unemployment rates raises involuntary exits and constrains the ability of others to transition into retirement in a manner of their choosing.
Labor Supply Responses to Marginal Social Security Benefits: Evidence from Discontinuities
by Jeffrey B. Liebman, Erzo F.P. Luttmer, and David G. Seif
SSA Project # NB06-12 • Social Security and Retirement
National Bureau of Economic Research Working Paper 14540
A key question for Social Security reform is whether workers currently perceive the link on the margin between the Social Security taxes they pay and the Social Security benefits they will receive. We estimate the effects of the marginal Social Security benefits that accrue with additional earnings on three measures of labor supply: retirement, hours, and labor earnings. We develop a new approach to identifying these incentive effects by exploiting five provisions in the Social Security benefit rules that generate discontinuities in marginal benefits or non-linearities in marginal benefits that converge to discontinuities as uncertainty about the future is resolved. We find clear evidence that individuals approaching retirement (age 52 and older) respond to the Social Security tax-benefit link on the extensive margin of their labor supply decisions: we estimate that a 10 percent increase in the net-of-tax share reduces the two-year retirement hazard by a statistically significant 2.1 percentage points from a base rate of 15 percent. The evidence with regards to labor supply responses on the intensive margin is more mixed: we estimate that the elasticity of hours with respect to the net-of-tax share is 0.41 and statistically significant, but we do not find statistically significant earnings elasticity.
The Long-Term Effects of the Divorce Revolution: Health, Wealth, and Labor Supply
by Kristin Mammen
SSA Project # BC07-S4 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-22
The effects of divorce on individuals and on society as a whole has been widely debated in public discussion of American life. The dialogue was sparked by the dramatic rise in the number of U.S. divorces which began in the 1960s: Figure 1 illustrates that the divorce rate doubled from 10.6 to 20.3 divorces per 1,000 married women between 1965 and 1975, and continued to rise until 1981. Scholars have also debated the implications of the 'Divorce Revolution' of this time period: the liberalization of divorce laws in a large number of states to a unilateral regime, which made divorce easier by requiring the consent of only one spouse to dissolve a marriage (e.g., Friedberg 1998, Weitzman 1995). Some policymakers, social scientists, and advocacy groups have argued that this sweeping policy change was an important factor in a general decline of the American family (e.g., Kirkwood 1996, Parkman 1993). Gruber (2004) found that children exposed to the unilateral divorce laws have poorer outcomes in young adulthood. On the other hand, the easing of divorce laws made it easier for people to leave toxic marriages, and arguably increased the bargaining power of abused partners within marriages; Stevenson and Wolfers (2006) find large declines in domestic violence in states that adopted unilateral divorce. This paper contributes to the evaluation of the change in divorce laws by examining a less studied area: the long term effects of this policy change on the well-being of men and women who were young adults when the laws were changing. This paper will examine laterlife measures including labor force status, earnings, wealth, and physical and mental health for these cohorts. This long term evaluation is important because this generation of Americans is now approaching and just beginning the retirement years. The aging of the population and the demands it will place on social service programs and future generations of workers is already an important topic for social scientists and policy makers (He et al. 2005). Understanding whether the wellbeing of cohorts affected by the divorce law changes differs from earlier retirees' will aid in this planning
A Parsimonious Choquet Model of Subjective Life Expectancy
by Alexander Ludwig and Alexander Zimper
SSA Project # BC07-S3 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-20
This paper develops and estimates a closed-form model of Bayesian learning of subjective survival beliefs within the framework of Choquet decision theory. Data from the Health and Retirement Study (HRS) indicate that, on average, young respondents underestimate their true survival probability whereas old respondents overestimate their survival probability. Such subjective beliefs violate the rational expectations paradigm and are also not in line with the predictions of the rational Bayesian learning paradigm which implies convergence of subjective to underlying 'objective' probabilities. Based on the assumption of non-additive beliefs, we therefore introduce a model of Bayesian learning which combines rational learning with the possibility that the interpretation of new information is prone to psychological attitudes. We estimate the parameters of our theoretical model by pooling the HRS data. Despite a parsimonious parametrization we find that our Choquet model results in a remarkable fit to the average subjective beliefs expressed in the data.
The Response of Household Saving to the Large Shock of German Reunification
by Nicola Fuchs-Schundeln
SSA Project # BC07-S1 • International Research
Center for Retirement Research at Boston College Working Paper 2008-21
German reunification was a large, unexpected shock for East Germans, with different economic consequences for different birth cohorts. Exploiting German reunification as a natural experiment, I analyze the validity of the life-cycle consumption model. In the empirical part, I derive three stylized features concerning the saving behavior of East vs. West Germans in the 1990s: (i) East Germans have higher saving rates than West Germans after reunification, (ii) this East-West gap in saving rates is increasing in the age of the birth cohort, and (iii) for every cohort, this gap is declining over time. The theoretical part investigates whether a comprehensive life cycle model can predict these three features. I find strong evidence in favor of rational, forward looking saving behavior. The precautionary saving motive is essential in replicating the features from the data.
Risky Pensions and Household Saving Over the Life Cycle
by David A. Love and Paul A. Smith
SSA Project # BC07- S2 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2008-19
Recent defined benefit (DB) pension freezes in large healthy firms such as Verizon and IBM, as well as terminations of plans in the struggling steel and airline industries, highlight the fact that these traditional pensions cannot be viewed as risk-free promises from the employee's perspective. In this paper we develop an empirical dynamic programming framework to investigate household saving decisions in a model economy with risky DB pensions. The model incorporates important sources of uncertainty facing households, including asset returns, employment, income, and mortality, as well as pension freezes. Applying a compensating variation measure of welfare, we find that pension freezes reduce welfare by a maximum of about $6,000 for individuals with a high school degree and about $2,000 for individuals with a college degree.
Sources of Support for Pension Reform: A Cross-National Perspective
by Michelle Dion and Andrew Roberts
SSA Project # BC07-S6 • International Research
Center for Retirement Research at Boston College Working Paper 2008-23
Many accounts of pension politics assign primary importance to societal forces. In the well-known formulation, pensions are the "third rail" of politics: politicians cannot cut benefits without suffering electoral retribution. In addition, some see the preferences of business as a key determinant of pension policy. This study takes aim at this problem by exploring what factors lead citizens and firms to support public pension systems and various reform efforts. To answer these questions, we analyze a survey of individuals and firms in 20 countries from five continents regarding attitudes toward pensions conducted by the Oxford Institute of Aging and the HSBC Bank. We examine separately variation in individual and then firm preferences regarding the role of government in pension provision and pension reform options. Then, we compare the preferences of firms to those of individuals to identify the potential space available for policy reform. The main results from the analyses are three. First, there are large cross-national differences in preferences of both individuals and firms. Second, these cross-national differences are not well explained by conventional theories. Third, there is some but not overwhelming support for micro-level theories about the reasons for differences between firms and individuals.
