Financial Risk, Retirement, Saving and Investment

This paper considers the prospects for adding choice of portfolio composition to a life cycle model of retirement and saving, while preserving the ability of the model to continue to explain the course of saving and retirement. If eventually successful, such a modification might be used to improve understanding of retirement and saving behavior both under the current Social Security system, and under variations involving personal accounts. In particular we consider the implications of separating parameters that now reflect both risk aversion and time preference. We explore a number of barriers to developing a specification that is consistent with observed saving, retirement and investment choices. In our previous model with exponential consumption, individuals would hold portfolios exclusively in stocks, contrary to observation. Changing the exponent of consumption can reduce stock holdings below 100%, but at the cost of implausible retirement behavior. Introducing a separate parameter for risk aversion can restore plausible retirement behavior, but the pattern of stock holdings is too high, especially at younger ages, for plausible values of the risk aversion parameter. At the moment, no easy solution is at hand to this fundamental problem now being engaged by financial economists. This suggests that models of retirement and saving may, for the immediate future, be forced to constrain portfolio composition to correspond with levels observed in the data, postponing the inclusion of portfolio mix as a choice variable until further progress is made in modeling that behavior. This does not necessarily reduce the efficiency of life cycle models of retirement and saving. Rather it recognizes that portfolio choice may be influenced by behavior that is not fully consistent with that posed by a life cycle model. Individuals may, for example, be accepting recommendations from planners or firms that they would not otherwise follow if they fully understood how to balance risk and return in portfolio choice in the same way they balance risk and return in their saving and retirement decisions. If these behavioral considerations govern their portfolio choice, while retirement and saving are determined by life cycle considerations, a model that correctly constrains portfolio composition may in fact generate parameter estimates that accurately reflect the forces governing retirement and saving behavior.

How Changes in Social Security Affect Retirement Trends

For married men, we find the conventional view of retirement trends -- that the long term trend to early retirement has been reversed -- is partially contradicted by recent data. Specifically, descriptive data collected from both the Census and the Health and Retirement Study (HRS) suggest that for those in their fifties, over the periods 1992 to 1998 and 1998 to 2004, the trend to early retirement reasserted itself and labor force participation fell. In contrast, for those in their sixties, there was an increase in work. Similarly, for those 65 and over, the amount of work increased. Simulations with a structural retirement model suggest that the recent acceleration of the trend to early retirement for those in their fifties is not the result of the change in Social Security rules. According to our model, changes in Social Security rules are expected to reduce the number of those in their early sixties who are working. This suggests that forces other than changing Social Security rules account for the observed increase in work by those in their early sixties, and that the effects of these forces are stronger than those suggested by the trends in descriptive data. Lastly, the analysis suggests that changing Social Security rules do help to explain the increase in work by those age 65 and older. The effects of these rule changes encourage workers to remain in their long term jobs for a longer time, encourage some to return from retirement to full time work, and encourage more partial retirement. Nevertheless, the changes in retirement induced by Social Security changes have been modest. Due to Social Security changes, the number of 65 year old married men at work increases by about two percentage points at ages 65 and 66, with slightly smaller changes at 67 to 69. Given the low basic labor force participation at 65 and 66, with 20 to 25 percent at full time work, and another 17 percent at part time work, the percentage increases in work due to Social Security changes are three or four times higher.

How Does Modeling of Retirement Decisions at the Family Level Affect Estimates of the Impact of Social Security Policies on Retirement?

This paper applies structural models of retirement and saving of two earner couples to explore the effects on retirement of two actuarially neutral policies, which we know from previous work can have a substantial effect on retirement if heterogeneity in time preference rates is allowed. The main question being investigated here is whether using a model that explicitly incorporates the retirement interactions of two working spouses yields a different evaluation of policies than when a much simpler model that treats the retirement decisions of the second spouse as exogenous is used. The findings indicate that unless the question of interest is specifically related to joint retirement issues, the effects of the two actuarially neutral policies being investigated are roughly equal whichever model is estimated. A second question explored in the paper is whether two earner and one earner households can be combined in the analysis. The effects of policy changes are clearly different for one earner and two earner households, but there is some evidence that the principal difference is due to the differing budget sets of the two groups. Though the estimated preference parameters are significantly different, the critical parameters governing responses to policy changes are similar. As a result, it seems plausible that unless the question being investigated involves looking at these two groups separately, the overall impact of the policy changes may be adequately assessed by combining the two groups, separately identifying them by a dummy variable. A third question involves the magnitude of the effects for these two specific policy changes. Increasing the Social Security early entitlement age from 62 to 64 would reduce the level of retirement for husbands from two earner households by 4.4-4.6 percentage points at age 62, and by 5.1-5.7 percentage points for wives. In contrast, this policy change would induce husbands from one earner households to reduce the level of retirement by 10.2 percentage points at age 62. In a system of personal accounts, offering Social Security benefits as a lump sum instead of as an annuity would increase the level of retirement for husbands from two earner households by 7.1-8.1 percentage points at age 62 and by 8.9 percentage points for husbands in one earner households, and by 2.8-3.2 percentage points for wives in two earner households.

