Alpha, or outperformance of a benchmark, can be generated in many ways within a portfolio. It can be created by picking the top hedge fund managers, or by capturing the illiquidity premium via alternative assets. Venture capital is a major source of alpha for long-term investors. Alpha can also be achieved by active asset allocation using both tactical and strategic beta tilts. For the top endowments, these and other innovative portfolio decisions have created great, long-term alpha versus a global balanced benchmark with 70% stocks/30% bonds. Since asset allocation plays a large role in determining portfolio returns, it is interesting to compare how beta (or index fund) portfolios have compared historically versus sophisticated institutional portfolios. We compare 3 decades of performance: the 10 year period before the Internet Bubble’s peak (FY1988-1998), the 10 years including fiscal year 2000’s spectacular gains (FY1998-2008), and a more recent period (FY2008-2018). The Endowment Model will no doubt continue to help colleges to fulfill their missions, and enable public pensions to meet their retirement obligations. However, for some investors, over-diversification can dilute manager alpha and lead to performance that is similar to beta portfolios. Given its complexity, the Endowment Model is not a one-size-fits-all strategy, and is best suited for larger investment teams with considerable resources. For those institutions constrained by limited resources, using a balance of alternative assets and beta could achieve the best of both worlds. For instance, mid-sized investors might be better served by streamlining their portfolios with a liquid beta core, coupled with satellite alternative assets. And smaller investors could only use index fund portfolios and still achieve alpha. An index fund portfolio may be no substitute for a world-class endowment fund, but it could be an ideal investment solution for some long-term investors.
{"title":"Alpha, Beta and the Endowment Model","authors":"M. Karris","doi":"10.2139/ssrn.3467351","DOIUrl":"https://doi.org/10.2139/ssrn.3467351","url":null,"abstract":"Alpha, or outperformance of a benchmark, can be generated in many ways within a portfolio. It can be created by picking the top hedge fund managers, or by capturing the illiquidity premium via alternative assets. Venture capital is a major source of alpha for long-term investors. Alpha can also be achieved by active asset allocation using both tactical and strategic beta tilts. \u0000 \u0000For the top endowments, these and other innovative portfolio decisions have created great, long-term alpha versus a global balanced benchmark with 70% stocks/30% bonds. \u0000 \u0000Since asset allocation plays a large role in determining portfolio returns, it is interesting to compare how beta (or index fund) portfolios have compared historically versus sophisticated institutional portfolios. We compare 3 decades of performance: the 10 year period before the Internet Bubble’s peak (FY1988-1998), the 10 years including fiscal year 2000’s spectacular gains (FY1998-2008), and a more recent period (FY2008-2018). \u0000 \u0000The Endowment Model will no doubt continue to help colleges to fulfill their missions, and enable public pensions to meet their retirement obligations. However, for some investors, over-diversification can dilute manager alpha and lead to performance that is similar to beta portfolios. Given its complexity, the Endowment Model is not a one-size-fits-all strategy, and is best suited for larger investment teams with considerable resources. \u0000 \u0000For those institutions constrained by limited resources, using a balance of alternative assets and beta could achieve the best of both worlds. For instance, mid-sized investors might be better served by streamlining their portfolios with a liquid beta core, coupled with satellite alternative assets. And smaller investors could only use index fund portfolios and still achieve alpha. \u0000 \u0000An index fund portfolio may be no substitute for a world-class endowment fund, but it could be an ideal investment solution for some long-term investors.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"11 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80201776","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}
How much might some of the recent legislative proposals for expanding access to employer sponsored retirement plans improve retirement income adequacy for current workers? This paper examines this by simulating the impact of some of the more important aspects of current legislative proposals, including: • Requiring retirement plans for all but the smallest employers. • Covering part-time employees. • Introducing auto portability. • Providing the option of guaranteed income for life from 401(k) and 403(b) plans. • Allowing open multiple employer plans (MEPs). • Modifying required minimum distributions. Previous research has shown that eligibility for participation in a defined contribution (DC) plan can have a significant impact on reducing retirement savings shortfalls. The analysis considers all workers (both eligible and ineligible) and gives the average individual retirement income deficits by the number of future years of eligibility for coverage in a defined contribution retirement plan. The deficit value for those in the youngest cohort (ages 35–39) assumed to have no future years of eligibility (as if they were never simulated to be employed in the future by an organization that provides access to those plans) is $78,046 per individual. That shortfall decreases substantially to $44,546 for those with one to nine years of future eligibility and even further to $27,830 for those with 10–19 years of future eligibility. Households in this age cohort fortunate enough to have at least 