Microsimulations in the Presence of Heterogeneity

This paper develops a method that improves researchers’ ability to account for behavioral responses to policy change in microsimulation models. Current microsimulation models are relatively simple, in part because of the technical difficulty of accounting for unobserved heterogeneity. This is all the more problematic because data constraints typically force researchers to limit their forecasting models to relatively few, mostly time-invariant explanatory covariates, so that much of the variation across individuals is unobserved. Furthermore, failure to account for unobservables often leads to biased estimates of structural parameters, which are critically important for measuring behavioral responses. This paper develops a theoretical approach to incorporate (univariate and multivariate) unobserved heterogeneity into microsimulation models; illustrates computer algorithms to efficiently implement heterogeneity in continuous and limited dependent models; and evaluates the importance of unobserved heterogeneity by conducting Monte Carlo simulations.

The Size and Composition of Wealth Holdings in the United States, Italy, and the Netherlands

This paper analyzes retirement saving and portfolio choice in the United States, Italy, and the Netherlands. While these countries enjoy roughly the same standard of living, they vary widely in their institutional organization of retirement income provisions. Building on extensions of the life cycle model, we derive hypotheses on the implications of institutional differences for wealth accumulation and portfolio composition. Examples of implications are that the ratio of net worth and gross wealth should be highest in Italy, that Dutch households should hold the lowest wealth levels at retirement and that the ownership of risky assets should be highest in the U.S. We investigate these and other hypotheses at both the macro and micro level and find that the data are generally consistent with the hypotheses.

Annuities and Retirement Well-Being

This chapter analyzes pre-retirement expectations and post-retirement well-being, in particular their association with the degree to which retirees’ financial resources are in the form of annuities. Using the 1992-2000 Health and Retirement Study (HRS), we find that most retirees were very satisfied with their overall situation, but the degree of satisfaction varied substantially with retirees’ characteristics. In particular, people in better health and with more financial resources tended to be more satisfied. Controlling for the present value of retirement resources and other factors, we find that retirees who could finance more of their consumption in retirement with pension annuities (vs. Social Security benefits and accumulated savings) were more satisfied. Retirees with lifelong annuities also tended to maintain their level of satisfaction during retirement, whereas those without tended to become less satisfied over time. We find the very same patterns with alternative depression-related measures of well-being in retirement. The findings have important implications for the well-being of future American retirees, who are increasingly reliant on defined contribution pension plans rather than traditional defined benefit pensions

What Makes Retirees Happier: A Gradual or 'Cold Turkey' Retirement?

This study explores the factors that affect an individual’s happiness while transitioning into retirement. Recent studies highlight gradual retirement as an attractive option to older workers as they approach full retirement. However, it is not clear whether phasing or cold turkey makes for a happier retirement. Using longitudinal data from the Health and Retirement Study, this study explores what shapes the change in happiness between the last wave of full employment and the first wave of full retirement. Results suggest that what really matters is not the type of transition (gradual retirement or cold turkey), but whether people perceive the transition as chosen or forced

Annuities and Retirement Satisfaction

This paper analyzes pre-retirement expectations and post-retirement satisfaction, in particular their association with the degree to which retirees' financial resources are in the form of annuities. Using the 1992-2000 Health and Retirement Study (HRS), the author finds that most retirees are very satisfied with their overall situation, but the degree of satisfaction varies substantially with retirees' characteristics. In particular, people in better health and with more financial resources tend to be more satisfied. Holding constant the present value of retirement resources and other factors, the author finds that retirees who can finance more of their consumption in retirement from pension annuities (vs. Social Security benefits and accumulated savings) are more satisfied. Retires with lifelong annuities also tend to maintain their level of satisfaction during retirement, whereas those without tend to become less satisfied over time. The author finds the very same patterns with alternative depression-related measures of well-being in retirement. The findings have important implications for the well-being of future American retirees, who are increasingly reliant on DC pension plans rather than the traditional DB pensions.