November 2008
Dual-Eligible Medicaid Spending: Are We on the Flat of the Curve?
by Melissa A. Boyle, Joanna N. Lahey, and Margaret E. Czervionke
SSA Project # BC08-15 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2008-16
For the U.S. Medicare population as a whole, previous studies show that additional medical spending at the margin is ineffective. For the elderly population overall, higher spending on health care does not appear to improve health outcomes or quality of life. The Medicaid literature, however, has shown benefits of increased spending on lower income populations such as single mothers. This suggests that there may be beneficial effects of spending on different segments of the Medicare population, particularly those most at risk—the low-income elderly. We use data from the Medicare Current Beneficiary Survey to examine whether increased medical spending results in differential use of medical services and/or improved health outcomes for low-income elderly who are dually-eligible for Medicare and Medicaid. We utilize state-level variation in Medicaid spending in a difference-in differences framework comparing the dual-eligible population to the near-eligible population just above the means test cutoff to investigate whether additional spending by Medicaid results in differences in health and service use for low-income elderly. Preliminary results suggest that additional spending leads to small increases in drug spending and no other significant increases in utilization or health improvements.
The Impact of Changing Earnings Volatility on Retirement Wealth
by Austin Nichols and Melissa Favreault
SSA Project # BC08-10 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2008-14
Over the last several decades, the volatility of family income has increased markedly, and own earnings volatility has remained relatively flat. Volatility may affect retirement wealth, depending on whether volatility affects accrued pension contributions or withdrawals or earnings credited toward future Social Security benefits. This project assesses the effect of the volatility of individual and family earnings on asset accumulation and projected retirement wealth using survey data matched to administrative earnings records.
by Gary V. Engelhardt and Nadia Greenhalgh-Stanley
SSA Project # BC08-05 • Program Interactions
Center for Retirement Research at Boston College Working Paper 2008-15
We provide empirical evidence on the extent to which long-term care insurance affects the housing and living arrangements of the elderly by examining plausibly exogenous changes in the supply of long-term care insurance through the Medicare program that occurred in the late 1990s. Prior to 1997, Medicare reimbursed home health care agencies on a retrospective-cost basis. Then, starting in October, 1997, as a result of the Balanced Budget Act of 1997 (BBA97), Medicare switched to a system of prospective payments for home health care, which induced state-by-calendar-year variation in the supply of this type of public long-term care insurance. We exploit this variation to econometrically identify the impact on the housing and living arrangements of the elderly, using CPS data from 1995-2000 (before and after the law change). Our estimates indicate that living arrangements are quite responsive to home health care benefits. The estimated elasticity of shared living to benefits is -0.7 over all elderly and -1 for widowed elderly. However, these benefits have little impact on household headship among the elderly. This suggests that the bulk of the shared-living response occurred through co-residents living in elderly households. There is some weak evidence that increases in benefits raised elderly homeownership.
What Effect Do Time Constraints Have on the Age of Retirement?
by Leora Friedberg, Wei Sun, and Anthony Webb
SSA Project # BC08-08 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2008-17
Work affects both the time available for non-market activities and the times at which those activities are performed—and therefore work-induced constraints on time use may influence retirement decisions. We analyze these effects by combining new data from the American Time Use Survey with information on retirement in the Health and Retirement Study. We find that the propensity to engage in three types of non-work activities—household production, leisure, and tertiary activities (eating, sleeping, grooming)—are substantially altered by work. Moreover, the ways in which the timing of these activities are distorted differ across ten different job types (industry-occupation combinations) that we examine in the ATUS. We use the resulting measures of time distortions as control variables in multinomial logit retirement models that we estimate in the HRS. Older workers in jobs with greater distortions to the quantity and timing of leisure activities have an increased propensity to leave those jobs, either for new jobs or for retirement. On the other hand, workers in jobs with greater distortions to household production have a reduced propensity to leave their jobs, and distortions to tertiary activities raise the propensity to take new jobs but reduce the propensity to retire.
October 2008
by David A. Autor and Mark Duggan
SSA Project # NB08-07 (w/ NB07-17) • Program Interactions
National Bureau of Economic Research
The objective of this project is to assess the impact of the Veterans Disability Insurance program (VDC) on Social Security enrollment, including SSI, SSDI and OASI. This topic is relevant to SSA both because VDC has expanded rapidly since 2001 and because further substantial increases in VDC enrollment are expected due to ongoing U.S. military involvement in Iraq and Afghanistan
September 2008
The Ability of Various Measures of Fatness to Predict Application for Disability Insurance
by Richard Burkhauser, John Cawley, and Max D. Schmeiser
SSA Project # UM08-17 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-185
This paper compares a variety of measures of fatness (e.g. BMI, waist circumference, waist-to-hip ratio, percent body fat) in terms of their ability to predict application for Social Security Disability Insurance (DI). This is possible through a recent linkage of the National Health and Nutrition Examination Survey (NHANES) III to Social Security Administration (SSA) administrative records. Our results indicate that the measure of fatness that best predicts application for DI varies by race and gender. For white men, BMI consistently predicts future application for DI. For white women, almost all are consistently predictive. For black men, none predict application. For black women, waist circumference and waist-to-hip ratio are the only significant predictors of DI application. This variation across race and gender suggests that the inclusion of alternative measures of fatness in social science datasets should be considered, and that researchers examining the impact of fatness on social science outcomes should examine the robustness of their findings to alternative measures of fatness.
The Adequacy of Economic Resources in Retirement
by Michael D. Hurd and Susann Rohwedder
SSA Project # UM08-11 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-184
The most common metric for assessing the adequacy of economic preparation for retirement is the income replacement rate, the ratio of income after retirement to income before retirement. However both economic theory and common sense say that someone is adequately prepared if she is able to maintain her level of economic well-being, which is not the same as maintaining her level of income or some fixed proportion of income. Economic well-being is typically measured by consumption, which is the measure we use. We define and estimate measures of economic preparation for retirement based on a complete inventory of economic resources, particularly wealth, which we compare with optimal consumption paths. We find that a substantial majority of those just past the usual retirement age are adequately prepared for retirement in that they will be able to finance a path of consumption that begins at their current level of consumption and then follows an age-pattern similar to that of current retirees. This is not true, however, for all groups in the population. In particular, almost half of singles who lack a high school education are likely to be forced to reduce consumption. Couples are much better prepared than singles. But because of taxes a substantial number of married college graduates will have to reduce consumption.
Are All Americans Saving 'Optimally' for Retirement?
by John Karl Scholz and Ananth Seshari
SSA Project # UM08-01 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-189
Many people fear that Americans are preparing poorly for retirement. But developing rigorous evidence on this issue is difficult. In this paper we briefly discuss evidence on the adequacy of retirement wealth accumulation. We conclude that existing descriptive evidence does not seem consistent with dire assessments of poor financial preparation. We then extend the straightforward, but computationally complex dynamic programming approach used in our earlier work to assess the adequacy of retirement wealth preparation of Americans born before 1954. We find only 4 percent of HRS households have net worth below their optimal targets in 2004, though this percentage is somewhat higher for more recent HRS cohorts. While our work is preliminary, we find little evidence that Americans born before 1954 have prepared poorly for retirement.