20 years of future eligibility in those programs have their average shortfall at retirement reduced to only $14,638. In other words, workers ages 35–39 with no future eligibility in a DC plan have a deficit more than five times higher than those with at least 20 years of future eligibility. The analysis shows the reduction in retirement deficits by age for three different coverage enhancements. Enhancement A assumes all employers are required to offer DC plans, save those with fewer than 10 employees. This analysis assumes that all new plans would be auto-IRAs with a 6 percent default contribution rate that escalates by 1 percent per year until it reaches 10 percent of pay. Based on experience observed from OregonSaves, a 30 percent opt-out is assumed for all new eligibles. • As expected, the youngest age cohort (35–39) would have the largest benefit — a 15.2 percent decrease in retirement deficit — since they would be exposed to the enhanced coverage for a long period of time. • Those in the 40–44 age cohort are simulated to have a 12.4 percent reduction in deficit. • Those 45–49 are simulated to have a 10.3 percent reduction in deficit. • Cohorts over 50 are also simulated to have reductions in retirement deficits; however, the reductions are less than 10 percent. Enhancement B is similar to Enhancement A, but with a cap on auto-escalation of 15 percent of pay. • In this case, the youngest cohort (those ages 35–39) is simulated to have a 17.0
{"title":"Under the Dome – A Closer Look at Legislative Proposals Impacting Retirement","authors":"Jack L. VanDerhei","doi":"10.2139/SSRN.3420962","DOIUrl":"https://doi.org/10.2139/SSRN.3420962","url":null,"abstract":"How much might some of the recent legislative proposals for expanding access to employer sponsored retirement plans improve retirement income adequacy for current workers? This paper examines this by simulating the impact of some of the more important aspects of current legislative proposals, including: \u0000• Requiring retirement plans for all but the smallest employers. \u0000• Covering part-time employees. \u0000• Introducing auto portability. \u0000• Providing the option of guaranteed income for life from 401(k) and 403(b) plans. \u0000• Allowing open multiple employer plans (MEPs). \u0000• Modifying required minimum distributions. \u0000 \u0000Previous research has shown that eligibility for participation in a defined contribution (DC) plan can have a significant impact on reducing retirement savings shortfalls. The analysis considers all workers (both eligible and ineligible) and gives the average individual retirement income deficits by the number of future years of eligibility for coverage in a defined contribution retirement plan. The deficit value for those in the youngest cohort (ages 35–39) assumed to have no future years of eligibility (as if they were never simulated to be employed in the future by an organization that provides access to those plans) is $78,046 per individual. That shortfall decreases substantially to $44,546 for those with one to nine years of future eligibility and even further to $27,830 for those with 10–19 years of future eligibility. Households in this age cohort fortunate enough to have at least 20 years of future eligibility in those programs have their average shortfall at retirement reduced to only $14,638. In other words, workers ages 35–39 with no future eligibility in a DC plan have a deficit more than five times higher than those with at least 20 years of future eligibility. \u0000 \u0000The analysis shows the reduction in retirement deficits by age for three different coverage enhancements. \u0000 \u0000Enhancement A assumes all employers are required to offer DC plans, save those with fewer than 10 employees. This analysis assumes that all new plans would be auto-IRAs with a 6 percent default contribution rate that escalates by 1 percent per year until it reaches 10 percent of pay. Based on experience observed from OregonSaves, a 30 percent opt-out is assumed for all new eligibles. \u0000• As expected, the youngest age cohort (35–39) would have the largest benefit — a 15.2 percent decrease in retirement deficit — since they would be exposed to the enhanced coverage for a long period of time. \u0000• Those in the 40–44 age cohort are simulated to have a 12.4 percent reduction in deficit. \u0000• Those 45–49 are simulated to have a 10.3 percent reduction in deficit. \u0000• Cohorts over 50 are also simulated to have reductions in retirement deficits; however, the reductions are less than 10 percent. \u0000Enhancement B is similar to Enhancement A, but with a cap on auto-escalation of 15 percent of pay. \u0000• In this case, the youngest cohort (those ages 35–39) is simulated to have a 17.0","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"51 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-07-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85415651","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 analyze preferences and beliefs of members in a DC pension scheme from Sweden, one of the first countries that launched choice-based funded individual pension accounts. Based on a survey among 2,646 members, we study the effect of choice overload, risk tolerance, and subjective knowledge on choice behavior and financial well-being. We find that more risk-averse and less knowledgeable members tend to invest in the default fund – a fund that is, however, one of the riskiest options on the choice menu. On top of this mismatch between members’ risk preferences and their investment choices, we find those members are more likely to feel negative about their future financial well-being. We also find a positive correlation between financial well-being and choice appreciation, whereas the act of choosing a fund has only minor impact.
