The Effect of Pension Plan Type on Retirement Age: Distinguishing Plan Incentives from Career Length Preferences

The widespread movement from defined benefit (DB) plans to defined contribution (DC) plans over the past few decades has transferred much of the retirement savings risk from the institution to the individual, particularly in the private sector. This study uses the Retirement Confidence Survey of College and University Faculty, 2005 to ex- amine the use of DC plans relative to DB plans among faculty and the impact of plan incentives on expected retirement age. This study finds that the difference in retirement wealth accrual patterns between the two types of plans generates an eight-month difference in expected retirement ages for individuals in a DC plan relative to those in a DB plan. Preferences over career length double the effect of incentives: individuals who elect to enroll in a DB plan expect to retire sixteen months earlier than those who chose to enroll in a DC plan. In addition, this paper finds that individuals choose retirement plans to diversity their sources of retirement income, which has implications for proposed policies that incorporate individual accounts into Social Security.

How Costly is Welfare Stigma? Separating Psychological Costs from Time Costs

This paper empirically decomposes the costs of welfare participation using a model of labor supply and participation in multiple welfare programs. Prior estimates of the cost of welfare participation have not differentiated psychological costs, or stigma, from the effort required to become eligible and maintain eligibility (time costs). The relative size of these two costs has implications for policy. We find that psychological costs are at least as large as the time costs associated with participation in food assistance programs. In addition, we find that the incidence of psychological costs is inconsistent with these costs acting as an effective screening mechanism.Program Participation, Welfare Stigma, Labor Supply, Structural Estimation

Who is a passive saver under opt-in and auto-enrollment?

Defaults have been shown to have a powerful effect on retirement saving behavior yet there is limited research on who is most affected by defaults and whether this varies based on features of the choice environment. Using administrative data on employer-sponsored retirement accounts linked to survey data, we estimate the relationship between retirement saving choices and individual characteristics – long-term discounting, present bias, financial literacy, and exponential-growth bias – under two distinct choice environments: an opt-in regime and an auto-enrollment regime. Consistent with our conceptual model, we find that the determinants of following the default and contribution behavior are regime-specific. Under the opt-in regime, financial literacy plays an important role in predicting total contributions, active saving choices, and maxing out contributions in the tax-preferred account. In contrast, under the auto-enrollment regime, present bias is the most significant behavioral predictor of contribution behavior. A causal interpretation of the estimates suggests that auto-enrollment increases saving primarily among those with low financial literacy

The Role of Time Preferences and Exponential-Growth Bias in Retirement Savings

There is considerable variation in retirement savings within income, age, and educational categories. Using a broad sample of the U.S. population, we elicit time preference parameters from a quasi-hyperbolic discounting model, and perceptions of exponential growth. We find that present bias (PB), the tendency to value utility in the present over the future in a dynamically inconsistent way, and exponential-growth bias (EGB), the tendency to neglect compounding, are prevalent and distinct latent variables. PB, EGB, and the long-run discount factor are all highly significant in predicting retirement savings, even while controlling for measures of IQ and general financial literacy as well as a rich set of demographic controls. We find that lack of self-awareness of these biases has an additional independent negative impact on retirement savings. We assess potential threats to a causal interpretation of our results with a hypothetical choice experiment and several robustness exercises. Finally, we explore potential mechanisms for our findings. If the relationship we estimate is causal, our estimates suggest that eliminating PB and EGB would be associated with an increase in retirement savings of 12%, or as high as 70% using estimates that account for classical measurement error

Are Retirement Planning Tools Substitutes or Complements to Financial Capability?

We conduct a randomized controlled trial to understand how a web-based retirement saving calculator affects workers’ retirement-savings decisions. In both conditions, the calculator projects workers’ retirement income goals. In the treatment condition, it also projects retirement income based on defined-contribution savings, prominently displays the gap between projected goal and actual retirement income, and allows users to interactively explore how alternative, future contribution choices would affect the gap. The treatment increased average annual retirement contributions by $174 (2.3 percent). However, effects were larger for those with greater financial knowledge, suggesting this type of tool complements, rather than substitutes for, underlying financial capability

General Human Capital and Employee Mobility: How Tuition Reimbursement Increases Retention through Sorting and Participation

Using administrative data from a large establishment that implemented a tuition reimbursement program, the author examines the relative importance of two channels by which these employer-sponsored general training programs increase employee retention. The first channel operates through the type of workers that sort into firms with tuition reimbursement programs versus firms without a program. The second channel is the direct effect on retention due to employees participating in the program. In this setting, the author finds that 80% of the program\u27s overall effect on retention comes through sorting. The author also exploits information on degree major to evaluate potential mechanisms outside standard human capital theory for how participation in general training increases retention

Incorporating Employee Heterogeneity Into Default Rules for Retirement Plan Selection

This paper examines the effect of incorporating individual-level heterogeneity into default rules for retirement plan selection. We use data from a large employer that transitioned from a defined benefit (DB) plan to a defined contribution (DC) plan, offering existing employees a choice of plans. Employees who did not make a choice were defaulted to switch to the DC plan if under age 45 or remain in the DB plan if age 45 or older. Using a regression discontinuity framework, we estimate that the default increased the probability of enrolling in one plan over the other by 60 percentage points. We develop a framework to solve for the optimal age-based default rule analytically and use our results to empirically evaluate the optimal age-based default rule for the firm in our setting. We show that for a broad range of levels of risk aversion, conditioning the default for the choice between pension plans on age can substantially improve outcomes relative to a uniform default policy. Our results suggest that considerable welfare gains are possible by varying defaults by observable characteristics.