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}
Due to the scarcity of the long-term market instruments, the valuation of private defined-benefit (DB) pension liabilities requires an extrapolation of the yield curve. In Canada, corporate yields are adopted to discount the private DB pension liabilities, but the issue on how to extrapolate the yield curve beyond the market liquid point has not been clearly addressed in the regulatory guidance. This paper introduces a macroeconomic extrapolation method called "the Canadian ultimate forward rate" to complete the yield curve. The new method effectively reduces the valuation volatility for it is robust against interpolation models and instantaneous market distortions.
{"title":"Discount Rate Regulation for Canadian Private Defined Benefit Pension Plans","authors":"Sally Shen","doi":"10.2139/ssrn.3083034","DOIUrl":"https://doi.org/10.2139/ssrn.3083034","url":null,"abstract":"Due to the scarcity of the long-term market instruments, the valuation of private defined-benefit (DB) pension liabilities requires an extrapolation of the yield curve. In Canada, corporate yields are adopted to discount the private DB pension liabilities, but the issue on how to extrapolate the yield curve beyond the market liquid point has not been clearly addressed in the regulatory guidance. This paper introduces a macroeconomic extrapolation method called \"the Canadian ultimate forward rate\" to complete the yield curve. The new method effectively reduces the valuation volatility for it is robust against interpolation models and instantaneous market distortions.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-12-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82235829","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}
Retirement income is not just about products. You need an underlying philosophy and sharpening the duties of trustee directors towards providing income in retirement would greatly assist funds in developing these. The super system needs to be able to measure success in the retirement phase and it’s not just a matter of using our accumulation measures. Measuring success by just being good investors is a dangerous game. There is a big wide world of asset managers out there and it is a highly fungible process. Serving customers, particularly retired customers, is the point of distinction for super funds.
{"title":"Retirement is Different","authors":"J. Cooper","doi":"10.2139/ssrn.3144670","DOIUrl":"https://doi.org/10.2139/ssrn.3144670","url":null,"abstract":"Retirement income is not just about products. You need an underlying philosophy and sharpening the duties of trustee directors towards providing income in retirement would greatly assist funds in developing these. The super system needs to be able to measure success in the retirement phase and it’s not just a matter of using our accumulation measures. Measuring success by just being good investors is a dangerous game. There is a big wide world of asset managers out there and it is a highly fungible process. Serving customers, particularly retired customers, is the point of distinction for super funds.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"152 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-11-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85170508","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 : 2017-09-30DOI: 10.5709/CE.1897-9254.244
Edyta Marcinkiewicz
The study aims at empirical verification of the quality of pension system clustering based on two dimensions: the extent of involvement of the state in the pension system and the level of voluntariness. To answer the question of whether these two dimensions actually determine the division into homogeneous groups that constitute pension regimes, Kendall’s W concordance coefficient is employed. It is typically used in Delphi studies as an indicator of expert consensus, but it has been shown that the concept of concordance can also be applied to statistical multivariate analysis to measure intra-group similarity. This empirical research comprises 30 OECD countries grouped into three pension regimes. It employs the classical chi-square test as well as the permutation test of the coefficient of concordance previously applied to empirical problems in biology. Additionally, this study proposes a new permutation procedure that allows for verifying the quality of clustering from a different perspective.