{"title":"Appreciated but Complicated Pension Choices? Insights from the Swedish Premium Pension System","authors":"Monika Böhnke, E. Brüggen, Thomas Post","doi":"10.2139/ssrn.3208077","DOIUrl":"https://doi.org/10.2139/ssrn.3208077","url":null,"abstract":"We analyze preferences and beliefs of members in a DC pension scheme from Sweden, one of the first countries that launched choice-based funded individual pension accounts. Based on a survey among 2,646 members, we study the effect of choice overload, risk tolerance, and subjective knowledge on choice behavior and financial well-being. We find that more risk-averse and less knowledgeable members tend to invest in the default fund – a fund that is, however, one of the riskiest options on the choice menu. On top of this mismatch between members’ risk preferences and their investment choices, we find those members are more likely to feel negative about their future financial well-being. We also find a positive correlation between financial well-being and choice appreciation, whereas the act of choosing a fund has only minor impact.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"89 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-06-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80544316","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 years there have been a number of policy proposals that call into question the value of existing defined contribution plans. However, the suggested alternatives do not provide a detailed analysis of the impact of terminating defined contribution plans on retirement income adequacy for American households. Previous research by the Employee Benefit Research Institute (EBRI) has provided some tangential evidence with respect to the potential impact. In 2014 EBRI provided simulation analysis of the serious error introduced by models that ignored future contribution activity from defined contribution plans. In 2017 EBRI produced simulation results showing that, if there were no employer-sponsored retirement plans (defined benefit as well as defined contribution) and individuals were assumed to behave in the manner observed for those with no access to such plans, the aggregate retirement deficits would jump from $4.13 trillion to $7.05 trillion (an increase of 71 percent). In contrast, this Issue Brief provides a comprehensive exploration of the impact on retirement income adequacy for various cohorts of American households if defined contribution retirement plans were completely eliminated. As expected, the results are significantly greater for younger cohorts, since they would lose potential access to defined contribution plans for a longer period. The youngest age cohort (those currently ages 35–39) would suffer the most, with average retirement deficits increasing 23 percent from $49,182 to $60,253. Older cohorts would experience less of an impact: those ages 40–44 would have an increase of 18 percent, while those ages 45–49 would have a 13 percent increase. The average deficits for households above age 50 would increase but by less than 10 percent. The results are also analyzed by preretirement income quartile and breakouts into the following categories: single male, single female, widow, and widower. We find that elimination of defined contribution plans would have the most negative impact on single females. The Issue Brief then analyzes the opposite end of the defined contribution access spectrum by exploring the impact of a universal defined contribution scenario where every employer (with the exception of those that already sponsor a defined benefit plan) is assumed to sponsor a defined contribution plan. Again in this scenario, the youngest age cohort and single females would experience the largest change in retirement income adequacy. The youngest age cohort would benefit the most from this scenario, with average retirement deficits decreasing 24 percent from $49,182 to $37,506. Older cohorts would experience less of an impact: those ages 40–44 would have a decrease of 19 percent, while those ages 45–49 would have a 16 percent decrease and those ages 50–54 would have a 12 percent decrease. The average deficit for households above age 55 would decrease but by less than 10 percent.