Curing the Dutch Disease: Lessons for the United Disability Policy
by Richard Burkhauser, Mary C. Daly, and Philip R. de Jong
SSA Project # UM08-Q2 • International Research
Michigan Retirement Research Center Working Paper 2008-188
In the 1990s, the United States reformed welfare programs targeted on single mothers and dramatically reduced their benefit receipt while increasing their employment and economic well-being. Despite increasing calls to do the same for working age people with disabilities in the U.S., disability cash transfer program rolls continue to grow as their employment rates fall and their economic well-being stagnates. In contrast to the failure to reform United States disability policy, the Netherlands, once considered to have the most out of control disability program among OECD nations, initiated reforms in 2002 that have dramatically reduced their disability cash transfer rolls, while maintaining a strong but less generous social minimum safety net for all those who do not work. Here we review disability program growth in the United States and the Netherlands, link it to changes in their disability policies and show that while difficult to achieve, fundamental disability reform is possible. We argue that shifts in SSI policies that focus on better integrating working age men and women with disabilities into the work force along the lines of those implemented for single mothers in the 1990s, together with SSDI program changes that better integrate private and public disability insurance programs along the lines of the reforms in the Netherlands, offer the best hope of improving their employment rates and economic well-being as well as reducing SSDI/SSI program growth.
The Distributional Effects of the Social Security Windfall Elimination Provision
by Jeffrey R. Brown and Scott Weisbenner
SSA Project # NB08-05 • Social Security and Retirement
National Bureau of Economic Research
Millions of federal, state and local government employees have lifetime earnings that are divided between employment that is covered by the Social Security system and employment that is not covered. Because Social Security benefits are a non-linear function of covered lifetime earnings, the simple application of the standard benefit formula to covered earnings only would provide a higher replacement rate on those earnings than is appropriate given the individuals' total (covered plus uncovered) lifetime earnings. The Windfall Elimination Provision (WEP), established in 1983, is intended to correct this situation by applying a modified benefit formula to earnings of individuals with non-covered employment. This paper analyzes the distributional implications of the WEP, and finds that it reduces benefits disproportionately for households with lower lifetime covered earnings. It discusses an alternative method of calculating the WEP that preserves the intended redistribution of the system. In recognition of the data limitations that prevent this alternative method from being used by SSA for at least another decade, the paper also analyzes two alternative ways of calculating the WEP that use the same information that SSA currently uses, are budget neutral, and come closer to maintaining the cross-sectional progressivity of Social Security than does the existing WEP formula.
by Xiaoyan Li and Nicole Maestas
SSA Project # UM08-21 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-198
This paper compares the fraction of retirement transitions through disability channel (defined as applying for DI) across birth cohorts with different full retirement age (FRA) in the Health and Retirement Study. After restricting the sample to retirement transitions made by people with work-limiting health problems and controlling for other observable variables that might affect DI application, we find that the rise in the FRA does encourage older people to increase their DI application rate conditional on retirement after they reach age 62.
by Hugo Benitez-Silva and Frank Heiland
SSA Project # UM08-09 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-183
The labor supply and benefit claiming incentives provided by the early retirement rules of the Social Security Old Age benefits program are of growing importance as the Normal Retirement Age (NRA) increases to 67, the labor force participation of Older Americans rises and a variety of reforms to the Social Security system are considered. Any reform needs to take into account the effects and rationale of the Social Security Earnings Test and the Actuarial Adjustment Factor. We describe these incentives, and emphasize that individuals who claim benefits before the NRA but continue to work, or return to the labor force, can reduce the early retirement penalty by suspending the collection of monthly benefits if they earn above the Earnings Test limit. We analyze benefit withholding patterns using data from the Master Beneficiary Files of the Social Security Administration, and present descriptive and exploratory evidence on the determinants of benefit withholding using data from the Health and Retirement Survey. We then investigate the importance of the Earnings Test limits for work and claiming behavior using a dynamic life-cycle model of labor supply, benefit claiming, and withholding. We use the latter framework to compare the consequences of a number of changes to the Earnings Test provision for the labor supply behavior and earnings of older Americans.
by Till von Wachter, Jae Song, and Joyce Manchester
SSA Project # NB08-08 • Program Interactions
National Bureau of Economic Research
We use administrative longitudinal data on earnings, impairment, and mortality to replicate and extend Bound's seminal study of rejected applicants to federal Disability Insurance (DI). We confirm Bound's main result that rejected older male applicants do not exhibit substantial labor force participation. We show this result is stable over time, robust to more narrow control groups, and similar within gender, impairment, industry, and earnings groups. However, we also find that younger rejected applicants have substantial employment after application. To what extent this translates into potential employment for new beneficiaries depends on which group among them is considered "on the margin" of receiving DI. If we use initially rejected applicants—a large and growing fraction of new beneficiaries—the resulting counterfactual employment rate for younger applicants is low, too. We also find that rejected applicants bear signs of economically induced applicants. DI appears to induce a growing number of less successful workers to apply, an important fraction of which ends up without benefits and non-employed.
Financial Literacy among the Young
by Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto
SSA Project # UM08-12 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-191
We examine financial literacy using data resulting from a set of questions included in the most recent wave of the National Longitudinal Survey of Youth. These questions were previously asked of older adults in a financial literacy module in the 2004 Health and Retirement Study (HRS). In this way, we can compare findings across age groups and cohorts. We show that financial illiteracy is widespread for the younger adult population, and knowledge of basic financial concepts such the working of inflation and risk diversification is missing among most of the young population. Moreover, financial illiteracy is particularly acute among some specific groups such as women, Blacks, and Hispanics, and those whose peers have low educational attainment. Illiteracy can also be linked to other important characteristics such as talents and ability, smoking when young, quality of education, and parental background. Specifically, those with less educated parents and whose family did not own stocks, a home, or retirement saving plans, are less likely to be financially literate. As these findings mirror the evidence from the HRS, financial illiteracy is problematic both for the young and the old.
Health and the Factors Driving Medical Spending
by David M. Cutler
SSA Project # NB06-14 • Demographic Research
National Bureau of Economic Research
With the rising cost of health care already a major concern for government, employers and individuals, one might reasonably ask what the future holds. This paper reports on a multi-faceted research agenda on the factors that influence health and health care costs over time, and what they suggest for the future. It focuses on demographic trends, trends in health and health behaviors, and medical advances as key aspects to forecasting medical spending. Age demographics are important, because of an increasing older population and a substantially higher level of medical spending at older ages. On top of these demographic changes, however, are increases in the level of medical spending at each age, as medical capability advances over time. At the same time, there has been substantial evolution over time in health behaviors and risk factors, such as smoking, obesity, and control of hypertension and high cholesterol. These risk factor changes have had a mixed influence on health trends to date and, depending on how health behaviors continue to evolve in the future, could be fundamental to population health in the future. Forecasting medical advances is also difficult. While there have been major medical advances in medical innovation in recent years, most of which have improved health, some have done so with expensive technological care, and some have contained costs with more effective disease and risk management. While the paper makes no attempt to quantitatively integrate the various influences on future health care costs, it discusses in substantial detail the factors that influence costs, the quantitative evidence that has been compiled on these various trends and influences, and how one would structure an integrative forecasting model from these component pieces.
by Alan L. Gustman and Thomas Steinmeier
SSA Project # UM08-03 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-179
This paper analyzes how Social Security policies influence the retirement behavior of two earner couples when there is heterogeneity in time preference. Heterogeneity in time preference refers to differences among people in the rate at which they are willing to trade current for future incomes. Heterogeneity in time preference means there are differences among people in the rate at which they are willing to tradeoff between current and future Social Security benefits.
