The impact of inheritances on the retirement behavior of older Europeans

The aim of this paper is to study how wealth affects retirement behavior. I use data from the 2004–2012 Survey of Health, Ageing and Retirement in Europe, covering 10 European countries. Inheritances are used as an exogenous change in wealth to estimate the causal effect of wealth/inheritance receipt on retirement. I apply binary choice models for a sample of persons working in 2004/05 to estimate the effect of inheritance receipt during 2005–2011 on the probability of retirement in 2011/12. By comparing data on expected retirement age at the beginning of the sample period with actual retirement age I am able to control for unobserved factors that might be correlated with wealth and affect retirement decisions. The main findings are: (1) Inheritance receipt is quite common for individuals nearing retirement age (50+). About 20 % of the sample aged 50 and older in 2011/12 live in households that received at least one inheritance between 2005 and 2011. (2) Inheritance receipt significantly increases the probability of retirement and the effect increases with the size of the inheritance. (3) In contrast to what life-cycle theory suggests I do not find any evidence that expected and unexpected inheritances affect adjustments of planned retirement age differently. These results are important for assessing the effect of policies that induce changes in wealth, such as pension reforms, tax reforms or reforms of Social Security, on retirement behavior.     

Do retirement planning strategies alter the effect of time preference on retirement wealth?

An individual’s willingness to accumulate retirement wealth is influenced by their preference for intertemporal consumption. People with a strong preference for current consumption (high personal discount rate) may choose to save less and face the risk of decreased retirement preparedness. A negative relation between a high personal discount rate and retirement wealth may be reduced when individuals engage in some form of retirement planning. Using the National Longitudinal Survey of Youth, we provide evidence that respondents with a high personal discount rate accumulated 37% less retirement wealth, on average, between 2004 and 2008, when compared with respondents with a low personal discount rate. However, when retirement planning strategies were included in the model, there was no statistical difference in retirement wealth between people with high and low personal discount rates. The retirement planning strategies included calculating a retirement income need, hiring a financial planner for retirement or engaging in both of these activities.     

The trajectory of wealth in retirement

In this paper, we develop a measure of household resources that converts total financial and non-financial assets, plus annuity-like assets (mainly, Social Security and defined-benefit pensions) into an expected annual amount of wealth per person in retirement. We use this measure, which we call “annualized comprehensive wealth,” to investigate spend-down behavior among a panel of older households in the Health and Retirement Study (HRS) from 1998 to 2006. Our analysis indicates that for most retired households, comprehensive wealth balances decline much more slowly than their remaining life expectancies, so that the predominate trend is for real annualized wealth to rise significantly with age over the course of retirement. Comparing the estimated age profiles for annualized wealth with profiles simulated from several different life-cycle models, we find that a model that takes into account uncertain longevity, random medical expenses, and intended bequests lines up best with the broad patterns of rising annualized wealth in the HRS.     

Pension expectations,reforms and macroeconomic downturn in Italy. What can microdata tell us?

We use different years of the Bank of Italy’s Survey on Household Income and Wealth (SHIW) to explore how Italian workers’ expectations regarding their future level of pension benefits and retirement age changed from 2000 to 2014. Comparing expected and statutory values for future pension benefits and retirement ages, we find that knowledge of the pension system and its rules are not evenly distributed among workers. Some sections of the population, in particular, younger workers, women and the self-employed, are less precise in estimating their future pension benefits. As for retirement age, a large share of the working population still has not completely assimilated the implications of the linkage with the evolution of lifetime expectations at 65. Expectations in the final part of the period observed are dominated by increasing pessimism, which may be related to the macroeconomic crisis of the Italian economy and to the approval of a severe pension reform in 2011. Checking whether a household’s total wealth is consistent with lifetime consumption, we find that households where the head overestimates the future value of the pension benefit accumulate fewer resources than the remaining part of the population.     

