Making Federal Pension Policy Work

Abstract

Millions of Americans retire while they are still productive. Of these, many will have the resources to enjoy all of their golden years. Unfortunately, many others will face economic hardships after they have exhausted their own resources but have become too frail to return to work. Part of the problem is that the current pension system is fraught with financial incentives that push ablebodied elderly workers into retirement just when they should instead be encouraged to remain in the workforce to accumulate additional retirement assets. This paper recommends a number of ways to change federal pension laws in order to encourage elderly workers to remain in the workforce. For example, this paper recommends toughening the penalty on premature distributions, repealing the minimum distribution rules, and repealing the exceptions to the Age Discrimination in Employment Act that permit retirement plans to provide early retirement incentives and subsidies.

This paper also considers whether the government should require that all retirement plans be neutral as to the timing of retirement. In an age-neutral world, workers would always accrue more benefits if they kept working. Consequently, more workers would remain in the workforce, accumulating additional assets for their eventual retirement.

Finally, this paper also considers how federal pension policy could help counteract the tendency of Americans to retire too early because they underestimate their life expectancies, overestimate their financial resources, and fail to understand the deleterious effects of inflation. In particular, this paper recommends that the government require that virtually all retirement plans pay at least a portion of their benefits in the form of an inflation-adjusted annuity.     

延迟退休年龄、内生生育率与养老金

本文通过构建内生生育率的OLG模型,从微观视角考察了延迟退休年龄对生育率、养老金替代率及其个人养老金收入的影响。研究表明:(1)延迟退休年龄会提高均衡时的生育率水平,但提高幅度非常有限。(2)生育率的提高会增加未来劳动力供给,促进养老金替代率上升和养老金收入增加,而延迟退休年龄延长了养老保险缴费期限,也会促进养老金替代率上升和养老金收入增加;但同时,延迟退休年龄将使得预防性储蓄下降,资本积累降低,工资收入下降,养老金收入降低。因此,延迟退休年龄会使养老金替代率上升。当资本产出弹性大于或等于0.5时,延迟退休年龄会使得养老金收入降低;当资本产出弹性小于0.5时,在平均预期寿命较大或养老保险缴费比例较高的情形下,养老金收入会随着退休年龄的延迟而增加,反之,其会随着退休年龄的延迟而降低。进一步地,将模型拓展到包含人力资本的情形,延迟退休年龄仍会提高均衡时的生育率与养老金替代率。     

Factors Affecting Retirement Mortality

Abstract

As many countries consider mandatory individual retirement accounts as their answer to a secure social security system, the question arises as to whether all workers can get true “market value” annuities when they retire. It is clear today that private-sector life annuities are priced assuming that the applicant is healthy—very healthy. Very little underwriting or risk classification now exists in the individual annuity marketplace. However, if a large percentage of the population were looking to annuitize their social security accounts upon retirement, there would be strong pressure for more risk classes in the annuity-pricing structure.

Even without the advent of individual accounts for social security, the authors of this paper feel there may be real market opportunities for more risk classification in the individual annuity market and the offering of “impaired life annuities.” Given that this pressure does or might soon exist, this paper reviews 45 recent research papers that look at factors that affect mortality after retirement. In particular, factors that seem to be important in predicting retirement mortality include age, gender, race and ethnicity, education, income, occupation, marital status, religion, health behaviors, smoking, alcohol, and obesity. for each factor, this paper gives highlights relative to the named factor of the impact expected from that variable as described in the 45 reviewed research papers.

The authors believe there is a wealth of information contained in the summaries that follow, and it is our sincere hope that this paper will cause an increased interest in a more broadly based risk classification structure for individual annuities.

Summaries of the 45 papers can be found at www.soa.org/sections/farm/farm.html.     

High-age implications of postretirement risks

The retirement world of the future is challenging because of the decline in defined benefit plans, low savings rates in the United States, increased longevity and the failure of many people to effectively plan for retirement. Drawing on a variety of studies and public opinion surveys, the authors of this article explain why a system that relies too much on people providing for themselves will have segments of the population who have inadequate retirement incomes due to a number of gaps, which pose the most risk at advanced ages. These gaps can occur because of difficulties in managing postretirement risk, acquiring inadequate savings in the first place and problematic public perceptions about retirement income risks.     

Retirement planning and long-term risk

Many defined contribution plan participants have available to them various measures of short-term risk. However, some of these participants don't understand that reducing short-term risk comes at the cost of increasing the risk of not reaching their retirement income goal. This article looks at the relationship between short- and long-term risk and their impact on retirement savings.     