How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?
by John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian
SSA Project # NB08-Q4 • Wealth and Retirement Income
National Bureau of Economic Research
We conduct an investment experiment designed to evaluate how the SEC's Summary Prospectus proposal—which seeks to simplify mutual fund disclosure—affects individual investors' mutual fund choices. Our subjects are Harvard staff members who allocate one equity portfolio and one bond portfolio. Subjects are randomly assigned to receive either statutory prospectuses or Summary Prospectuses. We find no evidence that the Summary Prospectus affects the quality of portfolio choices. The principal welfare gain from the Summary Prospectus appears to come from allowing investors to spend less time and effort to arrive at a portfolio decision similar to what they would have chosen after reading only the statutory prospectus.
How Do Lower-Income Families Think about Retirement?
by Helen Levy and Kristin Seefeldt
SSA Project # UM08-15 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-195
How do low-income households think about retirement? Do they think about retirement? If so, when do they think they will retire, and what is it they plan to live on? In this paper, we present evidence on these questions based on 51 qualitative interviews with low-income families in the Detroit area. We find that the great majority of low-income households think about retirement, although this does not necessarily mean they are able to plan and/or save actively for retirement. Most respondents plan to retire as soon as they become eligible for Social Security or, in a few cases, private pensions.
by Petra Todd
SSA Project # UM08-22 • International Research
Michigan Retirement Research Center Working Paper 2008-193
Chile has been at the forefront of pension reform, having switched in 1980 from a pay-as-you-go system to a fully funded privatized accounts system. The Chilean system served as a model for reform in many other Latin American countries and has also been considered by U.S. policy makers as a possible prototype for social security reform. One of the criticisms of the Chilean system is low coverage rates and contributions rates among certain segments of the population. In January 2008, the Chilean Congress passed several reforms aimed at increasing coverage and contribution rates and expanding the safety net provided by the system to poor households. This study evaluates how changes in pension system rules affect working behavior and pension contribution patterns using data from a new Chilean household survey administered in 2002 and 2004 linked with administrative data from the pension regulatory agency. It develops and estimates a dynamic model of decision-making about working in the covered or uncovered sectors of the economy and studies implications of changes in the pension system rules for pension accumulations. We find that working decisions of people age 18–40 are sensitive to changes in the number of years required to get a minimum pension and to changes in the level of minimum pension but are relatively insensitive to the level of fees charged by the pension system. Decreasing the requirements for a minimum pension or increasing the level of the minimum pension increases work in the covered labor market sector.
Immigrant-Native Fertility and Mortality Differentials in the United States
by Purvi Sevak and Lucie Schmidt
SSA Project # UM08-02 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-181
Immigrants have been discussed as a means of alleviating fiscal pressures on Social Security. Their long-term impact on the Social Security system depends critically on their fertility and mortality patterns. In this paper, we examine the fertility and mortality patterns of immigrants to the United States and compare these patterns with those of non-immigrants. We find that both the recent and cumulative fertility of immigrant women is higher than that of native-born women, but that a large share of these differentials can be "explained" by differences in age structures, race and ethnicity, years in the United States, and country of origin. Using a synthetic cohort approach, we examine the role of years in the United States in more detail, and find no evidence of assimilation towards native-born fertility patterns. Consistent with previous research, we find evidence of a disruption effect on fertility—the fertility of immigrant women in the most recent arrival cohorts is low, but increases at a faster rate relative to both the fertility of immigrants from earlier cohorts and relative to the fertility of natives. We find that immigrants experience lower mortality than native-born individuals in the United States, and these differences remain even after controlling for underlying differences in observable characteristics. However we find that they do not exhibit differences in their subjective expectations of their mortality.
Immigration and Labor Market Outcomes in the Native Elderly Population
by George J. Borjas
SSA Project # NB08-10 • Demographic Research
National Bureau of Economic Research
A rapidly increasing fraction of the elderly workforce is foreign-born. This paper uses data drawn from the 1960–2000 censuses and the post-1994 Current Population Surveys to examine the impact of immigration on various economic outcomes in the native elderly population. The analysis suggests that immigration had a depressing effect on the wage of competing native workers, and induced substantial reductions in labor supply and increases in retirement propensities in the native elderly population. The data also suggest that conditions in the labor market for elderly workers exhibit "excess sensitivity" to immigration-induced supply shifts. The wage elasticity typically found in national-level studies of the impact of immigration on the overall labor market lies around -0.3 or -0.4 (in other words, a 10-percent immigration induced supply shift in the size of a particular skill group lowers the wage of that group by 3 or 4 percent). In contrast, the wage elasticity in the elderly workforce seems to be twice as high. As a result, immigration had correspondingly large effects on the time allocation of elderly persons. A 10-percent immigration-induced increase in the size of the workforce lowers the employment rate of elderly men by 7 percentage points and increases the probability of receiving Social Security benefits by 6 percentage points.
Individuals' Responses to Social Security Reform
by Adeline Delavande and Susann Rohwedder
SSA Project # UM08-08 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-182
The Social Security trust fund is predicted to be depleted by 2041. While there are several viable reform proposals to restore long-term solvency of the Social Security system, one important element that is critical to the success of any reform remains unknown: how will individuals respond to, for example, a cut of their Social Security benefits. Will they work longer or save more or both, and to what extent will their response make up for the cut in benefits? In this paper we use data from the HRS Internet Survey where we asked respondents directly what they would do if everyone's Social Security benefits were cut by 30 percent. At a qualitative level, we find important differences in the response by sex, marital status, and SES, among others. We conduct a detailed quantitative analysis of response to timing of Social security claiming and find that on average individuals would postpone claiming Social Security by 1.13 years. If this time was spent working by everyone then the annual Social Security benefit would drop on average by 20 percent rather than the initial 30 percent imposed by the reform. In other words the response to claim later and work longer would make up for one third of the initial cut in Social Security benefits.