Policy Effects in Hyperbolic vs. Exponential Models of Consumption and Retirement

This paper constructs a structural retirement model with hyperbolic preferences and uses it to estimate the effect of several potential Social Security policy changes. Estimated effects of policies are compared using two models, one with hyperbolic preferences and one with standard exponential preferences. Sophisticated hyperbolic discounters may accumulate substantial amounts of wealth for retirement. We find it is frequently difficult to distinguish empirically between models with the two types of preferences on the basis of asset accumulation paths or consumption paths around the period of retirement. Simulations suggest that, despite the much higher initial time preference rate, individuals with hyperbolic preferences may actually value a real annuity more than individuals with exponential preferences who have accumulated roughly equal amounts of assets. This appears to be especially true for individuals with relatively high time preference rates or who have low assets for whatever reason. This affects the tradeoff between current benefits and future benefits on which many of the retirement incentives of the Social Security system rest.Simulations involving increasing the early entitlement age and increasing the delayed retirement credit do not show a great deal of difference whether exponential or hyperbolic preferences are used, but simulations for eliminating the earnings test show a non-trivially greater effect when exponential preferences are used.     

Mortality transition and differential incentives for early retirement

Many studies specify human mortality patterns parametrically, with a parameter change affecting mortality rates at different ages simultaneously. Motivated by the stylized fact that a mortality decline affects primarily younger people in the early phase of mortality transition but mainly older people in the later phase, we study how a mortality change at an arbitrary age affects optimal retirement age. Using the Volterra derivative for a functional, we show that mortality reductions at older ages delay retirement unambiguously, but that mortality reductions at younger ages may lead to earlier retirement due to a substantial increase in the individual?s expected lifetime human wealth.     

A NEW LOOK AT THE WEALTH ADEQUACY OF OLDER U.S. HOUSEHOLDS

We examine the current wealth adequacy of older U.S. households using the 1998–2006 waves of the Health and Retirement Study (HRS). We find that the median older U.S. household is reasonably well situated, with a ratio of comprehensive net wealth to present value poverty‐line wealth of about 3.9 in 2006. About 18 percent of households, however, have less wealth than would be needed to generate 150 percent of poverty‐line income over their expected future lifetimes. We see similar patterns of wealth adequacy when we examine ratios of annualized comprehensive wealth to pre‐retirement earnings. Comparing the leading edge of the baby boomers in 2006 to households of the same age in 1998, we find that the baby boomers show slightly less wealth, in real terms, than their elders did, but still appear to have adequate resources at the median. Moreover, we find a rising age profile of annualized wealth, even within households over time and after controlling for other factors, suggesting that older households are not spending their wealth as quickly as their survival probabilities are falling.     

RETIREMENT INCOME RIGHTS AS A COMPONENT OF WEALTH IN THE UNITED STATES*

Americans have accumulated a considerable amount of future purchasing power in the form of Social Security and employer pension rights. These rights are a form of wealth. In this paper, we ask how their inclusion alters the wealth portfolios of a sample of Americans at or nearing normal retirement age. Data from the 1973 wave of the longitudinal Retirement History Study suggest that, for many Americans, retirement income rights are the dominant component of wealth, and are often more important than all other entries combined, including home equity. We also find that this wealth can be seriously eroded during times of high inflation. Because of differences in marketability, pension and Social Security rights are not perfect substitutes for more liquid assets. Nonetheless, since they are so large in magnitude, and have been shown to be key determinants of the behavior of older workers, they should not be ignored.     

MODELING MOVEMENTS IN INDIVIDUAL CONSUMPTION: A TIME‐SERIES ANALYSIS OF GROUPED DATA

We characterize the time‐series properties of group‐level consumption, income, and interest rates using microdata. We relate the coefficients of moving average representations to structural parameters of theoretical models of consumption behavior. Using long time series of cross sections to construct synthetic panel data for the United Kingdom, we find that for high‐educated individuals the Euler equation restrictions are not rejected, the elasticity of intertemporal substitution is higher than one, and there is evidence of “excess smoothness” of consumption. Low‐educated individuals, conversely, exhibit excess sensitivity of consumption to past income, and the elasticity of intertemporal substitution is not statistically different from zero.     

