Is a Bird in Hand Worth More than a Bird in the Bush? Intergenerational Transfers and Savings Behavior

This paper provides new evidence on the decomposition of aggregate household wealth into life-cycle and transfer wealth. Using the 1998 Survey of Consumer Finances, it finds that transfer wealth accounts for approximately one-fifth to one-quarter of aggregate wealth, suggesting a larger role for life-cycle savings than some previous estimates. Despite the smaller aggregate size of transfer wealth, its concentration among a small number of households suggests that it can still have an important effect on the savings decisions of recipients. Estimates suggest that past receipts of transfer wealth reduce life-cycle savings by as much as dollar-for-dollar, while expected future transfers do not produce such a crowd-out effect.

Who Chooses Defined Contribution Plans?

This paper provides new evidence on what types of individuals are most likely to choose a defined contribution (DC) plan over a defined benefit (DB) plan. Making use of administrative data from the State Universities Retirement System (SURS) of Illinois, we study the decisions of nearly 50,000 new employees who make a one-time, irrevocable choice between a traditional DB plan, a portable DB plan, and an entirely self-managed DC plan. Because the SURS-covered earnings of these employees are not covered under the Social Security system, their choices provides insight into the DB vs. DC preferences of individuals with regard to a primary source of their retirement income. We find that a majority of participants fail to make an active decision and are thus defaulted into the traditional DB plan after 6 months. We also find that those individuals who are most likely to be financially sophisticated are most likely to choose the self-managed DC plan, despite the fact that, given plan parameters, the DC plan is inferior to the portable DB plan under reasonable assumptions about future financial market returns. We discuss both rational and behavioral reasons that might explain this finding.

Essays on the financial behavior of corporations and households

Thesis (Ph.D.)--Massachusetts Institute of Technology, Dept. of Economics, c1999.Includes bibliographical references.This thesis consists of three essays. The first essay investigates what role employee stock options and CEO compensation have in explaining the surge in corporate share repurchases in the mid 1990s. Corporations may opt to fund options with repurchased shares to avoid the immediate dilution of earnings per share. Whether the top executives receive stock-based compensation may also influence distribution decisions. To test the importance of these two hypotheses, I collect data on stock option programs for over 800 U. S. corporations at the end of 1994. Estimates suggest that a firm with outstanding options representing 10% of shares outstanding will repurchase .9 percentage points more stock in 1995, as opposed to a firm with no option program. Once total outstanding options are controlled for, CEO options and option holdings of the top five executives are if anything negatively correlated with stock buybacks. Firms whose CEOs hold options are significantly more likely to retain earnings. The paper also considers what role the taxation of distributions has in explaining the growth of corporate share repurchases. The second essay examines how participant choice in pension plans affects household portfolios. Some retirement plans allow the participant to choose how funds are invested. Being exposed to historical differences in asset returns may provide the participant with financial education which would otherwise not be received. This paper finds that households covered with pension plans in which the employee must decide upon investments are significantly more apt to hold stock outside of their retirement plan relative to households with plans offering no choice. The third essay investigates the effect of specific features of the U.S. capital gains tax on turn-of-the-year stock returns. Both the fraction of long-term losses that are deductible from Adjusted Gross Income and the required holding period for long-term losses have changed over the past three decades. These changes alter the incentives for year-end capital loss realization for individual investors. This paper presents evidence that is consistent with the hypothesis that detailed provisions of the capital gains tax affect the link between past capital losses and turn-of-the- year stock returns.by Scott J. Weisbenner.Ph.D

The Effect of Inheritance Receipt on Retirement

This paper uses the receipt of an inheritance to measure the effect of wealth shocks on retirement. Using the Health and Retirement Study (HRS), we first document that inheritance receipt is common among older workers %u2013 one in five households receives an inheritance over an eight-year period, with a median value of about $30,000. We find that inheritance receipt is associated with a significant increase in the probability of retirement. In particular, we find that receiving an inheritance increases the probability of retiring earlier than expected by 4.4 percentage points, or 12 percent relative to the baseline retirement rate, over an eight-year period. Importantly, this effect is stronger when the inheritance is unexpected and thus more likely to represent an exogenous shock to wealth.

Capital Gains Tax Rules, Tax Loss Trading and Turn-of-the-Year Returns

This paper investigates the effect of specific features of the U.S. capital gains tax on turn-of-the-year stock returns. It focuses on two tax changes. The first, enacted in 1969, reduced the fraction of long-term losses that were deductible from Adjusted Gross Income from 100 percent to 50 percent. The second, part of the Tax Reform Act of 1976, raised the required holding period for long-term gains and losses from six months to one year. This paper describes how each of these tax changes should have affected incentives for year-end capital loss realization and the potential magnitude of the turn of the year effect in stock returns. We present evidence that is consistent with the hypothesis that detailed provisions of the capital gains tax, such as the short-term holding period, affect the link between past capital losses and turn-of-the-year stock returns. These findings provide support for the role of tax-loss trading in contributing to turn-of-the-year return patterns.

Who Chooses Defined Contribution Plans

Abstract: This paper provides new evidence on what types of individuals are most likely to choose a defined contribution (DC) plan over a defined benefit (DB) plan. Making use of administrative data from the State Universities Retirement System (SURS) of Illinois, we study the decisions of nearly 50,000 new employees who make a one-time, irrevocable choice between a traditional DB plan, a portable DB plan, and an entirely self-managed DC plan. Because the SURS-covered earnings of these employees are not covered under the Social Security system, their choices provides insight into the DB vs. DC preferences of individuals with regard to a primary source of their retirement income. We find that a majority of participants fail to make an active decision and are thus defaulted into the traditional DB plan after 6 months. We also find that those individuals who are most likely to be financially sophisticated are most likely to choose the self-managed DC plan, despite the fact that, given plan parameters, the DC plan is inferior to the portable DB plan under reasonable assumptions about future financial market returns. We discuss both rational and behavioral reasons that might explain this finding