At What Age Do You Expect to Retire? Retirement Expectations and Increases in the Statutory Retirement Age

We analyse the extent to which an increase in the statutory retirement age affects individuals' retirement expectations. Understanding how individuals adjust their expectations is crucial to the evaluation of this policy, since retirement expectations directly affect other important decisions such as labour supply, engagement in (further) education and, of course, savings and investments. We consider the 2007 German pension reform that legislated an increase in the statutory retirement age from 65 years to 67. Our analysis is based on a longitudinal study that directly asks respondents at what age they expect to retire. Using a difference‐in‐differences approach, we look at the changes in subjective retirement expectations over time and estimate the extent to which they can be attributed to the 2007 reform. We find that the reform shifted the retirement expectations of the younger cohorts, although there is some heterogeneity in the way individuals adjusted. While there are no significant differences between men and women, lower‐educated individuals failed to revise their expectations. As these individuals usually acquire both lower pension claims and lower private savings, the fact that they have been slower in updating their retirement expectations causes concern regarding their income security after retirement.     

我国职工退休年龄影响因素的实证研究

当前我国劳动力逐渐短缺,职工退休年龄直接关系到我国劳动力供给的数量和结构。使用2011年在广东省21个地市的问卷调查数据,研究影响职工退休年龄问题的影响因素。实证研究表明,工资、工龄对职工退休年龄的影响显著为正。养老金对男职工退休年龄的影响显著为负。机关事业单位职工的退休年龄更晚。教育年限对女职工的影响显著为正。已婚、...     

Forced retirement risk and portfolio choice

Current literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using data from the Health and Retirement Study, this paper finds that the forced retirement risk is both significant and highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.     

Worries and plans as individuals approach retirement

The primary objective of an employment-based retirement plan is to provide a secure and adequate income for workers throughout retirement. In the defined contribution (DC) framework, asset accumulation is a means to the end, but not the end. Drawing retirement income from savings and paying for health care expenses in retirement are the two issues that concern individuals the most as they approach retirement. This article examines the attitudes of near-retirees regarding these risks and their plans for managing them. The author discusses how DC plan design can have a major impact on how individuals convert their retirement savings to retirement income; differences in survey responses between those who have consulted a financial advisor or other financial professional and those who have not; and the role of trust in implementing advice.     

Why are older investors less willing to take financial risks?

We investigate the link between age and tolerance of financial risks in the context of attitude to risk questionnaires completed by clients when meeting their financial advisors. Using a unique database comprising the responses to over half a million such questionnaires, we show that risk tolerance declines at an increasing, albeit slow, rate with age. We investigate the explanatory power of the ability to bear losses, declining investment horizon and retirement effects, finding that these variables have considerably greater explanatory power for the cross-section of risk aversion than age, and that they are only able to partially mediate the link between age and risk tolerance. We are unable to uncover any evidence that declining cognitive abilities among older investors are able to explain their lower willingness to take financial risks. Overall, our results are indicative of a modest age effect in risk tolerance that cannot be attributed to changes in other observable characteristics that differ between younger and older investors.     

Communicating the need for additional savings in the face of retiree health benefit cutbacks.

In preparing for retirement, employees need to consider not only their pension benefits but also the challenge of financing their retirement health care needs. Various trends evolving in our society indicate that future retirees will be increasingly dependent on their own retirement savings. Evidence suggests that employees are not fully aware of the significance of health costs in retirement and must be educated to the need to save for retiree health care expenses. This article discusses the issues of Medicare reduction and retiree health benefit cutbacks and the relative communication and education challenges such issues pose to employers.     

Here it comes: defined contribution health care

The Patient Protection and Affordable Care Act includes provisions to make the individual health insurance marketplace one where all Americans, including those with preexisting health conditions, can obtain affordable coverage. At the same time, the act has failed to address, in any significant way, many of the underlying flaws in the current U.S. health care system that have caused costs to spiral out of control. The combination of persistent U.S. health care cost increases and a viable individual health insurance marketplace will cause a sea change in employer-sponsored health care offerings that is similar to that seen among employer-sponsored retirement benefit plans: movement away from defined benefit approaches and toward defined contribution designs. Although the authors show parallels between the evolution of employers' health care and retirement offerings, they explain why certain key developments will need to occur before defined contribution approaches become as prevalent in employer-sponsored health care plans as they are in today's employer-sponsored retirement plans.     

The appropriateness of default investment options in defined contribution plans: Australian evidence

For participants in defined contribution (DC) plans who refrain from exercising investment choice, plan contributions are invested following the default investment option of their respective plans. Since default investment options of different plans vary widely in terms of their benchmark asset allocation, the most important determinant of investment performance, participants enrolled in these options face significantly different wealth outcomes at retirement. This paper simulates the terminal wealth outcomes under different static asset allocation strategies to evaluate their relative appeal as default investment choice in DC plans. We find that strategies with low or moderate allocation to stocks are consistently outperformed in terms of upside potential of exceeding the participant's wealth accumulation target at retirement as well as downside risk of falling below that target outcome by aggressive strategies whose allocation to stocks approach 100%. The risk of extremely adverse wealth outcomes for plan participants also does not appear to be very sensitive to asset allocation. Our evidence suggests the appropriateness of strategies heavily tilted towards stocks to be nominated as default investment options in DC plans unless plan providers emphasize predictability of wealth outcomes over adequacy of retirement wealth.     

