Pensions: theories of underfunding

The widespread underfunding of private defined benefit pensions has generated concern over the viability of employers' promises of retirement benefits. Years ago, similar concerns led to the creation of pension benefit insurance plans by governments in the United States and a number of other countries. This paper studies the causes of underfunding in an environment without pension benefit insurance. We find that the optimal level of retirement benefits will be offered and fully funded if the employer has sufficient internal funds or is able to borrow all it needs. If loans are not enforceable, an employer with limited resources will generally underfund pensions. Further, if pension investments earn lower returns than other investments, pensions will be underfunded. Thus, the paper highlights the link between financial markets and the underfunding of pensions.     

SAVINGS IN TIMES OF DEMOGRAPHIC CHANGE: LESSONS FROM THE GERMAN EXPERIENCE

Pension reforms in many developed countries make individuals shoulder a bigger share of longevity and income risks. The desired response is that individuals accumulate private assets for retirement. Whether this actually takes place, is of paramount relevance for scientists and policy makers. We take Germany as an example: Twenty years of pension reform have transformed the monolithic German pension system into a multipillar system. Formerly generous public pension benefits are gradually being reduced, whereas substantial incentives are granted to occupational and private saving schemes. Has this transition worked out? We survey the reform steps and households’ reactions: How did individuals adjust their labor market behavior? How did private and occupational pension plans take off? How do behavioral adjustments vary in the population? Most Germans adapted to the new situation. Both actual and expected retirement decisions changed and the share of households without supplementary pensions decreased from 73% to 39% in little more than a decade. This is a remarkable success. Nonetheless, households with low education, low income and less financial education did neither adjust their retirement behavior nor pick up supplementary pension plans and are thus likely to face difficulties in bridging the gap arising in future pension income.     

The public–private pension mix in OECD countries

This article provides a survey of selected aspects of the relationship between public and private pension provision in European countries in the Organisation for Economic Co‐operation and Development and compares this with other regions of the OECD. Population ageing has led many OECD countries to undertake a wide range of pension reforms. The overall effect of these reforms has in many cases been to significantly reduce public pension promises. This, in turn, has increased the interest in the role of private pensions, which has expanded significantly in a number of OECD countries. The article discusses the extent to which a number of countries will need to further increase private provision in order to guarantee adequate future retirement incomes.     

Transitions to self-employment at older ages: The role of wealth,health, health insurance and other factors

Relatively little research has been devoted to studying self-employment among older workers although they make up a disproportionate share of the self-employed workforce. This study uses 5 waves of panel data from the Health and Retirement Study to investigate the determinants of labor force transitions to self-employment at older ages. We estimate a multinomial logit model of transitions from wage and salary employment to self-employment, retirement or not working. Results are compared with those found in previous studies. New findings on the impact of health on transitions to self-employment are highlighted.     

FLEXIBLE RETIREMENT

Flexible retirement – that is, the opportunity to choose one's own personal retirement age – is a hedge against pension risk and provides insurance to workers facing health or productivity shocks. Flexible retirement and flexible pension schemes are in practice closely linked because of imperfect capital markets and institutional restrictions. I discuss three necessary conditions to provide insurance through flexible retirement. First, it should be possible to adjust the pension starting date at limited cost. This condition is gradually being fulfilled, as many countries are moving toward more actuarially neutral pension schemes. Second, individuals should be willing to adjust their labor supply in case of a wealth shock. This condition seems largely fulfilled, although the available empirical evidence suggests that the ‘standard retirement age’ is at least as important as the income effect. Third, the labor market should be able to deal with flexible individual retirement decisions. This condition is gaining importance, but has not yet received much attention in the literature. Institutions often hamper employment past the ‘standard retirement age’. Moreover, the hiring rates of older workers are low and their unemployment duration is high. Institutional reforms facilitating flexible retirement opportunities are desirable from an insurance perspective.     

Towards a theory of the labor market with a public sector

The object is to specify and analyze equilibrium in a labor market with frictions when there is a significant public sector. In the vast majority of equilibrium studies on labor markets, a public sector has been ruled out by assumption. This seems a strange oversight as about 17% of workers in the US are public sector workers, whereas in western Europe, approximately 22% of workers work in the public sector. The goal in this study is to provide answers to such questions as: what happens to private sector wages if the public sector is increased? If the Government increases the number of public sector jobs, does this crowd out private sector jobs? When will private sector wages be greater (less) than the public sector wage? Reasonably complete answers to these questions (and others) are provided within the context of the model developed.     