Projecting Behavioral Responses to the Next Generation of Retirement Policies

This paper examines retirement and related behavioral responses to policies that on average are actuarially neutral. Many conventional models predict that actuarially neutral policies will not affect retirement behavior. In contrast, our model allows those with high time preference rates to find that the promise of an actuarially fair increase in future rewards does not balance the loss from foregone current benefits. Using data from the Health and Retirement Study, we find that from age 62 through full retirement age, the earnings test reduces full-time work by married men by about four percentage points, or by about ten percent of married men at full-time work. Abolishing the requirements on many jobs that an individual work full-time or not at all, what we term a minimum hours constraint on employment, would induce more than twice as many people to enter partial retirement as would leave full-time work, so that total full-time equivalent (FTE) employment would increase, although by a modest amount. If all benefits from personal accounts could be taken as a lump sum, the fraction not retired at age 62 would fall by about 5 percentage points compared to a system where there is mandatory annuitization of benefits.

Projecting Behavioral Responses to the Next Generation of Retirement Policies

This paper examines retirement and related behavioral responses to policies that on average are actuarially neutral. Many conventional models predict that actuarially neutral policies will not affect retirement behavior. In contrast, our model allows those with high time preference rates to find that the promise of an actuarially fair increase in future rewards does not balance the loss from foregone current benefits. Using data from the Health and Retirement Study, we find that from age 62 through full retirement age, the earnings test reduces full-time work by married men by about four percentage points, or by about ten percent of married men at full-time work. Abolishing the requirements on many jobs that an individual work full-time or not at all, what we term a minimum hours constraint on employment, would induce more than twice as many people to enter partial retirement as would leave full-time work, so that total full-time equivalent (FTE) employment would increase, although by a modest amount. If all benefits from personal accounts could be taken as a lump sum, the fraction not retired at age 62 would fall by about 5 percentage points compared to a system where there is mandatory annuitization of benefits.

Partial Retirement and the Analysis of Retirement Behavior

This paper examines the phenomenon of partial retirement . Topics covered include: (1) the quantitative importance of partial retirement, (2) institutional constraints in addition to mandatory retirement which limit the opportunity to retire partially in the main job, (3) the effect of these constraints on the specification of the relevant structural equations in a life cycle retirement model, (4) the impact of standard explanatory variables on four outcomes -- complete retirement, partial retirement both in and outside the main job, and non-retirement, (5) the importance of partial retirement even for those who do not face mandatory retirement, are not covered by a pension and are healthy, (6) the sensitivity of results based on a dichotomous retirement variable to whether the partially retired are classified as retired or not retired. A number of studies have either treated partial retirement inappropriately or have adopted unrealistic assumptions about the opportunity set facing potential retirees. Our findings call their results into question.

A Model for Analyzing Youth Labor Market Policies

This paper formulates a model of the youth labor market. At the heart of the model is a minimum wage restriction which causes some youths to become unemployed and prevents others from training. Labor is assumed to be heterogeneous in performance on skilled iobs and is less productive as youths than as adults simply because of immaturity. The model is applied to analyze the effects of three representative policies: a youth subminimum wage, subsidies paid to firms that hire youths, and training subsidies that offset the costs of on-the-job training.

Personal Accounts and Family Retirement

This paper constructs a model of retirement and saving by two earner couples. The model includes three dimensions of behavior: the joint determination of retirement and saving; heterogeneity in time preference; and the interdependence of retirement decisions of husbands and wives. Estimation is based on panel data from the Health and Retirement Study covering the period 1992 to 2000. When husbands postpone their retirement so they can retire together with their typically younger wives, the spike in retirement at age 62 is smeared to later ages. Thus retirements differ between one and two earner families. We find both an asymmetry in which husbands prefer their wife to be retired before they retire, and a clear distaste of many husbands to retiring when their wives are in poor health, while the wives are willing to stay at home with sickly husbands. We simulate a system of personal Social Security accounts based on a 10.6 percent contribution rate over the lifetime. One version allows individuals to make lump sum withdrawals at retirement instead of annuitizing. This program would increase the retirement rates of husbands at age 62 by about 15 percentage points compared to the current system. Adding a lump sum option, by itself, would increase retirements at 62 by about 6 percentage points.

Social Security Reform and Labor Supply

A structural life-cycle retirement model with an improved specification over previous models is used to analyze and compare the long-run labor supply effects of the rules for Social Security in place in 1972,1977 and 1983, and for an actuarially fair system. The effects of separate provisions from the 1983 amendments are examined. These include the raising of the normal retirement age to 67, the increase in the delayed retirement credit to 8 percent, and the lowering of the reduction rate for earnings over the test amount to one dollar for every three dollars of earnings.

Labor Markets and Evaluations of Vocational Training Programs in the Public High Schools - Toward a Framework for Analysis

A simplified model is constructed to analyze the role played by vocational training programs In high schools. The model assumes that there are two kinds of educational programs in high schools, vocational and general. It also assumes that there are two types of jobs for high school graduates. One job requires training that either can be obtained from a vocational program in high school or as general training on the job. The other job has no special training requirements. The model is used in two ways. First, it is used to examine how the equilibrium outcome is affected by limitations on the number of places in the vocational training program and by the minimum wage. Second, it helps to determine what can be. learned from studies that take what has become a standard approach to evaluating high school vocational training programs -- attempting to estimate the productivity of this program by comparing the earnings of vocational and nonvocational program graduates. We conclude that whether or not limitations on enrollments In vocational programs and minimum wages influence the wage difference between vocational and nonvocational program graduates, findings based on the standard approach to cost-benefit analysis of high school vocational training programs may prove to be highly misleading guides for policy.