Lack of savings for retirement is a major issue, especially in soon-to-be ageing societies. Using a dataset from the American Life Panel (ALP) fielded by Goda et al. (2019), I investigate the role of financial literacy in alleviating the detrimental effects of present bias and exponential growth bias on retirement savings. I first examine the relationship of these biases on the retirement savings. Consistent with the previous studies, these findings suggest that individuals with these biases tend to save less for their retirement. However, I also find that financially literate individuals are less affected by present bias, and the effect from present bias is insignificant among the most literate ones. Moreover, better financial literacy is associated with a more accurate perception of exponential growth, which stimulates retirement savings.
{"title":"Improving Retirement Savings by Alleviating Behavioral Biases with Financial Literacy","authors":"Kanin Anantanasuwong","doi":"10.3905/jor.2023.1.140","DOIUrl":"https://doi.org/10.3905/jor.2023.1.140","url":null,"abstract":"Lack of savings for retirement is a major issue, especially in soon-to-be ageing societies. Using a dataset from the American Life Panel (ALP) fielded by Goda et al. (2019), I investigate the role of financial literacy in alleviating the detrimental effects of present bias and exponential growth bias on retirement savings. I first examine the relationship of these biases on the retirement savings. Consistent with the previous studies, these findings suggest that individuals with these biases tend to save less for their retirement. However, I also find that financially literate individuals are less affected by present bias, and the effect from present bias is insignificant among the most literate ones. Moreover, better financial literacy is associated with a more accurate perception of exponential growth, which stimulates retirement savings.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":" ","pages":""},"PeriodicalIF":0.0,"publicationDate":"2023-06-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47602732","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Most Americans retire around age 65 because of a decision made in Germany more than a century ago. Today, this is not economically practical and fights human nature. While some people do happily and successfully retire before 65, many can’t, or don’t want to. This article looks at the gains from working longer. We argue that working longer produces more pre- and post-retirement income, more employer profits, higher tax revenue, and a more optimal social configuration. Using simulations, we show the improvement in incomes from working to various ages and at various levels of engagement. We present a solution. Laws, regulations, and other institutional factors, mostly put in place with good intentions to protect workers, keep employers and employees from negotiating individualized wage and hour agreements in older age, even when both would benefit. We advocate establishing a purely voluntary “unprotected class” into which any employee can opt, making both employer and employee immune from age discrimination lawsuits and other obstacles to these individually negotiated deals. It’s all upside for both parties, since nobody would ever be required to join the unprotected class.
{"title":"Longer, Healthier, Happier: Why Working Longer Improves Almost Everything","authors":"Laurence B. Siegel, Stephen C. Sexauer","doi":"10.3905/jor.2023.1.138","DOIUrl":"https://doi.org/10.3905/jor.2023.1.138","url":null,"abstract":"Most Americans retire around age 65 because of a decision made in Germany more than a century ago. Today, this is not economically practical and fights human nature. While some people do happily and successfully retire before 65, many can’t, or don’t want to. This article looks at the gains from working longer. We argue that working longer produces more pre- and post-retirement income, more employer profits, higher tax revenue, and a more optimal social configuration. Using simulations, we show the improvement in incomes from working to various ages and at various levels of engagement. We present a solution. Laws, regulations, and other institutional factors, mostly put in place with good intentions to protect workers, keep employers and employees from negotiating individualized wage and hour agreements in older age, even when both would benefit. We advocate establishing a purely voluntary “unprotected class” into which any employee can opt, making both employer and employee immune from age discrimination lawsuits and other obstacles to these individually negotiated deals. It’s all upside for both parties, since nobody would ever be required to join the unprotected class.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"11 1","pages":"7 - 21"},"PeriodicalIF":0.0,"publicationDate":"2023-05-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42919290","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We conducted an online experiment with 2,822 young people in the UK to increase comprehension of the recommended levels of contributions to savings for retirement. In this randomised controlled trial, we showed respondents a scenario of a hypothetical 25-year-old with median income and default contributions, and presented information about their situation. Our results show that respondents are more likely to recommend that the 25-year-old make additional contributions when they are shown information showing how small increases in current retirement savings contributions can lead to large returns in the long term. However, when asked whether this information increased participants’ own likelihood of increasing their own retirement savings contributions, the most effective information involved asking participants to think about their retirement, including activities they wanted to do and people they wanted to spend time with. This suggests that attempts to increase engagement with retirement savings by showing financial information may not be as effective as more emotional appeals that encourage reflection on future lifestyle objectives.