From authenticity to significance: Tourism on the frontier of culture and place

The tourism of the future will include greater demand on the part of citizens of economically emerging nations, as well as on the part of a growing number of retirement age persons in many of the more developed countries. There are important environmental, cultural, and social consequences associated with these demographic shifts. Trendsetters for the tourism of the near future are likely to be well-educated elites who are familiar with travel and comfortable in culturally diverse situations. They will have an understanding of the consequences of global economic development, and will better realize that their participation in tourism comes with a cost to communities and environments through which they pass. They will see value in tourism experiences that support principles of environmental sustainability, heritage preservation and cultural diversity, and human equality. This generation of tourists will have greater choice of travel venues and access to considerably more information on which to base their travel plans, and they will be more likely to expect travel experiences that have breadth as well as depth and that provide opportunities for self-improvement as well as leisure and entertainment.     

Replacement ratio redux

Disconnects between what employees need and expect to receive during retirement and what employer-sponsored plans provide can create workforce issues with important implications. By creating a model that analyzes the spend-down phase of retirement, the authors provide a framework for better understanding what employees will need to save during their working lifetimes.     

Will we outlive our money?

Fewer and fewer Americans retire with benefits in the form of life annuities. The author raises key issues regarding the increased importance that uncertainty plays in determining retirement income. The key issues include longevity risk and how savings withdrawals rates will be affected at varying rates of return.     

延迟退休、个人账户调整与城镇职工医疗保险基金可持续运行

文章通过构建精算模型,从城镇职工医疗保险基金可持续运行的角度对不同延迟退休和个人账户调整方案及组合进行模拟评估。研究发现:现行制度下城镇职工医疗保险统筹基金面临支付风险,延迟退休仅能够在短期内缓解城镇职工医疗保险基金的支付压力;仅依靠延迟退休难以在长期内缓解城镇职工医疗保险基金的支付压力,运用“延迟退休+个人账户调整”的模式,即在延迟退休的基础上对个人账户进行调整,更有利于基金的长期稳定运行。在现行退休制度下,建议取消个人账户,将单位缴费和个人缴纳的费用计入统筹账户,城镇职工医疗保险基金的单位缴费率可以下调1%;在延迟退休政策势在必行的情况下,建议在男性和女性不同岁退休的基础上,取消个人账户,实现城镇职工医疗保险单位缴费率降低2%。这样既有利于基金的可持续运行,也可以保证基金的运行效率,更能加强城镇职工医疗保险制度的互助共济性。     

Maximum Withdrawal Rates: A Novel and Useful Tool

Even after accumulating a portfolio of investment assets, retirees still need to know how much of their wealth they can spend each year without risking running out of money before they die. Traditionally, financial advisers use extensive simulation to predict a “failure rate” (i.e. the probability of a retiree running out of money before they die). Unfortunately, the failure rate approach is flawed because strategies with the same failure rate may not be comparable overall. For example, different withdrawal strategies may have the same failure rate but wind up leaving significantly different amounts of wealth behind. Instead of failure rate, this author recommends using the maximum withdrawal rate, or MWR, approach that predetermines a desired bequest (which could be zero or some positive sum), thus enabling an apples‐to‐apples comparison of retirement strategies. In addition to permitting direct comparisons of retirement strategies, the MWR provides a way to assess how likely a retiree is to sustain a target sequence of inflation‐adjusted withdrawals. This is the main advantage of the MWR; it is a single tool that can be used to explore two of the most important issues in retirement analysis. The MWR as presented here is essentially a measure of the best a retiree could have done had he known the future returns of his portfolio. Obviously, one cannot be sure of future rates of return ahead of time, so the MWR does not eliminate all retirement risk. That said, its adoption would be an improvement upon current practice.     

Saving and investing for early retirement: A theoretical analysis

We study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time. We show that investing for early retirement tends to increase savings and reduce an agent's effective relative risk aversion, thus increasing her stock market exposure. Contrary to common intuition, an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets, even when her income and the investment opportunity set are constant. The model predicts a decrease in risk aversion following strong market gains like those observed in the nineties.     

Issues for Implementing Phased Retirement in Defined Benefit Plans

Abstract

U.S. society is aging. The nature of work has changed from work that requires physical strength to work based on knowledge. As a result, workers are beginning to phase into retirement rather than going directly from full-time work to full retirement. From a retirement income perspective, many final-average-pay defined benefit plans have features that make phased retirement difficult at best and detrimental at worst. U.S. pension law and regulations present barriers to phased retirement if the phased retiree wants to receive a portion of available pension benefits during phased retirement.

This paper examines private sector options to encourage phased retirement and to eliminate the disincentives that currently affect defined benefit plans. It offers alternative calculations of final average pay that do not penalize the part-time worker. It also demonstrates that the plan’s early retirement reduction and late retirement increase can be set to maintain actuarial equity throughout phased retirement. The paper presents benefit calculations with equal actuarial values for various payout patterns.

The paper discusses the coordination between phased retirement and subsidized early retirement. Finally, the paper notes some of the changes in ERISA that will be needed to facilitate phased retirement in defined benefit plans, especially for participants who want to receive pension distributions while working part time.