The dynamic effects of health on the labor force transitions of older workers

This paper addresses the interplay between health and labor market behavior in the later part of the working life. We use the longitudinal Health and Retirement Survey to analyze the dynamic relationship between health and alternative labor force transitions, including labor force exit, job change and application for disability insurance. Specifically, we examine how the timing of health shocks affects labor force behavior. Controlling for lagged values of health, poor contemporaneous health is strongly associated with labor force exit in general and with application for disability insurance in particular. At the same time, our evidence suggests that controlling for contemporaneous health, poor lagged health is associated with continued participation. Thus, it appears that not just poor health, but declines in health help explain retirement behavior. We conclude that modeling health in a dynamic, longitudinal framework offers important new insights into the effects of poor health on the labor force behavior of older workers.     

Pensions, non-discrimination policies, and the employment of older workers

This paper analyzes firms' decisions to hire older workers. We model, the role of pensions in back-loading pay for specifically trained workers. We then evaluate the effects, of imposing age discrimination rules and non-discriminatory fringe benefit rules, and analyze the consequences for the firm's decision to hire older versus younger individuals. The model predicts that defined benefit pension plans deter the hiring of older workers, but only if hired for entry level position. The reason is f hat the wages of this group cannot be lowered enough to pay for the benefits. Data from a new survey of employers are used to test this hypothesis. The findings show that a more generous defined benefit pension plan reduces employment prospects for older, entry level workers. Employers offering defined benefit pension, plans employ older workers, but tend not to hire them into entry level jobs.     

HOW TO CLEAR UP THE PENSIONS MESS

All three pillars of the British pensions system are crumbling. The basic state pension is unsustainable in its present form. Defined benefit occupational pension schemes are fast disappearing, and with them the retirement hopes of millions of workers. A further 3 million low-income earners are not saving enough for their retirement. And uncertainty about pensions choices is widespread. In each case the primary cause of the problem is governmental or regulatory failure. The paper makes eight general and four specific proposals for restoring the system.     

The great recession and changes in faculty expected retirement age

The great recession of 2008 has shifted retirement plans of workers in general. This paper examines the changes in expected retirement age following the great recession of 2008 of a subset of the labor force—university faculty who are near retirees and participate in a defined contribution retirement plan. We find evidence consistent with the life-cycle model which predicts changes in expected retirement age when there are unexpected changes in retirement wealth. For the faculty who expected to delay planned retirement, the average delay is 4 years. Regression estimates indicate a longer time horizon moderates the delay in expected retirement. We also find evidence that expected wealth at retirement amplifies the delay in expected retirement age while current value of retirement wealth moderates the delay in planned retirement.     

Tackling age discrimination in employment in Singapore

In a country with an ageing work-force, a decline in the number of new entrants to the labour market and an acute labour shortage, it would be reasonable to assume that employers would encourage older workers to remain in employment for as long as possible. In the case of Singapore, however, private sector employers often retired employees at age 55 and hired younger workers in their place. In many cases older workers re-hired had to accept lower pay and lower grade jobs. In an attempt to tackle this sort of age discrimination in employment, the government passed the Retirement Age Act in 1993. Prior to its enactment, the government urged employers to raise the retirement age voluntarily, but the response was poor, especially in the non-unionized sector. This paper argues that employers resisted the extension of the retirement age because they perceived older workers in stereotypical terms. The main issues which gave rise to the Retirement Age legislation are discussed. So also is the possible impact of the legislation on some HRM practices. The paper also proposes some future directions for research on older workers in Singapore.     

Retirement Age Considerations for Central Europe

The paper analyzes the arguments for and possible consequences of an increase in the statutory retirement age in central Europe, including the Czech Republic, Hungary, Poland and Slovakia. The analysis reflects the current and projected demographic and economic developments, and discerns the long-term trends from the specific aspects of transition. As for the long-term trends, the paper offers a simple framework for calculation of the intergenerational transfers through pensions under different reform scenarios. The calculations confirm that, in the aging central European societies, down-sizing of the existing pay-as-you-go schemes, including an increase in the statutory retirement age, is necessary to sustain solvency and intergenerational fairness in the public provision for retirement. The paper argues, however, that proposals to increase the retirement age in central European countries need to enhance their assessment of the possible counter-productive effects, which may arise due to the low working ability, poor health status and high occupational and environmental risks faced by the population.     

Unemployment as a Factor in Early Retirement Decisions

Abstract . Is retiring early a way for older workers to cope with the stigma and discouragement of unemployment? A regression analysis using the National Longitudinal Survey sample of American men age 52–64 in 1973 shows that weeks of previous unemployment is significantly related to early retirement for both Black and White males. This relationship holds when controlling for social security and pension eligibility, assets, health limitations, family responsibilities, occupation, changes in the unemployment rate and urban residence. The results suggest that social policy concerning retirement prior to age 65 should take into account the important role of unemployment in pushing workers out of the labor force into early retirement.     