{"title":"Contemplating the Future Increases Intentions to Save for Retirement in Young People","authors":"Ravi Dutta-Powell, Vera Newman, Pieter Cornel","doi":"10.3905/jor.2023.1.139","DOIUrl":"https://doi.org/10.3905/jor.2023.1.139","url":null,"abstract":"We conducted an online experiment with 2,822 young people in the UK to increase comprehension of the recommended levels of contributions to savings for retirement. In this randomised controlled trial, we showed respondents a scenario of a hypothetical 25-year-old with median income and default contributions, and presented information about their situation. Our results show that respondents are more likely to recommend that the 25-year-old make additional contributions when they are shown information showing how small increases in current retirement savings contributions can lead to large returns in the long term. However, when asked whether this information increased participants’ own likelihood of increasing their own retirement savings contributions, the most effective information involved asking participants to think about their retirement, including activities they wanted to do and people they wanted to spend time with. This suggests that attempts to increase engagement with retirement savings by showing financial information may not be as effective as more emotional appeals that encourage reflection on future lifestyle objectives.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":" ","pages":""},"PeriodicalIF":0.0,"publicationDate":"2023-05-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44834583","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Advocates for working longer as the sole response to population aging in America ignore the rising inequalities in health, wealth, and longevity; the often-detrimental health effects of working longer; the high risk of job loss and involuntary retirement at older ages; and the low wages and poor working conditions of many of the jobs available to older workers. Eliminating employment protections for older workers—such as minimum wage requirements and age discrimination prohibitions—would likely make working into old age more onerous and inequality worse.
{"title":"The False Promises of Working Longer","authors":"T. Ghilarducci, Beth C. Truesdale","doi":"10.3905/jor.2023.1.136","DOIUrl":"https://doi.org/10.3905/jor.2023.1.136","url":null,"abstract":"Advocates for working longer as the sole response to population aging in America ignore the rising inequalities in health, wealth, and longevity; the often-detrimental health effects of working longer; the high risk of job loss and involuntary retirement at older ages; and the low wages and poor working conditions of many of the jobs available to older workers. Eliminating employment protections for older workers—such as minimum wage requirements and age discrimination prohibitions—would likely make working into old age more onerous and inequality worse.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"11 1","pages":"22 - 30"},"PeriodicalIF":0.0,"publicationDate":"2023-05-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42353734","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
B. Pagnoncelli, Shirley Redroban, Arturo Cifuentes
This article demonstrates the dangers of attempting to create investment funds with different risk-return profiles by relying only on investment policies based on asset class-limits, but without incorporating portfolio-level risk constraints. The analysis is based on a natural experiment: the Chilean pension system. The study considers monthly returns data from the five investment funds that constitute the bedrock of the Chilean system and covers the period October 1, 2002 to June 1, 2020. The analysis, which relies on the use of different rank-order metrics, shows that the five funds delivered returns incompatible with their intended risk-return profile. In short, rank-ordering the five funds based on their cumulative returns resulted in a sequence at odds with the original intention; that is, contrary to the regulator’s aim, riskier funds frequently delivered lower returns. These findings are relevant for policy makers and the private sector, as many institutional investors (not only pension funds) based their investment policies on such limits alone.
{"title":"A Useful (But Painful) Risk-Management Lesson from the Chilean Pension System","authors":"B. Pagnoncelli, Shirley Redroban, Arturo Cifuentes","doi":"10.3905/jor.2023.1.135","DOIUrl":"https://doi.org/10.3905/jor.2023.1.135","url":null,"abstract":"This article demonstrates the dangers of attempting to create investment funds with different risk-return profiles by relying only on investment policies based on asset class-limits, but without incorporating portfolio-level risk constraints. The analysis is based on a natural experiment: the Chilean pension system. The study considers monthly returns data from the five investment funds that constitute the bedrock of the Chilean system and covers the period October 1, 2002 to June 1, 2020. The analysis, which relies on the use of different rank-order metrics, shows that the five funds delivered returns incompatible with their intended risk-return profile. In short, rank-ordering the five funds based on their cumulative returns resulted in a sequence at odds with the original intention; that is, contrary to the regulator’s aim, riskier funds frequently delivered lower returns. These findings are relevant for policy makers and the private sector, as many institutional investors (not only pension funds) based their investment policies on such limits alone.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"11 1","pages":"74 - 83"},"PeriodicalIF":0.0,"publicationDate":"2023-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46814282","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In recent history, corporate defined-benefit pension plans have remained underfunded; however, the economic instability generated by the COVID-19 pandemic prompted the enactment of two massive pieces of federal legislation, both of which included provisions that affected a significant rise in the discount rate utilized to calculate the pension liability. This study provides a detailed comparative analysis of pension funding metrics from 2020 to 2021 for half of the Milliman 100 Companies. Taking into consideration the continuing trend of corporations to shift their defined-benefit plans into defined-contribution plans, the study examines half-active and half-frozen defined-benefit plans. Results indicate that these large corporate defined-benefit pension plans have seen their decades-long underfunded status transmuted into either a significantly less underfunded status or, more often, an overfunded status. Although such results are encouraging in the short-term, economic instability continues to threaten the corporate pension system, and defined-contribution plans may place employee retirement funds at greater risk.