Retirement expectations, pension reforms, and their impact on private wealth accumulation

We estimate the effect of pension reforms on households' expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of intense Italian pension reforms as a source of exogenous variation in expected pension wealth. The Survey of Household Income and Wealth, a large random sample of the Italian population, elicits expectations of the age at which workers expect to retire and of the ratio of pension benefits to pre-retirement income between 1989 and 2002. We find that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth, particularly by workers that are better informed about their pension wealth.     

The Economics of Ageing—What do you Face?

The economics of ageing is the study of economic decision‐making by individuals and government aimed at fostering well‐being in old age. These decisions include preparing for old age and dealing with the risks of old age. The risks are substantial. Using the life‐cycle model, this article considers the risks for well‐being that people face in retirement and the role of government and private insurance in meeting those risks. The perspective of the life‐cycle model is also used to consider the gender gap in wealth on retirement.     

Why does consumption fall at retirement? Evidence from Germany

Analyzing the consumption behavior over retirement in Germany, this paper finds a negative correlation between income replacement and the increase in home-production-related activities. This might reconcile the observed drop in consumption at retirement with the predictions of the standard life cycle model. However, since individuals with fairly stable income over retirement also increase home production, this increase cannot be entirely attributed to a substitution effect.     

Retirement planning in the light of changing demographics

With increasing longevity and decreasing fertility rates, governments and policy makers are increasingly engaged in the question of long term retirement planning. In many cases this has included emphasising the need for individuals to take more responsibility for their own retirement planning through tax incentives, compulsion and changes to the age at which state retirement benefits become available. In the case of Australia, as is considered here, long term retirement planning has been focused around the development of a compulsory defined contribution (DC) superannuation system. Here we investigate the interaction between population ageing and the sustainability of the superannuation system by modelling a general superannuation scheme to compare the adequacy of retirement funds under a number of alternative scenarios. The model incorporates stochastic longevity forecasts and provides insight into the sufficiency of compulsory retirement saving both now and future. We find that the current pension scheme is more robust to longevity improvements for mid-class individuals however significant gaps arise for low-income individuals as longevity improves. Without addressing these issues, government expenditure is expected to increase substantially.     

How real people make long-term decisions: The case of retirement preparation

Large variations in retirement wealth are common, with some households accumulating hundreds of thousands of dollars and others accumulating next to nothing. We examine to what extent formal planning or simple rules of thumb contribute to these differences in wealth accumulation. In particular, we investigate whether those who follow simple rules of thumb or those who come up with more complete plans accumulate more wealth than those who take an unsystematic approach. We test this empirically using a specifically designed survey about retirement preparation. We find that people who rely on a rule of thumb behave like literal planners. However, people without any systematic approach save substantially less. Our results, taken together with evidence from psychology, suggest that financial planning advice based on simple rules of thumb may be helpful for those who currently take no systematic approach.     

Changes in subjective well-being with retirement: assessing savings adequacy

Does retirement represent a state of relative prosperity or unanticipated hardship? To assess whether individuals are successful in smoothing their well-being across the transition to retirement we analyse measures of subjective well-being (SWB) in the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Specifically, this research examines retirees’ current standard of living, financial security and overall happiness relative to their pre-retirement levels. It is found SWB either improves or remains constant for the large majority of individuals as they retire from the labour force. However, there are significant disparities in changes in well-being with retirement among the group of retirees. In particular, the subset of individuals who are forced to retire early due to job loss or their own health, and who find their income in retirement to be much less than expected, report marked declines in their SWB with retirement.     