Defined benefit versus defined contribution pension plans: How are the interests of employees and the public best served?

Prior to the enactment of the Employee Retirement Income Security Act of 1974 the rate of formation of defined benefit retirement plans exceeded the rate of formation of defined contribution retirement plans. Following its enactment the trend has been reversed. This article reviews the development of public policy with respect to privately sponsored retirement benefits, takes note of the legislatively mandated regulatory distinctions between defined benefit and defined contribution plans, outlines the distinctions between the plans from the perspective of plan sponsors versus plan participants, and questions the appropriateness of the movement away from defined benefit plans in terms of public policy objectives regarding retirement income security.     

Total Reward and pensions in the UK in the public and private sectors

Recent controversy has surrounded the relative value of public and private sector remuneration. We propose a comprehensive measure of Total Reward (TR) which includes not just pay, but pensions and other ‘benefits in kind’, evaluate it as the present value of the sum of all these payments over the lifetime and compare it for the highly educated in the UK public and private sectors. Our results suggest that TR is broadly equalised over the lifecycle for highly educated men while highly educated women have a clear TR advantage in the public sector by the end of their career. We suggest that the current controversy over public–private sector pension differentials and the perennial issues of public/private sector pay gaps requires a lifetime perspective and that the concept of TR is appropriate.     

Career Exploration and Perceived Employability within an Emerging Economy Context

Following four decades of unprecedented economic, social, and cultural change, the United Arab Emirates (UAE) labor market is highly segmented: The native population is almost exclusively employed in the government sector, while the private sector is effectively outsourced to foreigners. This has created an unsustainable situation with growing numbers of young citizens reaching working age and with a public sector that has reached the saturation point. Policymakers repeatedly try to legislate to encourage private‐sector employers to hire citizens. These policies have had limited success. We explored the career attitudes of 2,267 United Arab Emirates citizens prior to their entry into the labor market. Using structural equation modeling, we found that the social contract and resulting expectations toward state employment have strong implications for willingness to work in the private sector. © 2014 Wiley Periodicals, Inc.     

The Chilean model

In 1981, Chile replaced its government-run pay-as-you-go pension system with a national system of individual Pension Savings Accounts managed by the private sector. The new system has contributed to the increase in the country's savings rate, the productivity of capital and the rate of economic growth. More important, Chilean workers now have property rights over their own pension contributions and enjoy much higher pensions than under the old system.     

In Search of Late Career: A Review of Contemporary Social Science Research Applicable to the Understanding of Late Career

Concerns expressed in the mid-1990s about the lack of research on late career are no longer valid. There is a growing body of research; however, it is scattered across a range of disciplines. In an effort to gather current thinking on late career, this review draws upon work addressing chronological aging, labor economics, sociology and social psychology, retirement research, human resource management, and career theory. Several cross-disciplinary observations were made: (1) Cognitive declines with age are not sufficient to impact work performance; (2) Current economic models assume declining productivity among older workers, but this reflects perceptions rather than reality; (3) Aging may be better understood as a series of discrete transformations rather than as a continuous process of decline; (4) A productive use of older workers recognizes individuals' specific strengths and the increasingly distinctive individual differences among older workers.     

The Central Government-Private Sector Wage Differential

Since Ehrenberg and Schwarz (1986) there has been a plethora of articles investigating the relationship between public and private sector wages. This article examines part of this post 1986 literature by reviewing articles that examine central government-private sector wage differentials. In sum, most articles find that there is a premium paid to central government workers, although the premium has declined in recent years. In developing countries, however, the differential is usually negative. Women and minorities tend to do better in the public sector relative to their private sector counterparts. The evidence on union premiums between sectors is mixed, although the premium tends to be higher in the private sector. However public sector union workers do not do much better than private sector union members. The magnitude of all of the wage differentials discussed are sensitive to the estimation technique and data source used. The most common explanation for the public sector wage premium is economic rent accruing to government workers, although the public sector wage determination literature suggests that the differential is due to returns to political and 'vote producing' activities not relevant in the private sector.     

The provision of public goods in a growing urban economy

The growth path of a mixed open urban economy is considered. In the private sector profit maximizing firms produce an all-purpose output with labor, capital and public infrastructure. Workers move between the urban area and the rest of the nation so as to increase their real income which is the sum of wages and income derived from the use of the urban infrastructure. The public sector determines infrastructure investments so as to maximize the current value of future per capita felicity. Infrastructure has public good characteristics and is used jointly by firms and workers. The urban growth path is derived and public sector policies are analyzed.