{"title":"Alternative Realities: The Impact of Extreme Changes in Defined Contribution Plans on Retirement Income Adequacy in America","authors":"Jack L. VanDerhei","doi":"10.2139/ssrn.3403753","DOIUrl":"https://doi.org/10.2139/ssrn.3403753","url":null,"abstract":"In recent years there have been a number of policy proposals that call into question the value of existing defined contribution plans. However, the suggested alternatives do not provide a detailed analysis of the impact of terminating defined contribution plans on retirement income adequacy for American households. Previous research by the Employee Benefit Research Institute (EBRI) has provided some tangential evidence with respect to the potential impact. In 2014 EBRI provided simulation analysis of the serious error introduced by models that ignored future contribution activity from defined contribution plans. In 2017 EBRI produced simulation results showing that, if there were no employer-sponsored retirement plans (defined benefit as well as defined contribution) and individuals were assumed to behave in the manner observed for those with no access to such plans, the aggregate retirement deficits would jump from $4.13 trillion to $7.05 trillion (an increase of 71 percent). In contrast, this Issue Brief provides a comprehensive exploration of the impact on retirement income adequacy for various cohorts of American households if defined contribution retirement plans were completely eliminated. As expected, the results are significantly greater for younger cohorts, since they would lose potential access to defined contribution plans for a longer period. The youngest age cohort (those currently ages 35–39) would suffer the most, with average retirement deficits increasing 23 percent from $49,182 to $60,253. Older cohorts would experience less of an impact: those ages 40–44 would have an increase of 18 percent, while those ages 45–49 would have a 13 percent increase. The average deficits for households above age 50 would increase but by less than 10 percent. The results are also analyzed by preretirement income quartile and breakouts into the following categories: single male, single female, widow, and widower. We find that elimination of defined contribution plans would have the most negative impact on single females. The Issue Brief then analyzes the opposite end of the defined contribution access spectrum by exploring the impact of a universal defined contribution scenario where every employer (with the exception of those that already sponsor a defined benefit plan) is assumed to sponsor a defined contribution plan. Again in this scenario, the youngest age cohort and single females would experience the largest change in retirement income adequacy. The youngest age cohort would benefit the most from this scenario, with average retirement deficits decreasing 24 percent from $49,182 to $37,506. Older cohorts would experience less of an impact: those ages 40–44 would have a decrease of 19 percent, while those ages 45–49 would have a 16 percent decrease and those ages 50–54 would have a 12 percent decrease. The average deficit for households above age 55 would decrease but by less than 10 percent.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"14 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-06-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77732623","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}
Pension systems combine government and privately-sponsored support to finance a suitable standard of living during retirement. Pension systems can be financed through pay-as-you-go (PAYG) or through pre-funding. PAYG pension schemes finance old- age retirement benefits in one particular period with the contributions of the working- age population. Pre-funding, on the other hand, relies on the capital markets. Both financing methods face labour and longevity risk. Benefits differ across pension systems depending on who the main bearer of the risks is. Defined benefit (DB) schemes provide guarantees in the benefit payout, and transfer the financing risk to the sponsor. Defined contribution (DB) schemes guarantee a minimum level of financing, transferring the risk to the retiree. Some pension systems offer hybrid schemes that combine DB and DC features. The benefit design has an impact in the long-term sustainability of the pension system, the standard of living during retirement and the actuarial fairness that represents the link between lifelong contributions and benefits. Recent reforms have reduced benefits to achieve long-term sustainability and solvency caused by population ageing. Future research should focus on the impact of policy design in inequality arising from gender or heterogeneous life expectancy.
