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Target date funds in corporate retirement plans grew from $5B in 2000 to $734B in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Including these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target date funds may enhance retirement wealth by as much as 50 percent over a 30-year horizon.
Many people do not understand the concepts of life expectancy and longevity risk, potentially leading them to under-save for retirement or to not purchase longevity insurance, which in turn could reduce wellbeing at older ages. We investigate alternative ways to increase the salience of both concepts, allowing us to assess whether these change peoples’ perceptions and financial decision making. Using randomly-assigned vignettes providing subjects with information about either life expectancy or longevity, we show that merely prompting people to think about financial decisions changes their perceptions regarding subjective survival probabilities. Moreover, this information also boosts respondents’ interest in saving and demand for longevity insurance. In particular, longevity information influences both subjective survival probabilities and financial decisions, while life expectancy information influences only annuity choices. We provide some evidence that many people are simply unaware of longevity risk.
In the wake of the global pandemic known as COVID-19, retirees, along with those hoping to retire someday, have been shocked into a new awareness of the need for better risk management tools to handle longevity and aging. This paper offers an assessment of the status quo prior to the spread of the coronavirus, evaluates how retirement systems are faring in the wake of the shock. Next we examine insurance and financial market products that may render retirement systems more resilient for the world’s aging population. Finally, potential roles for policymakers are evaluated.
This chapter outlines the conditions under which accounting-based smoothing can be beneficial for policyholders who hold with-profit or participating payout life annuities (PLAs). We use a realistically-calibrated model of PLAs to explore how alternative accounting techniques influence policyholder welfare as well as insurer profitability and stability. We find that accounting smoothing of participating life annuities is favorable to consumers and insurers, as it mitigates the impact of short-term volatility and enhances the utility of these long-term annuity contracts.
Many Americans claim Social Security benefits early, though this leaves them with lower benefits throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people received a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents’ answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.
People who delay claiming Social Security receive higher lifelong benefits upon retirement. We survey individuals on their willingness to delay claiming later, if they could receive a lump sum in lieu of a higher annuity payment. Using a moment-matching approach, we calibrate a lifecycle model tracking observed claiming patterns under current rules and predict optimal claiming outcomes under the lump sum approach. Our model correctly predicts that early claimers under current rules would delay claiming most when offered actuarially fair lump sums, and for lump sums worth 87% as much, claiming ages would still be higher than at present.
This paper investigates whether exchanging the Social Security delayed retirement credit, currently paid as an increase in lifetime annuity benefits, for a lump sum would induce later claiming and additional work. We show that people would voluntarily claim about half a year later if the lump sum were paid for claiming any time after the Early Retirement Age, and about two-thirds of a year later if the lump sum were paid only for those claiming after their Full Retirement Age. Overall, people will work one-third to one-half of the additional months, compared to the status quo. Those who would currently claim at the youngest ages are likely to be most responsive to the offer of a lump sum benefit.
The paper discusses an additional reform proposal for enhancing Social Security solvency which reframes the existing debate in a different light. In our research, we focus on incentives to prolong working years and to delay benefits claiming as a way of sustaining Social Security. Specifically, we analyze how the offer of a budget-neutral, actuarially fair lump sum payment - instead of the current delayed retirement credit – would encourage people to delay claiming their OASI benefits and work longer. The results of our research will be useful for policymakers, namely in (1) measuring who would delay claiming benefits if offered a lump sum instead of higher annuity payments, (2) examining how long they would wait, and (3) how much longer, if at all, they would continue working in the interim.
We designed and fielded an experimental module in the 2014 HRS which seeks to measure older persons’ willingness to voluntarily defer claiming of Social Security benefits. In addition we evaluate the stated willingness of older individuals to work longer, depending on the Social Security incentives offered to delay claiming their benefits. Our project extends previous work by analyzing the results from our HRS module and comparing findings from other data sources, which included very much smaller samples of older persons. We show that half of the respondents would delay claiming if no work requirement were in place under the status quo, and only slightly fewer, 46 percent, with a work requirement. We also asked respondents how large a lump sum they would need with or without a work requirement. In the former case, the average amount needed to induce delayed claiming was about $60,400, while when part-time work was required, the average was $66,700. This implies a low utility value of leisure foregone of only $6,300, or about 10 percent of older households’ income.
Given rising life expectations around the world, it seems that old-age pension benefits will need to be cut and pension contributions boosted in many nations. Yet our research on old-age system reforms does not require raising mandatory retirement ages or contributions. Instead, we offer ways to enhance incentives for people to work longer and delay retirement. There are good reasons to incentivize older people to work longer and delay retirement. These include rising longevity, the shrinking workforce, and emerging evidence indicating that working longer can be associated with better mental and physical health for many people. Nevertheless, old age Social Security systems in many nations find that people tend to claim benefits early, usually leading to reduced benefits.In the United States, for instance, a majority of Americans claim their Social Security benefits at the earlier feasible age, namely 62, even though their monthly benefits would be 75% higher if they waited until age 70. To test whether this is the result of people underweighting the economic value of higher lifetime benefit streams, we examine whether people would claim later and work longer if they were rewarded with a lump sum instead of a higher lifetime benefit stream for deferring. Two arguments have been offered to explain early claiming. One is that workers claim early to avoid potentially “forfeiting” their deferred benefits should they die too soon (Brown et al., 2016). A second explanation is that many people underweight the economic value of lifetime benefit streams (Brown et al., 2017). This latter rationale motivates the present study.