Test Scores and Self-Selection of Higher Education: College Attendance versus College Completion

As a companion paper to our work on students' application and colleges' admission decisions, we have estimated a joint discrete-continuous utility maximization model of college attendance and college completion. The paper is motivated by the possibility that test scores are poor predictors of who will succeed in college and thus may not promote optimal investment decisions and may indeed unjustly limit the educational opportunities of some youth. We find that: (1) College attendance decisions are strongly commensurate with college completion. Persons who are unlikely to attend college would be very likely to drop out of even their "first-choice" colleges, were they to attend. College human capital investment decisions are strongly mirrored by the likelihood that they will pay off. (2) Contrary to much of the recent criticism of the predictive validity of test scores, we find that their informational content is substantial. After controlling for high school class rank, for example, the probability of dropping out of the first-choice college varies greatly with SAT scores. (3) Individual self-selection, related to both measured and unmeasured attributes, is the dominant determinant of college attendance.

IRAs and Saving

Increasing current Individual Retirement Account (IRA) limits would lead to substantial increases in tax-deferred saving according to evidence in the paper, based on the 1983 Survey of Consumer Finances. For example, the recentTreasury Plan would increase IRA Contributions by about 30 percent. The primary focus of the paper, however, is the effect of limit increases on othersaving. How much of the IRA increase would be offset by reduction in non-tax-deferred saving? The weight of the evidence suggests that very little of the increase would be offset by reduction in other financial assets,possibly 10 to 20 percent. The estimates suggest that 45 to 55 percent of the IRA increase would be funded by reduction in expenditure for other goods and services, and about 35 percent by reduced taxes. The analysis rests on a savings decision structure recognizing the constraint that the IRA limit places on the allocation of current income; it is a constrained optimization model with the IRA limit the principle constraint. The evidence also suggests substantial variation in saving behavior among segments of the population. In addition, it appears that IRAs do not serve as a substitute fo rprivate pension plans. Thus the legislative goal of disproportionately increasing retirement saving among persons without pension plans is apparently not being realized. But the more general goal of increasing general saving is.

Aging and Housing Equity: Another Look

Aside from Social Security and, for some, employer-provided pensions, housing equity is the principle asset of a large fraction of older Americans. Many retired persons have essentially no financial assets to support retirement consumption. We use data from the Health and Retirement Study (HRS), the Asset and Health Dynamics Among the Oldest Old (AHEAD), and the Survey of Income and Program Participation (SIPP) to understand the extent to which families use housing equity to support general consumption in retirement. The initial analysis is based on self-assessed home values reported by survey respondents. Because the self-assessments exaggerate actual home equity, much of the subsequent analysis is based on the selling price of recently sold homes, together with the reported equity in recently purchased homes. Homeowners can change home equity by either discontinuing ownership or by purchasing another home of lesser or greater value. We find that in the absence of a precipitating shock--death of a spouse or entry of a family member into a nursing home- -families are unlikely to discontinue home ownership. And even when there is a precipitating shock, discontinuing ownership is the exception rather than the rule. On average, families that move and purchase a new home tend to increase home equity. We find, however, that income-poor and house-rich families are more likely to reduce equity when they move, while house-poor and income-rich households are more likely to increase housing equity. Overall, accounting for discontinuing ownership and moving to another home, housing equity increases with age until about age 75 and then declines slightly as households grow older. The overall decline among older households (surveyed in the AHEAD) is about 1.76 percent per year, and this decline is largely accounted for by a 7.84 percent decline among households who experience a precipitating shock. Families that remain intact reduce housing equity very little, about 0.11 percent per year for two-person households and 1.15 percent per year for one- person households. We conclude that, on average, home equity is not liquidated to support general non-housing consumption needs as households age.

The Wealth of Cohorts: Retirement Saving and the Changing Assets of Older Americans

Personal retirement accounts are becoming an increasingly important form of retirement saving. Using data from the Survey of Income and Program Participation, the paper considers the effect of this change on the assets of recent retirees and persons who are approaching retirement. Much of the analysis is based on comparison of younger and older cohorts with different lengths of exposure to personal retirement saving programs. The findings suggest that personal retirement saving has already added substantially to the personal financial assets of older families. Projections imply that the personal financial assets of the cohort that will attain age 76 in 28 years will be almost twice as large as the personal financial assets of the cohort that attained age 76 in 1991. The results indicate also that to date there has been little replacement of employer-provided pension saving with personal retirement saving. Together with evidence that personal financial saving is unrelated to changes in home equity, the results suggest that personal retirement saving will lead to an important increase in the overall wealth of the elderly.