{"title":"Pension Systems Similarity Assessment: An Application of Kendall's W to Statistical Multivariate Analysis","authors":"Edyta Marcinkiewicz","doi":"10.5709/CE.1897-9254.244","DOIUrl":"https://doi.org/10.5709/CE.1897-9254.244","url":null,"abstract":"The study aims at empirical verification of the quality of pension system clustering based on two dimensions: the extent of involvement of the state in the pension system and the level of voluntariness. To answer the question of whether these two dimensions actually determine the division into homogeneous groups that constitute pension regimes, Kendall’s W concordance coefficient is employed. It is typically used in Delphi studies as an indicator of expert consensus, but it has been shown that the concept of concordance can also be applied to statistical multivariate analysis to measure intra-group similarity. This empirical research comprises 30 OECD countries grouped into three pension regimes. It employs the classical chi-square test as well as the permutation test of the coefficient of concordance previously applied to empirical problems in biology. Additionally, this study proposes a new permutation procedure that allows for verifying the quality of clustering from a different perspective.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"39 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87151500","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}
Xiaodong Fan, Ananth Seshadri, Christopher R. Taber
We develop and estimate a model in which individuals make decisions on consumption, human capital investment, labor supply, and retirement. Unlike all previous work, our model allows both an endogenous wage process (which is typically assumed exogenous in the human capital and earnings dynamics literature). In addition, we introduce health shocks. We estimate the model and match the life-cycle profiles of wages, hours and retirement from SIPP data. We analyze the impact of health shocks on retirement, as well as the effect of changes in payroll taxes and increases in the Normal Retirement Age on labor force participation of older Americans.
{"title":"Understanding Earnings, Labor Supply, and Retirement Decisions","authors":"Xiaodong Fan, Ananth Seshadri, Christopher R. Taber","doi":"10.2139/ssrn.3107764","DOIUrl":"https://doi.org/10.2139/ssrn.3107764","url":null,"abstract":"We develop and estimate a model in which individuals make decisions on consumption, human capital investment, labor supply, and retirement. Unlike all previous work, our model allows both an endogenous wage process (which is typically assumed exogenous in the human capital and earnings dynamics literature). In addition, we introduce health shocks. We estimate the model and match the life-cycle profiles of wages, hours and retirement from SIPP data. We analyze the impact of health shocks on retirement, as well as the effect of changes in payroll taxes and increases in the Normal Retirement Age on labor force participation of older Americans.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88403021","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}
Same-sex marriage became legal nationwide in the United States on June 26, 2015. Federal legalization of same sex marriage expands the pool of individuals potentially eligible for spousal benefits from Social Security to the estimated 4% of the population that is lesbian, gay, or bisexual. This chapter is a foundational step to better understand the potential impact of the expansion of marriage rights to same-sex couples on Social Security. We primarily use data from the 2011-2015 American Community Survey to describe the economic circumstances of heterosexual and same-sex households. We estimate the anticipated social security benefit amounts for these individuals, as well as eligibility to claim spousal benefits. We estimate the size of the gay and lesbian populations by age and sex from 2017-2040 using standard demographic methods. Finally, we supplement the analyses with new data from the RAND American Life Panel.
{"title":"Exploring the Social Security Benefit Implications of Same-Sex Marriage","authors":"M. Pollard, Italo Lopez","doi":"10.2139/ssrn.3162220","DOIUrl":"https://doi.org/10.2139/ssrn.3162220","url":null,"abstract":"Same-sex marriage became legal nationwide in the United States on June 26, 2015. Federal legalization of same sex marriage expands the pool of individuals potentially eligible for spousal benefits from Social Security to the estimated 4% of the population that is lesbian, gay, or bisexual. This chapter is a foundational step to better understand the potential impact of the expansion of marriage rights to same-sex couples on Social Security. We primarily use data from the 2011-2015 American Community Survey to describe the economic circumstances of heterosexual and same-sex households. We estimate the anticipated social security benefit amounts for these individuals, as well as eligibility to claim spousal benefits. We estimate the size of the gay and lesbian populations by age and sex from 2017-2040 using standard demographic methods. Finally, we supplement the analyses with new data from the RAND American Life Panel.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"54 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90468437","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}
Poverty has been a common feature in all human societies since the dawn of civilization. Purchasing power of an individual decides her standard of living. In many cases, it even decides whether a person can live or not (eg: in starvation or malnourishment, victims have no purchasing power to buy calories). As such, the Right to Life philosophy of many National Constitutions comes to naught if the state cannot ensure adequate purchasing power for its people. Thus, an individual should have Right to Money in order to live with respect and dignity. In this paper, we will explore the concept of the Right to Money and how it is linked to the Right to Life. We will see how the Right to Money concept can ensure a continued economic expansion even in a scenario when automation has reached a critical point (i.e Technological Singularity). Right to Money can also ensure continued human dominance over Machine Intelligence as and when they arise. Interestingly the Right to Money leads to another advanced concept – The Right to Machines which will make certain that there is continued synergy between human and artificial intelligence in future and that the Human race stays relevant. The paper concludes as to how human society can be best prepared economically (or otherwise) for a Post-Technological Singularity scenario.
