The Changing Nature of Retirement

The trend to later retirements and increased work for pay during retirement have been explained by longer life expectancies, better health at older ages, and declining pension coverage. Retirement surveys show current workers continue to push back retirement plans and increasing numbers plan to work for pay in retirement. Yet the fraction or retirees working for pay is substantially lower, and the age of retirement notably younger, than suggested by surveys. This apparent conundrum can be explained by lack of demand for the services for older workers, and the fact that future retirees are likely to experience retirement very differently than the current older generation. Current workers should factor uncertainty about labor market outcomes into their retirement planning

Did Pension Plan Accounting Contribute to a Stock Market Bubble?

During the 1990s the assets of corporate defined-benefit pension plans ballooned with the booming stock market. Under current accounting guidelines, the result was a substantial but stealthy boost to sponsoring firms' profits. This study assesses the extent to which investors were fooled by pension accounting. It finds that stock prices reflected not the fair market value of sponsoring firms' net pension assets, as reported in the footnotes to their financial statements, but rather some capitalization rate on pension cost accruals in the income statement. Additional tests indicate that the market values a firm's pension earnings no differently from its core earnings, suggesting that pension earnings are often overvalued. This failure to differentiate induces large valuation errors for many firms, although this does not seem to translate into aggregate overvaluation, at least not before 2001, when falling stock prices and interest rates slashed pension net asset values but not pension earnings.macroeconomics, Pension Plan Accounting, Stock Market Bubble

is Social Security Part of the Social Safety Net?

Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the poor. This question is important because a Social Security program that reduces overall inequality by redistributing from high income individuals to middle income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle to upper income households. We have four major findings. First, as we expand the definition of income to use more comprehensive measures of well-being, we find that Social Security becomes less progressive. Indeed, when we use an "endowment" defined by potential labor earnings at the household level, rather than actual earnings at the individual level, we find that Social Security has virtually no effect on overall inequality. Second, we find that this result is driven largely by the lack of redistribution across the middle and upper part of the income distribution, so it masks some small positive net transfers to those at the bottom of the lifetime income distribution. Third, in cases where redistribution does occur, we find it is not efficiently targeted: many high income households receive positive net transfers, while many low income households pay net taxes. Finally, the redistributive effects of Social Security change over time, and these changes depend on the income concept used to classify someone as "poor".

Changing Retirement Behavior in the Wake of the Financial Crisis

The financial crisis and ensuing Great Recession left huge scars on household balance sheets, with households approaching retirement seeing the largest decline in wealth. This chapter examines how these households have adjusted to these developments. To date, most evidence on this question has come from surveys of household intentions. Using data on actual household behavior, we find that households nearing retirement are making up for financial losses by increasing saving and deferring retirement. They also appear to have reduced financial risk exposure by taking on less leverage and moving their portfolios in a more conservative direction

Retiring on the House? Cross-Cohort Differences in Housing Wealth

This chapter evaluates the role of housing wealth in Baby Boomers’ retirement prospects, to determine what role housing wealth will play in their retirement wellbeing. Our approach compares the wealth position of the leading edge of the Boomers with that of the generation immediately preceding it, in the years just prior to retirement. We rely on the Health and Retirement Survey (HRS) and compare persons age 51-61 in 1992, whom we refer to as the original HRS cohort, with the Early Baby Boomers interviewed at age 51-56 interviewed in 2004. We find that Boomers do have more valuable homes, but they have also borrowed more against them, so they have a similar fraction of assets allocated to home equity as their predecessors. Unlike prior studies, we find that people do view housing as a source of wealth that can help them finance their retirement needs. Indeed, a substantial fraction of older households do move, and in the process, they appear to liquidate some home equity which they convert to financial assets. Consequently, some of the home equity extraction observed in recent years may be related to the aging of the population, rather than a cyclical response to rapid house appreciation

The Progressivity of Social Security

How much does the current social security system really redistribute from rich to poor? We use the PSID to estimate lifetime wage profiles and actual earnings each year for a sample of 1778 individuals, and we use mortality probabilities to calculate expected payroll taxes and social security benefits. For a given set of facts' about the net flows received by each individual, measured progressivity depends on many assumptions. This paper attempts to capture and to quantify all of the individual characteristics that are relevant to determine the progressivity of a life-cycle program like social security. We proceed in seven steps. First, we classify individuals by annual income and use Gini coefficients to find that social security is highly progressive. Second, we reclassify individuals on the basis of lifetime income and find that social security is less progressive. Third, we remove the cap on measured earnings and find that social security is even less progressive. Fourth, we switch from actual to potential lifetime earnings (the present value of the wage rate times 4000 hours each year). This measure captures the value of leisure and home production, so those out of the labor force are less poor, and net payments to them are less progressive. Fifth, we assign to each married individual half of the couple's income. The low-wage spouse is then not so poor less progressive. Sixth, we incorporate mortality probabilities that differ by potential lifetime income. Since the rich live longer and collect benefits longer, social security is no longer progressive. Finally, we increase the discount rate from 2% to 4%, which puts relatively more weight on the earlier-but-regressive payroll tax and less weight on the later-but-progressive benefit schedule. The whole social security system is then regressive.