{"title":"The Shifting Funding Status of Corporate Defined-Benefit Pension Plans","authors":"Amanda M. Grossman, Steven D. Grossman","doi":"10.3905/jor.2023.1.134","DOIUrl":"https://doi.org/10.3905/jor.2023.1.134","url":null,"abstract":"In recent history, corporate defined-benefit pension plans have remained underfunded; however, the economic instability generated by the COVID-19 pandemic prompted the enactment of two massive pieces of federal legislation, both of which included provisions that affected a significant rise in the discount rate utilized to calculate the pension liability. This study provides a detailed comparative analysis of pension funding metrics from 2020 to 2021 for half of the Milliman 100 Companies. Taking into consideration the continuing trend of corporations to shift their defined-benefit plans into defined-contribution plans, the study examines half-active and half-frozen defined-benefit plans. Results indicate that these large corporate defined-benefit pension plans have seen their decades-long underfunded status transmuted into either a significantly less underfunded status or, more often, an overfunded status. Although such results are encouraging in the short-term, economic instability continues to threaten the corporate pension system, and defined-contribution plans may place employee retirement funds at greater risk.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2023-05-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42120099","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study employs a large sample of defined-benefit pension plans sponsored by publicly traded US corporations over the period 1998–2016, and it explores the impact of the level of pension funding on firm performance and dividend payout policy. Using panel regression analysis, the study finds evidence of significant positive association between the level of pension funding and both firm performance and dividend payout. The results have a number of important implications that should be cause for concern for policymakers and a wide range of stakeholders, including investors, pensioners, employees, and managers.
{"title":"Corporate Pension Funding Levels, Firm Performance, and Dividend Payout Ratios","authors":"Panayiotis Papakyriakou","doi":"10.3905/jor.2023.1.132","DOIUrl":"https://doi.org/10.3905/jor.2023.1.132","url":null,"abstract":"This study employs a large sample of defined-benefit pension plans sponsored by publicly traded US corporations over the period 1998–2016, and it explores the impact of the level of pension funding on firm performance and dividend payout policy. Using panel regression analysis, the study finds evidence of significant positive association between the level of pension funding and both firm performance and dividend payout. The results have a number of important implications that should be cause for concern for policymakers and a wide range of stakeholders, including investors, pensioners, employees, and managers.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"10 1","pages":"70 - 98"},"PeriodicalIF":0.0,"publicationDate":"2023-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44954449","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Clare, James Seaton, Peter N. Smith, Stephen H. Thomas
This article shows how to use the concept of Perfect Withdrawal Rates to quantify appropriate retirement withdrawal amounts year by year based on changing returns and (probably) in conversation with an adviser, using both historical strings of returns and Monte Carlo simulations. The authors show how the ‘strings’ approach is superior (i.e., more ‘realistic’) in practice to Monte Carlo. The preferred withdrawal strategy is ‘adaptive’ as information is updated, and their suggested measure of success is how well a withdrawal strategy performs against a targeted withdrawal financial amount, most likely chosen in discussion between a retiree and an advisor, and which is labeled as the minimum acceptable annual withdrawal (MAAW) rate. The authors suggest that this offers a very simple, practical, and intuitively appealing measure of success for the performance of portfolios in the decumulation context. They also discuss the use of delayed and deferred annuities in this context, as well as the associated target residual financial sum.
{"title":"Using the Minimum Acceptable Annual Withdrawal with the Perfect Withdrawal Rate Rule","authors":"A. Clare, James Seaton, Peter N. Smith, Stephen H. Thomas","doi":"10.3905/jor.2023.1.131","DOIUrl":"https://doi.org/10.3905/jor.2023.1.131","url":null,"abstract":"This article shows how to use the concept of Perfect Withdrawal Rates to quantify appropriate retirement withdrawal amounts year by year based on changing returns and (probably) in conversation with an adviser, using both historical strings of returns and Monte Carlo simulations. The authors show how the ‘strings’ approach is superior (i.e., more ‘realistic’) in practice to Monte Carlo. The preferred withdrawal strategy is ‘adaptive’ as information is updated, and their suggested measure of success is how well a withdrawal strategy performs against a targeted withdrawal financial amount, most likely chosen in discussion between a retiree and an advisor, and which is labeled as the minimum acceptable annual withdrawal (MAAW) rate. The authors suggest that this offers a very simple, practical, and intuitively appealing measure of success for the performance of portfolios in the decumulation context. They also discuss the use of delayed and deferred annuities in this context, as well as the associated target residual financial sum.","PeriodicalId":36429,"journal":{"name":"Journal of Retirement","volume":"11 1","pages":"34 - 55"},"PeriodicalIF":0.0,"publicationDate":"2023-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46526649","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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