Interactions in the Labor Market Behavior of Couples over the Life Course
by Chinhui Juhn and Simon Potter
SSA Project # NB08-03 • Demographic Research
National Bureau of Economic Research
Using the matched March Current Population Surveys for 1968–2007 we examine the extent to which husbands and wives coordinate their labor supply over different stages in the life cycle. We examine within couple correlations in year-to-year changes in weeks and annual hours worked. We find that correlations of couples' labor supply changes substantially rise with age, consistent with the notion that couples' time at home are substitutes during child-bearing ages, but are complements at older ages. We also find that labor supply changes have become more positively correlated with each successive birth cohort as participation rates of married men and women converged. The exception appears to be the youngest aged couples of the post Baby Boom cohort for whom husbands' and wives' hours strongly negatively co-vary upon birth of a child
Labor Market and Immigration Behavior of Middle-Aged and Elderly Mexicans
by Emma Aguila and Julie Zissimopoulos
SSA Project # UM08-14 • International Research
Michigan Retirement Research Center Working Paper 2008-192
In this study we analyzed the retirement behavior of Mexicans with migration spells to the United States that returned to Mexico and non-migrants. Our analysis is based on rich panel data from the Mexican Health and Aging Study (MHAS). Approximately 9 percent of MHAS respondents aged 50 and older reported having lived or worked in the United States. These return migrants were more likely to be working at older ages than non-migrants. Consistent with much of the prior research on retirement in the United States and other developed countries, Mexican non-migrants and return migrants were responsive to institutional incentives. Both groups were more likely to retire if they had publicly provided health insurance and pensions. In addition, receipt of U.S. Social Security benefits increased retirement rates among return migrants. Return migrants were more likely to report being in poor health and this also increased the likelihood of retiring. The 2004 draft of an Agreement on Social Security would coordinate benefits across United States and Mexico boundaries to protect the benefits of persons who have worked in foreign countries. The agreement would likely increase the number of authorized and unauthorized Mexican workers and family members eligible for Social Security benefits. The responsiveness of current, older Mexican return migrants to pension benefits, suggests that an Agreement would affect the retirement behavior of Mexican migrants.
by Nicole Maestas and Na Yin
SSA Project # UM08-13 • Program Interactions
Michigan Retirement Research Center Working Paper 2008-194
The Social Security DI program has long been thought to impose a strong work disincentive. Nevertheless, its causal effect on labor supply has been difficult to estimate. We take a new look at this question by exploiting the fact that DI benefits are payable only until full retirement age (FRA), at which point they are converted to retired worker benefits, and the implicit greater-than-100 percent tax rate on earnings is abruptly relaxed. Using a quasi-experimental research design, we examine whether the DI work disincentives are binding by comparing changes in labor force participation rates before and after the FRA for DI beneficiaries versus non-beneficiaries. We find a relative increase in labor force participation at FRA for DI beneficiaries of 7 percentage points, and argue that this is likely a lower bound on the latent work capacity of DI recipients.
Marital Histories and Economic Well-Being
by Julie Zissimopoulos, Benjamin Karney, and Amy Rauer
SSA Project # UM08-10 • Demographic Research
Michigan Retirement Research Center Working Paper 2008-180
Compared to unmarried individuals married individuals report greater average wealth. A restricted focus on current marital status risks misrepresenting the effects of marriage on wealth, as an increasing proportion of older adults have been divorced and remarried, having lived through the dramatic upheavals in family structure from the 1960s through the 1980s. To shed light on the associations between a lifetime of marriage events and wealth near retirement, we used panel data from the Health and Retirement Study and developed categories of marital experiences that acknowledged current status, type, number and date of past marital disruptions and total duration of time spent married across the lifespan. We found that the route individuals took to get to their current marital status were important predictors of wealth levels near retirement and were different for males and females. Observable differences in lifetime earnings, mortality risk, risk aversion, other characteristics such as education and number of children, explained much of the wealth difference between married and remarried individuals however neither observable characteristics nor sources of other wealth from pensions and Social Security were enough to explain the large differences in wealth accumulation between single and married women and individuals experiencing more than one marital disruption. Given the higher divorce rate, prevalence of multiple divorces and earlier age of divorce of the Baby Boomer cohort compared to earlier cohorts, an understanding of how marriage disruptions over the lifecycle impact savings is increasingly important for understanding the economic security of retirees.
The Market Value of Social Security
by John Geanakoplos and Stephen P. Zeldes
SSA Project # NB08-11 • Social Security and Retirement
National Bureau of Economic Research
The Social Security Administration calculates a number of measures to assess the financial state of the system. This requires assigning a current value to the stream of benefit payments and payroll tax revenues that can be expected in the future. The traditional actuarial approach to making these calculations ignores risk, and assigns an expected value. Private financial markets would value these future costs and revenues differently by adjusting for uncertainty and risk. In exploratory work completed last year, our focus was on the market value of already obligated future benefits. The idea was to value future Social Security benefit obligations in a way that accounts for future risks and uncertainties in a way that investors would do if they regarded these payments as liabilities of their own businesses. In this study, we expand the analysis by estimating the market value for the Social Security system as a whole. We first estimate the market value of Social Security's future expenditures (worker benefits) and receipts (worker contributions obtained from payroll taxes). In addition to already-obligated benefits (the focus of our preliminary work), we consider the full stream of benefits and payroll tax contributions that can be expected in the future. We then construct market-based (i.e., risk-adjusted) estimates of three common measures of Social Security's financial health, and compare these estimates to those obtained using the traditional SSA methods with no correction for the price of risk. Using this market-based approach, and applying risk adjustment empirically, we estimate that the 75-year open group unfunded liability is 30 percent lower than the SSA estimates using actuarial methods.
A Matter of Trust: Understanding Worldwide Public Pension Conversions
by Kent Smetters and Walter Theseira
SSA Project # NB08-15 • International Research
National Bureau of Economic Research
Fundamental reform of social security systems from traditional pay-as-you-go defined benefit systems toward defined-contribution accounts represents one of the most important fiscal policy changes worldwide during the past century. Current explanations of this phenomenon lack theoretical justification or empirical support. In fact, the traditional pension model is likely superior along several important dimensions. So why have so many countries reformed? Adding to this puzzle is that these reforms have taken on numerous shapes and sizes across the world, and typically have been larger in developing countries facing less severe demographic problems. We propose a simple model of "intergenerational trust" that is consistent with these stylized facts. Empirical analysis is provided that supports the basic tenets of the model.
The Optimal Design of Social Security Benefits
by Shinichi Nishiyama and Kent Smetters
SSA Project # UM08-19 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-197
The United States Social Security system is fairly unique in that it explicitly allows for a progressive formulation of retirement benefits by assigning a larger replacement rate to workers with small pre-retirement wages. In contrast, the public pension systems in other countries often replace a constant fraction of pre-retirement wages, although the length of the "averaging period" is typically shorter relative to the U.S. This paper examines the ex-ante optimal U.S. Social Security benefit structure using the model developed in Nishiyama and Smetters (2007). On one hand, progressivity in the benefit structure provides risk sharing against shocks that are difficult to insure privately. On the other hand, progressivity introduces various marginal tax rates that distort labor supply. Rather surprisingly, we find that the ex-ante best U.S. Social Security replacement rate structure is fairly "flat." Intuitively, the relatively long averaging period used in the U.S. system formulation already provides some insurance against negative idiosyncratic shocks, but in a manner that is more efficient than explicit redistribution.