Consumer Expenditures and Home Production at Retirement – New Evidence from Germany

Abstract. This paper investigates consumer expenditures of German households pre‐ and post‐retirement. The widely observed distinct drop in spending upon retirement entry poses an empirical puzzle since life cycle theory predicts smoothing of the marginal utility of consumption over time. As one explanation, I explore the role of home production as a substitute for consumer expenses. Taking a combined look at consumer expenditures and time use pre‐ and post‐retirement, I find a significant drop of about 17% of pre‐retirement expenses at retirement which coincides with an increase in time spent on home production of an additional 89 minutes per day, accounting for 21% of average home production.     

Is there a retirement consumption puzzle in Japan? Evidence from a household panel dataset spanning several years

Using a unique long-run panel of Japanese households, this paper examines the changes in consumption at retirement (‘the retirement-consumption puzzle’). Our analysis shows that households’ expenditure does decline after the retirement of the household head and that changes in household composition at retirement cannot fully account for this decline. Changes in life-style/preferences after retirement also do not appear to explain a salient feature of the expenditure decline, namely, the strong correlation between the magnitudes of the expenditure decline and the income decline upon retirement. On the other hand, our finding that the expenditure decline is larger for households with smaller savings and/or that experienced a large unexpected income decline is broadly consistent with the standard LC/PIH augmented with unexpected shocks, while it does not rule out the possibility that there is a relatively small subset of households that are myopic and lack sufficient saving discipline.     

Social Security and Old Age Unemployment Risk with Efficient Wage Bargaining

I analyze a life‐cycle economy with old age productivity risk where wages, employment, and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms. Allocations with limited union membership are second‐best inefficient as they generate too little labor supply in young age, too much consumption before retirement, too little employment of older workers (early retirement), and too little insurance against old age unemployment. Providing public transfers to early retirees (disability benefits or early pensions) might help to increase the degree of risk sharing at the cost of lower old age employment. Depending on whether absolute risk aversion is increasing or decreasing in consumption, these policies might or might not produce efficiency gains at equilibrium.     

DEFINED CONTRIBUTION PLANS, DEFINED BENEFIT PLANS, AND THE ACCUMULATION OF RETIREMENT WEALTH

The private pension structure in the United States, once dominated by defined benefit (DB) plans, is currently divided between defined contribution (DC) and DB plans. Wealth accumulation in DC plans depends on a participant's contribution behavior and on financial market returns, while accumulation in DB plans is sensitive to a participant's labor market experience and to plan parameters. This paper simulates the distribution of retirement wealth under representative DB and DC plans. It uses data from the Health and Retirement Study (HRS) to explore how asset returns, earnings histories, and retirement plan characteristics contribute to the variation in retirement wealth outcomes. We simulate DC plan accumulation by randomly assigning individuals a share of wages that they and their employer contribute to the plan. We consider several possible asset allocation strategies, with asset returns drawn from the historical return distribution. Our DB plan simulations draw earnings histories from the HRS, and randomly assign each individual a pension plan drawn from a sample of large private and public defined benefit plans. The simulations yield distributions of both DC and DB wealth at retirement. Average retirement wealth accruals under current DC plans exceed average accruals under private sector DB plans, although DC plans are also more likely to generate very low retirement wealth outcomes. The comparison of current DC plans with more generous public sector DB plans is less definitive, because public sector DB plans are more generous on average than their private sector DB counterparts.     

EFFECTS OF STOCK MARKET FLUCTUATIONS ON THE ADEQUACY OF RETIREMENT WEALTH ACCUMULATION

This paper examines the relation between fluctuations in the aggregate value of equities and the adequacy of households’ saving for retirement. Using more recent data than most studies on this topic, we find that many and perhaps most households appear to be saving adequate amounts for retirement, and that there is almost no link between aggregate equity values and the adequacy of retirement saving. A simulated 40 percent decline in stocks has little effect on the adequacy of saving. The substantial growth in equity values and ownership in the 1980s and 1990s did not lead to a surge in the adequacy of retirement saving provisions. The results occur because equity holdings are concentrated among households with significant amounts of other wealth.