{"title":"Pension Systems","authors":"Jennifer Alonso-García","doi":"10.2139/ssrn.3596128","DOIUrl":"https://doi.org/10.2139/ssrn.3596128","url":null,"abstract":"Pension systems combine government and privately-sponsored support to finance a suitable standard of living during retirement. Pension systems can be financed through pay-as-you-go (PAYG) or through pre-funding. PAYG pension schemes finance old- age retirement benefits in one particular period with the contributions of the working- age population. Pre-funding, on the other hand, relies on the capital markets. Both financing methods face labour and longevity risk. Benefits differ across pension systems depending on who the main bearer of the risks is. Defined benefit (DB) schemes provide guarantees in the benefit payout, and transfer the financing risk to the sponsor. Defined contribution (DB) schemes guarantee a minimum level of financing, transferring the risk to the retiree. Some pension systems offer hybrid schemes that combine DB and DC features. The benefit design has an impact in the long-term sustainability of the pension system, the standard of living during retirement and the actuarial fairness that represents the link between lifelong contributions and benefits. Recent reforms have reduced benefits to achieve long-term sustainability and solvency caused by population ageing. Future research should focus on the impact of policy design in inequality arising from gender or heterogeneous life expectancy.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"111 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-02-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91088359","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}
Pub Date : 2019-01-07DOI: 10.1108/JFRC-03-2018-0048
A. Garvey, Bridget McNally, Thomas O'Connor
PurposeThis paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring companies potentially produce an artificial result which is at odds with the “faithful representation” and “relevance” objectives of these standards.Design/methodology/approachThe approach is a theoretical analysis of the relevant reporting standards with the use of a practical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment.FindingsWhere a pension fund engages in asset liability matching and invests in “risk-free” assets, the term, quantity and duration/maturity of which is intended to match some or all of its scheme liabilities, the required accounting treatment potentially results in the sponsoring company’s financial statements reporting fluctuating surpluses or deficits each year which are potentially ill informed and misleading.Originality/valuePension scheme surpluses or deficits reported in the financial statements of listed companies are potentially very significant numbers; however, the dangers posed by theoretical nature of the calculation have largely gone unreported.
{"title":"Valuation of Defined Benefit Pension Schemes in IAS 19 Employee Benefits – True and Fair?","authors":"A. Garvey, Bridget McNally, Thomas O'Connor","doi":"10.1108/JFRC-03-2018-0048","DOIUrl":"https://doi.org/10.1108/JFRC-03-2018-0048","url":null,"abstract":"PurposeThis paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring companies potentially produce an artificial result which is at odds with the “faithful representation” and “relevance” objectives of these standards.Design/methodology/approachThe approach is a theoretical analysis of the relevant reporting standards with the use of a practical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment.FindingsWhere a pension fund engages in asset liability matching and invests in “risk-free” assets, the term, quantity and duration/maturity of which is intended to match some or all of its scheme liabilities, the required accounting treatment potentially results in the sponsoring company’s financial statements reporting fluctuating surpluses or deficits each year which are potentially ill informed and misleading.Originality/valuePension scheme surpluses or deficits reported in the financial statements of listed companies are potentially very significant numbers; however, the dangers posed by theoretical nature of the calculation have largely gone unreported.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"19 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-01-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79580258","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}
Pub Date : 2018-10-03DOI: 10.1007/978-3-319-78461-8_15
C. Deiana, Gianluca Mazzarella
{"title":"Does the Road to Happiness Depend on the Retirement Decision? Evidence from Italy","authors":"C. Deiana, Gianluca Mazzarella","doi":"10.1007/978-3-319-78461-8_15","DOIUrl":"https://doi.org/10.1007/978-3-319-78461-8_15","url":null,"abstract":"","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"41 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79394055","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 this paper, we developed and evaluated “consequence messaging,” a behaviorally motivated communication strategy in which we used vignettes — video and written stories about hypothetical people — to explain the consequences of decisions. We studied two related areas where consequence messaging may improve understanding and decision-making: valuing annuities and Social Security claiming decisions. We evaluated the impact of consequence messaging by conducting a small-scale, online study on a representative sample of about 650 Americans ages 50 to 60. We randomly assigned respondents to no vignette, a video vignette, or a written vignette. Then, we assessed the impact on understanding and decision-making through a survey. We assessed understanding by asking factual questions, and assessed decision-making by asking respondents to provide advice to a hypothetical person facing various decisions about annuities and Social Security claiming. The vignettes improved understanding and decision-making for both valuing annuities and Social Security claiming decisions. The effect sizes were not significantly different across written vignettes versus video vignettes. The vignettes did not have a statistically significant effect on how respondents rated the importance of concerns related to retirement.