Pension Plan Documents from Government Sources
by Charles Brown and David Weir
SSA Project # UM08-Q1 • Wealth and Retirement Income
Michigan Retirement Research Center
The purpose of this project is to locate Federal Employer Identification Numbers (EINs) for employers of Health and Retirement Study respondents who were employed at the time of the initial Wave I interview. These EINs are essential for linking our respondents to Form 5500 information about their pension plan, including both the machine-readable versions of the forms themselves and the plan summaries that we learned are often included as attachments to Form 5500.
by Emma Aguila, Michael D. Hurd, and Susann Rohwedder
SSA Project # UM08-16 • International Research
Michigan Retirement Research Center Working Paper 2008-196
In 1997 Mexico introduced Personal Retirement Accounts (PRAs) which, after a transition phase, will completely replace the pay-as-you-go (PAYG) system. We give a detailed overview of the relevant institutional framework, the market of PRA providers and how it has evolved since the 1997 reform. We use administrative data obtained from CONSAR, the regulatory agency of the PRA system to assess how pension fund management fees affect pension accumulations. We find that fees can drain up to a quarter of individuals' pension savings.
by Jeffrey B. Liebman and Erzo F.P. Luttmer
SSA Project # NB08-01 • Social Security and Retirement
National Bureau of Economic Research
The degree to which the Social Security tax distorts labor supply decisions depends on the extent to which individuals recognize that future benefits are based on how much they worked. To measure the perceived linkage between labor supply and Social Security benefits, we administer a survey about the Social Security benefit rules to a representative sample of Americans aged 50–70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply, i.e., that the Social Security benefit rules provide a positive work incentive. The magnitude of this perceived incentive varies across respondents, but people generally cite an incentive that is somewhat greater than the actual figure. We also surveyed people about their understanding of various provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming, and rules on widow benefits) are relatively well understood while others (rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood.
Preparation for Retirement, Financial Literacy and Cognitive Resources
by Adeline Delavande, Susann Rohwedder, and Robert Willis
SSA Project # UM08-07 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-190
Traditional economic models assume that individuals have full information and act perfectly rationally. However, we show that there is considerable variation in financial literacy in the population and propose modeling the acquisition of financial knowledge in a human capital production framework. The model makes several predictions, notably with respect to portfolio choice. For example, it helps explain household nonparticipation in the stock market for some fraction of the population, and it provides guidance about the share of risky assets to hold for other types of households. Estimation of the human capital production function for financial knowledge on data from the Cognitive Economics Survey yields results that are consistent with important features of the model.
by John Beshears, James J. Choi, David Laibson, and Brigitte C. Madrian
SSA Project # NB08-09 • Wealth and Retirement Income
National Bureau of Economic Research
Although the popular press and politicians often describe 401(k) loans as a problem, classical economic theory has a more benign view. Loans from a 401(k) can relax liquidity constraints and increase household utility. Moreover, loan provisions may have the subtle effect of raising net asset accumulation by making 401(k) participation more appealing: employees who can access their 401(k) assets if they need them may be willing to put more money into an otherwise illiquid 401(k) account. Our research suggests that 401(k) loans are neither a blessing nor a bogeyman. Conditional on borrowing to finance consumption, we show that a 401(k) loan may be a reasonable source of credit in many circumstances. We further show that the net impact of 401(k) loans on asset accumulation is likely to be small (and could be either positive or negative) for a reasonable range of parameter assumptions. Our empirical analysis also suggests that it may be possible to structure the provision of 401(k) loans in ways that reduce their potential to negatively impact retirement wealth accumulation, as we find that 401(k) loan utilization is responsive to the types of loan features adopted by firms. 401(k) loan utilization is higher in plans that have lower minimum loan amounts and in plans that allow employees to take out multiple loans. 401(k) loan utilization is lower in plans that have higher loan interest rates.
Retirement Wealth Across Cohorts: The Role of Earnings Inequality and Pension Changes
by Ann Huff Stevens
SSA Project # UM08-18 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-186
Changes in labor markets over the past 30 years suggest upcoming changes in the distribution of wealth at retirement. Baby boom cohorts have spent the majority of their prime earnings years in a labor market with increased earnings inequality. This paper investigates how changes in lifetime earnings distributions affect the distribution of retirement wealth among cohorts retiring over the next decade. I use data from the Health and Retirement Study from 1992 to 2004 to estimate the relationship between lifetime earnings, pre-retirement private wealth and Social Security wealth. I show that changes in the lower half of the male earnings distribution explain a substantial portion of changes in the distribution of pre-retirement wealth. Growth in women's earnings across the cohorts does not offset these declines in wealth associated with male earnings. When pensions are added to the measure of wealth, the role of earnings is even larger, reflecting a strong correlation between changes in earnings across these cohorts and changes in the values of their employer-provided pensions. These pension changes do not appear to operate via changes in pension structures (defined benefit versus defined contribution). The present value of wealth from future Social Security benefits, in contrast, grows in real terms throughout most of the distribution. At the bottom of the male distribution of Social Security wealth, reductions in lifetime earnings limit this growth in real benefits, while at the top of the distribution earnings growth amplifies expected growth in Social Security wealth.
Reverse Mortgages: A Closer Look at HECM Loans
by Tonja Bowen Bishop and Hui Shan
SSA Project # NB08-Q2 • Wealth and Retirement Income
National Bureau of Economic Research
Housing wealth is often the most important wealth component for many elderly homeowners in the United States. Reverse mortgages allow elderly homeowners to consume housing wealth without having to sell or move out of their homes. However, very few eligible homeowners used reverse mortgages to achieve consumption smoothing until recent years when the reverse mortgage market in the U.S. has witnessed substantial growth. This paper examines all Home Equity Conversion Mortgage (HECM) loans that were originated between 1989 and 2007 and insured by the Federal Housing Administration (FHA). We show how characteristics of HECM loans and HECM borrowers have evolved over time, we compare borrowers with non-borrowers, and we analyze loan outcomes using a hazard model. In addition, we conduct numerical simulations on HECM loans that were originated in 2007 to illustrate how the profitability of the FHA insurance program depends on factors such as termination rates, housing price appreciation, and the payment schedule. The analysis performed in this paper serves as the first step to understand the implication of recent growth in the reverse mortgage market. Our results also suggest policy makers who are evaluating the current HECM program should practice caution in predicting future profitability.
