Research, Statistics, & Policy Analysis
Retirement Research Consortium
The Retirement Research Consortium (RRC) consists of three multidisciplinary centers housed in three separate institutions (Boston College, the University of Michigan, and the National Bureau of Economic Research) and is funded through cooperative agreements with the Social Security Administration. SSA awarded approximately $7.5 million to the RRC in FY2009, when the current 5-year award was made. Funding is expected to continue at that level for each of the remaining years of the award.
The RRC has three main goals:
- Conduct research and evaluation on a wide array of topics related to Social Security and retirement policy,
- Disseminate information on Social Security and retirement issues relevant to policy makers, researchers, and the general public, and
- Train scholars and practitioners in research areas relevant to Social Security and retirement issues.
To meet these goals, the centers perform many activities. They conduct research, prepare policy briefs and working papers, hold an annual conference, and provide research and training support for young scholars. Links to recent RRC research are provided below. For further information about RRC activities, affiliated institutions, or individual researchers, please visit the Web sites of the respective institutions:
- Center for Retirement Research at Boston College
- Michigan Retirement Research Center
- National Bureau of Economic Research
Recent RRC Research
View RRC Research by Priority Research Area | View Archived Research
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 Researc
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 ResearchR
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.