{"title":"The Right to Money as the Fundamental Right of Individuals in the Coming Digital Economy","authors":"Kartik Hegadekatti","doi":"10.2139/ssrn.2957172","DOIUrl":"https://doi.org/10.2139/ssrn.2957172","url":null,"abstract":"Poverty has been a common feature in all human societies since the dawn of civilization. Purchasing power of an individual decides her standard of living. In many cases, it even decides whether a person can live or not (eg: in starvation or malnourishment, victims have no purchasing power to buy calories). As such, the Right to Life philosophy of many National Constitutions comes to naught if the state cannot ensure adequate purchasing power for its people. Thus, an individual should have Right to Money in order to live with respect and dignity. In this paper, we will explore the concept of the Right to Money and how it is linked to the Right to Life. We will see how the Right to Money concept can ensure a continued economic expansion even in a scenario when automation has reached a critical point (i.e Technological Singularity). Right to Money can also ensure continued human dominance over Machine Intelligence as and when they arise. Interestingly the Right to Money leads to another advanced concept – The Right to Machines which will make certain that there is continued synergy between human and artificial intelligence in future and that the Human race stays relevant. The paper concludes as to how human society can be best prepared economically (or otherwise) for a Post-Technological Singularity scenario.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"52 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-04-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73471658","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 single-period tontine is an arrangement in which a group of members contribute to an investment pool, and after a fixed period of time, the pool is distributed to those members who are still alive. The distribution is made in unequal amounts based on member death probabilities and contribution amounts. In a companion article we apply the single-period tontine to propose products that we feel have commercial potential. Here, we focus on the analytics. The analysis applies not just to single-period tontines, but also to other arrangements that can be analyzed as a sequence of single-period tontines, such as pooled annuity funds.The core of the paper is the development of formulas for the mean and variance of the random amount that a surviving member receives in a single-period tontine. We use the formulas to resolve an open question about bias in pooled annuity funds and to show practical conditions under which it can be made negligible. We show how the provider can use the formulas to manage the subscription process, determining who is allowed to participate and how much they are allowed to contribute, so that the statistics of the tontine are favorably controlled. We use the formulas to compare mixing different cohorts within a single tontine versus creating a separate tontine for each cohort, finding that mixing cohorts is better because it reduces both idiosyncratic risk and systematic risk.
{"title":"The Analytics of a Single-Period Tontine","authors":"Michael J. Sabin, J. Forman","doi":"10.2139/ssrn.2874160","DOIUrl":"https://doi.org/10.2139/ssrn.2874160","url":null,"abstract":"A single-period tontine is an arrangement in which a group of members contribute to an investment pool, and after a fixed period of time, the pool is distributed to those members who are still alive. The distribution is made in unequal amounts based on member death probabilities and contribution amounts. In a companion article we apply the single-period tontine to propose products that we feel have commercial potential. Here, we focus on the analytics. The analysis applies not just to single-period tontines, but also to other arrangements that can be analyzed as a sequence of single-period tontines, such as pooled annuity funds.The core of the paper is the development of formulas for the mean and variance of the random amount that a surviving member receives in a single-period tontine. We use the formulas to resolve an open question about bias in pooled annuity funds and to show practical conditions under which it can be made negligible. We show how the provider can use the formulas to manage the subscription process, determining who is allowed to participate and how much they are allowed to contribute, so that the statistics of the tontine are favorably controlled. We use the formulas to compare mixing different cohorts within a single tontine versus creating a separate tontine for each cohort, finding that mixing cohorts is better because it reduces both idiosyncratic risk and systematic risk.","PeriodicalId":39542,"journal":{"name":"Social Security Bulletin","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2016-11-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83045226","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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