Tapping Assets in Retirement: Which Assets, How and When?
by James Poterba, Steven Venti, and David A. Wise
SSA Project # NB08-06 • Wealth and Retirement Income
National Bureau of Economic Research
Just two or three decades ago retirement saving in the United States was based heavily on employer-provided defined benefit plans that provided distributions in the form of lifetime annuities. With the transition to 401(k) and similar programs, the decision about when and how to withdraw retirement resources rests instead with the individual. And to date, assets held in personal retirement accounts have rarely been annuitized. So what are the drawdown patterns for these assets? And how do they relate to the drawdown of other asset categories? Our earlier work focused on the drawdown of home equity in retirement, concluding that home equity is typically not used to support general consumption in retirement, but is instead held as a buffer against shocks, such as the death of a spouse or entry into a nursing home. In this study, similar results are found for 401(k) accounts and for total wealth in all asset categories. Following retirement, the percentage of dollars withdrawn from personal accounts each year appears to fall below the rate of return earned on existing balances, allowing balances to accumulate further. This is true even after people are required to make minimum withdrawals at age 70½ . We find that personal account assets of continuing two-person families tend to increase throughout the age range we consider, through age 85. The retirement assets of continuing one-person families, although much lower than the assets of continuing two-person families, also tend to increase throughout the age range we consider. Personal retirement assets do decline, sometimes precipitously, when two-person families become one-person families through the death of a spouse, divorce, or separation. The overall finding, however, is that in the absence of a major life event, people tend to conserve their assets as they age.
The Taxation of Social Security Benefits as an Approach to Means Testing
by Sarena Goodman and Jeffrey Liebman
SSA Project # NB08-02 • Wealth and Retirement Income
National Bureau of Economic Research
Many Social Security reform proposals suggest cutting benefits in ways that concentrate the benefit cuts on those most able to bear them. The most common approach adjusts the Social Security benefit formula to reduce replacement rates by a greater amount for those with high levels of lifetime earnings. An alternative approach is to means test Social Security benefits, targeting benefit reductions on those with substantial non-Social Security financial resources. Since 1984, a limited amount of means testing has been accomplished by subjecting a portion of Social Security benefits to the income tax. This paper considers the advantages and disadvantages of means testing as an alternative to progressive benefit formula adjustments and analyzes how close the current taxation of Social Security benefits in the U.S. comes to achieving the potential benefits of means testing. The paper finds that retirement income sources other than Social Security benefits have substantial predictive power for consumption levels in retirement, implying that efforts to target Social Security benefit reductions on those most able to bear them may be more effective if done using information on both Social Security and non- Social Security income sources.
by Richard Burkhauser,Mary C. Daly, Jeff Larrimore, and Joyce Kwok
SSA Project # UM08-Q2 • Program Interactions
Michigan Retirement Research Center Working Paper 2008-187
In the 1990s, social expectations of single mothers shifted towards the notion that most should, could, and would work, if given the proper incentives. This shift in expectations culminated in the passage of the Personal Responsibility and Work Opportunity Reconciliation Act in 1996, commonly known as welfare reform. As a result, ADFC/TANF caseloads fell along with cash transfers to single mothers who did not work. A decade later the earnings and household income of single mothers are significantly higher and moving more in synch with the U.S. economy. In stark contrast and despite espoused goals to the contrary, public policies toward working age men and women with disabilities have remained imbued with the notion that most cannot and thus, would not work, no matter what incentives they faced. As a result, SSDI/SSI expenditures and caseloads have increased and the earnings and household income of working age men and women with disabilities have fallen, leaving them even further behind the average working age American than they were a decade ago. Using data from the Current Population Survey we follow the economic well-being and employment of single mothers and working age men and women with disabilities over the past two major United States business cycles (1982–1993 and 1993–2004) and show that despite the dramatic decline in ADFC/TANF funding, single mothers' economic well-being, labor earnings and employment all have risen substantially. In contrast, despite the dramatic increase in SSDI/SSI funding, the economic wellbeing of working age men and women with disabilities remained stagnant, as their labor earnings and employment plummeted.
The Under-Reporting of Transfers in Household Surveys: Its Nature and Consequences
by Bruce D. Meyer, Wallace K.C. Mok, and James X. Sullivan
SSA Project # NB08-12 • Program Interactions
National Bureau of Economic Research
Benefit receipt in major household surveys is often under-reported. In recent years, as many as half of the dollars received through Food Stamps, Temporary Assistance for Needy Families (TANF) and Workers' Compensation has not been reported in the Current Population Survey (CPS). High rates of understatement are found for many other government transfer programs and in datasets such as the Survey of Income and Program Participation (SIPP) and the Panel Study of Income Dynamics (PSID). These datasets are among our most important for analyzing incomes and their distribution as well as transfer receipt. Thus, this understatement has major implications for our understanding of the economic circumstances of the population and the working of government programs. We provide estimates of the extent of transfer underreporting for the main transfer programs and the major nationally representative household surveys. We obtain estimates by comparing weighted totals reported by households for these programs with those published by government agencies. Our results show sharp differences across programs and surveys as well as over time. These differences are informative as to the relative importance of the various reasons for under-reporting. The estimates indicate the magnitude of bias in existing estimates and can also be used to adjust estimated program effects on incomes and estimates of program take-up.
Who Determines When You Retire? Peer Effects and Retirement
by John M.R. Chalmers, Woodrow T. Johnson, and Jonathan Reuter
SSA Project # NB08-13 • Social Security and Retirement
National Bureau of Economic Research
We study the factors that affect the choice of retirement date for a large sample of retirement-eligible Oregon state employees between 1992 and 2003. Given the complexities of the Oregon Public Employees Retirement System, we hypothesize that individuals will infer their optimal retirement behavior, in part, from the retirement behavior of their coworkers. Indeed, controlling for individual retirement incentives and characteristics, we find that individuals are economically significantly more likely to retire in months when more of their coworkers retire. The facts that this positive correlation is robust to the inclusion of numerous fixed effects and controls and survives estimation using two distinct sets of instrumental variables lead us to conclude that it reflects peer effects in the choice of retirement date. With respect to the possible welfare consequences of peer effects, our preliminary evidence is mixed, but points to modest costs and benefits. Interestingly, we find little evidence of peer effects amongst employees whose salaries are in the bottom 25th percentile, where financial literacy is likely to be the lowest.
August 2008
Aging, Asset Markets, and Asset Returns
by Axel Borsch-Supan and Alexander Ludwig
SSA Project # NB08-14 • Macroeconomic Analyses of Social Security
National Bureau of Economic Research
This study looks at the complex interactions between demographic trends, public pension reform, labor markets, and capital markets in a global context. The investigation connects several strands of literature. First, it investigates how strong "asset meltdown" effects are in an aging economy that is embedded in global financial markets. Second, it focuses on the importance of labor supply in particular, how policies affect labor markets, and how labor markets in return affect financial market performance. Third, it considers the impact of public pension reform on both capital and labor markets. And fourth, it looks ahead at the overall macroeconomic outcomes that result from these changes. The effects of population aging on the value of capital are estimated to be modest, and moderated by international capital flows. No major asset meltdown is predicted by the model. The changes in labor markets, however, may significant impact macroeconomic outcomes. The main effect of demographic change is that the number of gainfully employed people could fall sharply over time, relative to the population of consumers. This will put pressure on productive capacity of the economy, and could contain future economic growth. The study concludes by reiterating the importance of capital markets in an aging society, as the only way of distributing resources geographically, over time, and across generations.