{"title":"Using Consequence Messaging to Improve Understanding of Social Security","authors":"A. Samek, A. Kapteyn, Andre Gray","doi":"10.2139/SSRN.3320755","DOIUrl":"https://doi.org/10.2139/SSRN.3320755","url":null,"abstract":"In this paper, we developed and evaluated “consequence messaging,” a behaviorally motivated communication strategy in which we used vignettes — video and written stories about hypothetical people — to explain the consequences of decisions. We studied two related areas where consequence messaging may improve understanding and decision-making: valuing annuities and Social Security claiming decisions. We evaluated the impact of consequence messaging by conducting a small-scale, online study on a representative sample of about 650 Americans ages 50 to 60. We randomly assigned respondents to no vignette, a video vignette, or a written vignette. Then, we assessed the impact on understanding and decision-making through a survey. We assessed understanding by asking factual questions, and assessed decision-making by asking respondents to provide advice to a hypothetical person facing various decisions about annuities and Social Security claiming. The vignettes improved understanding and decision-making for both valuing annuities and Social Security claiming decisions. The effect sizes were not significantly different across written vignettes versus video vignettes. The vignettes did not have a statistically significant effect on how respondents rated the importance of concerns related to retirement.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"17 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72731208","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}
The prospect of outliving retirement savings is a very real risk for many Baby Boomers and Gen Xers. Yet, only a very small percentage of defined contribution (DC) and individual retirement account (IRA) balances are annuitized — and a significant percentage of defined benefit (DB) accruals have been taken as lump-sum distributions when the option was available.
Some believe that cost is an issue; Deferred Income Annuities (DIAs) are designed to reduce the probability of outliving savings by providing monthly benefits in the later stages of retirement. Because of their delayed payments, DIAs could be offered for a small fraction of the cost for a similar monthly benefit through an annuity that starts payments immediately at retirement. Many believe that the lower cost would at least partially mitigate retirees’ reluctance to give up control over a large portion of their DC and/or IRA balances at retirement age.
New research was prepared for this Issue Brief to explore how the probability of a “successful” retirement, measured by the EBRI Retirement Readiness Rating (RRR), varies with the percentage of the 401(k) balance that is used to purchase a DIA. Results are provided for all households (with a 401(k) balance) combined as well as by simulated age of death. The results are also provided by age-specific wage quartiles.
We find that, at current annuity rates, purchases of a DIA at age 65 deferring 20 years with no death benefits result in an overall improvement in RRR (for all ages of death combined) for DIA purchases equal to 5, 10, 15, and 20 percent of the 401(k) balance. However, there is an overall decrease in RRR for DIA purchases equal to 25 and 30 percent — due in part to the interaction with long-term care costs. If a pre-commencement death benefit is added to the DIA, there is an overall improvement in RRR for DIA purchases equal to 5, 10, and 15 percent of the 401(k) balance.
When the results are broken out by age at simulated death, we find overall decreases in RRR for those dying before benefits begin (ages 65–84) as well as for those dying soon after benefits begin (ages 85–89). For each of the groups living beyond age 89 we find an increase in RRR, and, as expected, the larger the percentage of 401(k) balance used to purchase a DIA, the larger the percentage increase in RRR. The results are significantly improved by adding a pre-commencement death benefit for those who die before benefits begin, but this is offset by larger decreases in RRR for those dying between ages 85 and 89 and smaller increases in RRR for those living beyond age 89.
