Conferences.

• Position: Report on The Private Pension Structure in the United States - Report

The private pension structure in the United States once was dominated by defined benefit (DB) plans, but currently is divided between DB and defined contribution (DC) plans. Wealth accumulation in DC plans depends on financial market returns, while accumulation in a DB pension is very sensitive to an individual's labor market experience. Poterba and his coauthors examine how the expansion of DC plans affects the average level of private retirement wealth and the variation in retirement wealth across households. They consider the stochastic contributions of asset returns, earnings histories, and retirement plan characteristics using data from the Health and Retirement Study (HRS). The analysis simulates retirement wealth accumulation under DC and DB plans. For DC plans, the analysis matches individuals to randomly selected DC plans and draws asset returns from historical distributions. It allows for various asset allocation strategies and expense ratios. For DB plans, the analysis draws earnings histories from the HRS, and randomly assigns a pension plan to each job the individual holds. These procedures generate a distribution of potential DC and potential DB accruals that reflect the structure of DB and DC plans, the stochastic structure of earnings over the lifecycle, and the random contribution of asset returns to retirement wealth. The results provide a measure of the dispersion in prospective retirement wealth under both DB and DC regimes.

Brown and his coauthors examine how the menu of investment options made available to workers in defined contribution plans influences portfolio choice. Using unique panel data on 401 (k) plans in the United States, they present three principal findings: 1) the share of investment options in a particular asset class (that is, company stock, equities, fixed income, and balanced funds) has a significant effect on aggregate participant portfolio allocations across these asset classes. Second, the vast majority of the new funds added to 401 (k) plans are high-cost actively managed equity funds, as opposed to lower-cost equity index funds. Because the average share of assets invested in low-cost equity index funds declines with an increase in the number of options, average portfolio expenses increase, and average portfolio performance is thus depressed. Third, investment restrictions--such as requiring a match in company stock, or placing a ceiling on the fraction of assets that can be held in a particular asset--can change the overall risk/return profile of the portfolio much more than would be expected in a standard portfolio model. For example, restricting investment in company stock is associated with an overall reduction in all equities, not just company stock, perhaps suggesting that participants view such restrictions as a form of implicit investment advice.

Cremer and his coauthors study the determination through majority voting of a pension scheme in which society consists of far-sighted and myopic individuals. All individuals have the same basic preferences but those who are myopic tend to adopt a short-term view (instant gratification) when dealing with retirement saving. Consequently, they will find themselves with low consumption after retirement and regret their insufficient savings decisions. As a result, when voting they tend to commit themselves into forced saving. The authors consider a pension scheme that is characterized by two parameters: the payroll tax rate (that determines the size or generosity of the system) and the "Bismarckian factor" that determines how much it redistributes. Individuals vote sequentially. The authors examine how the introduction of myopic agents changes the size and the level of redistribution of the pension system. Their main result is that a flat pension system is always chosen when all individuals are of one kind (either all rational or all myopic), while a system that redistributes less may be chosen if society is composed of both myopic and rational agents. With logarithmic preferences, the size of the system increases with the proportion of those who are myopic. However, this property does not necessarily hold with more general preferences.

Employer matching of employee 401(k) contributions is a key component in pension-plan design in the United States. Using detailed administrative contribution, earnings, and pension-plan data from the Health and Retirement Study, Engelhardt and Kumar formulate a lifecycle-consistent discrete choice regression model of 401(k) participation and estimate the determinants of participation accounting for non-linearities in the household budget set induced by matching. The estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) participation by 3.75 to 6 percentage points, and the estimated elasticity of participation with respect to matching ranges from 0.02-0.07. The estimated elasticity of intertemporal substitution is 0.74-0.83. Overall, the analysis reveals that matching is a rather poor policy instrument with which to increase retirement saving.

Bingley and Lanot study the economic determinants of the joint retirement process of couples. They propose a tractable, dynamic discrete choice model for the retirement decision of couples that allows for non-trivial saving behavior. They estimate the model on a sample of Danish couples of retirement age observed in the administrative database of the Danish population. The recent history of changes in a publicly financed early-retirement program provides them with the required variation in the data to insure the identification of the parameters of interest: the elasticity of retirement age with respect to incomes flows. In particular, their estimates imply a significant asymmetry in the sensitivity of retirement behavior of men and women with respect to variation in their own, or their spouse's income flows.

Butler and Teppa use a unique dataset on individual retirement decisions in Swiss pension funds to analyze the choice between an annuity and a lump sum at retirement. Their analysis suggests the existence of an "acquiescence bias" meaning that a majority of retirees chooses the standard option offered by the pensions fund or suggested by common practice. Small levels of accumulated pension capital are much more likely to be withdrawn as a lump sum, suggesting a potential moral hazard behavior or a magnitude effect. The authors hardly find evidence for adverse selection effects in the data. Single men, for example, whose money's worth of an annuity is considerably below the corresponding value of married men, are not more likely to choose the capital option.

Amromin, Huang, and Sialm show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax-deferred accounts (TDA). Using data from the three latest Surveys of Consumer Finances, they show that about 38 percent of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean tax benefit of 11 to 17 cents per dollar, depending on the choice of investment assets in the TDA. In the aggregate, these misallocated savings are costing U.S. households as much as 1.5 billion dollars per year. Finally, the authors show empirically that this inefficient behavior is unlikely to be driven by liquidity or other constraints, and that self-reported debt aversion and risk aversion variables explain to some extent the preference for paying off debt obligations early and hence the propensity to forgo possible tax arbitrage.

Coile and Levine examine how unemployment affects retirement and whether the Unemployment Insurance (UI) system and Social Security (SS) system affect how older workers respond to labor market shocks. To do so, they use data from the longitudinal Health and Retirement Survey (HRS), pooled cross-sections from the March Current Population Survey (CPS), and March CPS files matched between one year and the next. They find that downturns in the labor market increase retirement transitions. The magnitude of this effect is comparable to that associated with moderate changes in financial incentives to retire and to the threat of a health shock to which older workers are exposed. Interestingly, retirements only increase in response to an economic downturn once workers become SS-eligible, suggesting that retirement benefits may help alleviate the income loss associated with a weak labor market. The authors also estimate the impact of UI generosity on retirement and find little consistent evidence of an effect. This suggests that in some ways SS may serve as a more effective form of unemployment insurance for older workers than UI.

Karlstrom, Palme, and Svensson study the effect of a reform of the Swedish disability insurance (DI) program whereby the special eligibility rules for workers aged 60-64 were abolished. They first use a differences-in-differences approach to study changes in the disability take-up...