Deferred Annuities and Strategic Asset Allocation
by Wolfram J. Horneff and Raimond H. Maurer
SSA Project # UM08-24 • Wealth and Retirement Income
Michigan Retirement Research Center Working Paper 2008-178
The optimal portfolio choice and consumption pattern has been derived over the lifecycle for households facing labor income, capital market, and mortality risk. In addition to stocks and bonds, households also have access to deferred annuities. Deferred annuities offer a hedge against mortality risk and provide similar benefits as Social Security. The paper shows that a considerable fraction of wealth should be annuitized to skim the return enhancing mortality credit. The remaining liquid wealth (stocks and bonds) is used to hedge labor income risk during work life and to earn the equity premium. There seems to be a marginal difference between a strategy involving deferred annuities and one where the investor can purchase immediate life annuities.
The Housing Bubble and Retirement Security
by Alicia H. Munnell, Mauricio Soto, and Jean-Pierre Aubry
SSA Project # BC08-13 • Wealth and Retirement Income
Center for Retirement Research at Boston College Working Paper 2008-13
House prices rose 60 percent between 2000 and 2007 before the housing bubble burst. The question is whether the housing boom made people better or worse prepared for retirement. Theory says that infinitely-lived households experience no increase in their real net worth when housing prices increase and would therefore have no reason to borrow against the increment in their home equity to increase their consumption. Two pieces of evidence suggest that they did tap their equity: the big increase in mortgage borrowing has accompanied the run-up in house prices, and a number of studies have reported a positive relationship between house prices and consumption. Using the 2004 Survey of Consumer Finances (SCF) this paper investigates the probability of households extracting home equity through an increase in housing-related debt, the probability that they use their housing-related borrowing for consumption, and finally the factors that determine the level of consumption spending out of their increased debt. The results show that while homeowners appear to take the present discounted value of future rents into account, many of them extracted equity and used it for consumption. A substantial proportio—perhaps 30 percent—of older households will be less secure in retirement because of the housing bubble.
How Much Do State Economic and Other Characteristics Affect Retirement Behavior?
by Alicia H. Munnell, Mauricio Soto, Robert K. Triest, and Natalia A. Zhivan
SSA Project # BC08-16 • Social Security and Retirement
Center for Retirement Research at Boston College Working Paper 2008-12
Economic conditions and labor force participation vary significantly across the states of the Union. Despite these marked differences, little is known about the reasons for such variations in retirement patterns. Using the Current Population Survey for the period 1977–2007, this paper demonstrates that the differences in the labor force participation of men age 55–64 are related to the labor market conditions, the nature of employment, and the employee characteristics in each state as well as a pseudo replacement rate. These variables explain more than one-third of the total variation. Even moving to a fixed effects model only cuts the explanatory power by half. The question remains, however, whether these relationships reflect different populations or unique aspects of the state. To answer that question we turn to the Health and Retirement Study (HRS). We estimate equations for the probability of working and for the expected retirement for men in their late fifties and early sixties. In each case, the first equation includes just the state-level variables and the second the state-level variables and the HRS demographic and economic information for each individual. The results show that the state-level variables explain almost none of the variation in the probability of working or the expected retirement age, but most of the state-level variables are statistically significant both before and after the inclusion of the HRS information.
Should the Poor Own Stocks? The Role of Social Security
by Ying Chen and Kent Smetters
SSA Project # NB07-08 • Social Security and Retirement
National Bureau of Economic Research
This paper examines how households should optimally allocate their portfolio choices between stocks and bonds in a lifecycle model where they face uninsurable wage shocks and an uncertain lifetime. We include a progressive social security system that is wage indexed before retirement, as in many pay-as-you-go systems including the United States. Social security benefits are correlated with stock returns at a low frequency that is relevant for lifecycle retirement planning. We show that this model is able to more closely replicate the key stylized facts of portfolio choice relative to alternative specifications.
Will People Be Healthy Enough To Work Longer?
by Alicia H. Munnell, Mauricio Soto, and Alex Golub-Sass
SSA Project # BC08-12 • Demographic Research
Center for Retirement Research at Boston College Working Paper 2008-11
If Americans continue to retire at age 63, a great many will risk income shortfalls especially at older ages. Because work directly increases current income, Social Security benefits, retirement saving, and decreases the length of retirement, a logical solution would be to increase the age of retirement. But are Americans healthy enough to work longer? Using the National Health Interview Study, this paper shows that healthy life expectancy increased by about three years over 1970–2000 for the average 50-year old man. This increase is largely the result of men moving up the education ladder, with minimal increases within educational groups. Moreover, major disparities in healthy life expectancy remain between those in the bottom and top quartiles of the population. And these disparities mean that a vulnerable portion of the population—perhaps those who most need to work longer—might not be able to extend their work lives.
June 2008
What Good is Wealth Without Health? The Effect of Health on the Marginal Utility of Consumption
by Amy Finkelstein, Erzo F.P. Luttmer, and Matthew J. Notowidigdo
SSA Project # NB08-Q1 • Wealth and Retirement Income
National Bureau of Economic Research Working Paper 14089
We estimate how the marginal utility of consumption varies with health. To do so, we develop a simple model in which the impact of health on the marginal utility of consumption can be estimated from data on permanent income, health, and utility proxies. We estimate the model using the Health and Retirement Study's panel data on the elderly and near-elderly, and proxy for utility with measures of subjective well-being. We find robust evidence that the marginal utility of consumption declines as health deteriorates. Our central estimate is that a one-standard-deviation increase in the number of chronic diseases is associated with an 11 percent decline in the marginal utility of consumption relative to this marginal utility when the individual has no chronic diseases. The 95 percent confidence interval allows us to reject declines in marginal utility of less than 2 percent or more than 17 percent. Point estimates from a wide range of alternative specifications tend to lie within this confidence interval. We present some simple, illustrative calibration results that suggest that state dependence of the magnitude we estimate can have a substantial effect on important economic problems such as the optimal level of health insurance benefits and the optimal level of life-cycle savings.
January 2008
Deconstructing Lifecycle Expenditure
by Mark Aguiar and Erik Hurst
SSA Project # UM08-06 • Social Security and Retirement
Michigan Retirement Research Center Working Paper 2008-173
In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar "hump" shaped lifecycle profile of nondurable expenditures. We document that the behavior of total non-durables masks surprising heterogeneity in the lifecycle profile of individual sub-components. We find, for example, that while food expenditures decline after middle age, expenditures on entertainment continue to increase throughout the lifecycle. These patterns pose a challenge to familiar lifecycle models that emphasize inter-temporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment. Secondly, we document that the increase in the cross-sectional dispersion of expenditure over the lifecycle is not greater for luxuries. In particular, the dispersion in entertainment expenditure declines relative to food expenditures as households become older, casting further doubt on theories that emphasize (exclusively) shocks to permanent income. We propose and test a Beckerian model that emphasizes intra-temporal substitution between time and expenditures as the opportunity cost of time varies over the lifecycle. We find this alternative model successfully explains the joint behavior of food and entertainment expenditures in the latter half of the lifecycle. The model, however, is less successful in explaining expenditure patterns during the early half of the lifecycle.
