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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.
Implications of money-back guarantees for individual retirement accounts: protection then and now
(2019)
In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.
This paper examines heterogeneity in time discounting among a representative sample of elderly Americans, as well as its role in explaining key economic behaviors at older ages. We show how older Americans evaluate simple (hypothetical) inter-temporal choices in which payments today are compared with payments in the future. Using the indicators derived from this measure, we then demonstrate that differences in discounting patterns are associated with characteristics of particular importance in elderly populations. For example, cognitive deficits are associated with greater impatience, whereas bequest motives are associated with less impatience. We then relate our discounting measure to key economic outcomes and find that impatience is associated with lower wealth, fewer investments in health, and less planning for end of life care.