The need for longevity protection is arguably less for those in the lowest wage quartile given their greater reliance on Social Security. We broke out the overall RRR changes by age-specific wage quartiles and found that in all but the smallest DIA purchase (5 percent of the 401(k) balance), households in the lowest age-specific wage quartiles experienced a dec
{"title":"Deferred Income Annuity Purchases: Optimal Levels for Retirement Income Adequacy","authors":"Jack L. VanDerhei","doi":"10.2139/ssrn.3309900","DOIUrl":"https://doi.org/10.2139/ssrn.3309900","url":null,"abstract":"The prospect of outliving retirement savings is a very real risk for many Baby Boomers and Gen Xers. Yet, only a very small percentage of defined contribution (DC) and individual retirement account (IRA) balances are annuitized — and a significant percentage of defined benefit (DB) accruals have been taken as lump-sum distributions when the option was available.<br><br>Some believe that cost is an issue; Deferred Income Annuities (DIAs) are designed to reduce the probability of outliving savings by providing monthly benefits in the later stages of retirement. Because of their delayed payments, DIAs could be offered for a small fraction of the cost for a similar monthly benefit through an annuity that starts payments immediately at retirement. Many believe that the lower cost would at least partially mitigate retirees’ reluctance to give up control over a large portion of their DC and/or IRA balances at retirement age. <br><br>New research was prepared for this Issue Brief to explore how the probability of a “successful” retirement, measured by the EBRI Retirement Readiness Rating (RRR), varies with the percentage of the 401(k) balance that is used to purchase a DIA. Results are provided for all households (with a 401(k) balance) combined as well as by simulated age of death. The results are also provided by age-specific wage quartiles.<br><br>We find that, at current annuity rates, purchases of a DIA at age 65 deferring 20 years with no death benefits result in an overall improvement in RRR (for all ages of death combined) for DIA purchases equal to 5, 10, 15, and 20 percent of the 401(k) balance. However, there is an overall decrease in RRR for DIA purchases equal to 25 and 30 percent — due in part to the interaction with long-term care costs. If a pre-commencement death benefit is added to the DIA, there is an overall improvement in RRR for DIA purchases equal to 5, 10, and 15 percent of the 401(k) balance.<br><br>When the results are broken out by age at simulated death, we find overall decreases in RRR for those dying before benefits begin (ages 65–84) as well as for those dying soon after benefits begin (ages 85–89). For each of the groups living beyond age 89 we find an increase in RRR, and, as expected, the larger the percentage of 401(k) balance used to purchase a DIA, the larger the percentage increase in RRR. The results are significantly improved by adding a pre-commencement death benefit for those who die before benefits begin, but this is offset by larger decreases in RRR for those dying between ages 85 and 89 and smaller increases in RRR for those living beyond age 89.<br><br>The need for longevity protection is arguably less for those in the lowest wage quartile given their greater reliance on Social Security. We broke out the overall RRR changes by age-specific wage quartiles and found that in all but the smallest DIA purchase (5 percent of the 401(k) balance), households in the lowest age-specific wage quartiles experienced a dec","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76149264","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}
I examine the relationship between Social Security benefits, a major component of income in older age, and intergenerational transfers of financial help and care-giving. I find that the net pass-through rate of Social Security benefits from parents to children is about 15 percent, including only monetary inter vivos transfers. Parents with higher Social Security benefits provide more hours of help to children in the form of grandchild care, even though children significantly withdraw care-giving to parents along this dimension. Taken together, these results are consistent with parental altruism and have strong implications for the distributional consequences of Social Security reform.
{"title":"Time and Money: Social Security Benefits and Intergenerational Transfers","authors":"Anit Mukherjee","doi":"10.2139/ssrn.3165828","DOIUrl":"https://doi.org/10.2139/ssrn.3165828","url":null,"abstract":"I examine the relationship between Social Security benefits, a major component of income in older age, and intergenerational transfers of financial help and care-giving. I find that the net pass-through rate of Social Security benefits from parents to children is about 15 percent, including only monetary inter vivos transfers. Parents with higher Social Security benefits provide more hours of help to children in the form of grandchild care, even though children significantly withdraw care-giving to parents along this dimension. Taken together, these results are consistent with parental altruism and have strong implications for the distributional consequences of Social Security reform.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2018-04-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83510606","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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