Many social security systems face high and escalating disability costs. In Chile's new system, the disability assessment procedure includes participation by private pension funds (AFPs) and insurance companies, who finance the benefit, have a direct pecuniary interest in controlling costs and are able to pursue this objective by helping to set criteria and providing countervailing information. We hypothesize that these procedures and incentives will keep costs low, by cutting the incidence of successful claims. Using the Cox proportional hazard model and a retrospective sample of new and old-system affiliates (EPS, 2002), we find that disability hazard rates are only 20–35% as high in the new system as in the old traditional system. Analysis of mortality rates suggests that the new system has accurately targeted individuals with more severe medical problems.

This study examines the consequences of a pension fund investing in the stock of the sponsoring firm. Using a merger of data on pension asset holdings from IRS Form 5500 filings and financial data on the company's stock from CRSP, two broad questions are addressed: first, what factors influence the extent of a pension fund's investments in the employer's stock? Second, when a pension invests in the employer's stock, how much is lost as a result of poor diversification? The empirical results suggest that investments in employer stock are responsive to non-diversification costs, tax consequences, and the employee's ability to absorb risk. There is also evidence that employers and employees weight these factors differentially in their decision of how much employer stock to include in the pension. Using actual return data on pension plans, we also find that concentrated investments in employer stock substantially reduce risk-adjusted return performance. However, modest holdings of employer stock have negligible effects on pension performance.

We discuss pension system risk in the USA, focusing on the investment policy and the methodology for the valuation of the liabilities of the Pension Benefit Guaranty Corporation (PBGC). We offer suggestions as to how the PBGC should consider modifying the Pension Insurance Modeling System. The issues of investment policy and liability valuation are not two distinct topics. As emphasized here, the proper valuation of liabilities provides a benchmark for the PBGC to use as a starting point for the establishment of its investment policy and then for assessing investment performance.

This paper builds on previous work (Costrell and McGee, 2017a, Education Finance and Policy) on the redistribution of teacher pension benefits, as measured by the wide variation in individual normal cost rates by age of entry and exit, and the associated cross-subsidies. The further steps taken here are: (i) to examine the impact of the discount rate on the degree of redistribution, and the analytics behind it; and (ii) to identify the distribution of the market value of the pension guarantee. Using the example of the California State Teachers’ Retirement System, I find that: (i) high-assumed returns substantially understate the extent to which costs are redistributed for back-loaded plans; and (ii) the market value of the pension guarantee is highly concentrated among long-term teachers.

We study how pension participation and expected pension benefits affect working-age adults’ consumption based on a nationally representative dataset from the China Health and Retirement Longitudinal Study (CHARLS) during the period 2011–2018. We find that the consumption of working-age adults who participate in China's Residents' Basic Pension is 15.4% higher than that of non-participants. Furthermore, we find that if working-age adults' expected pension benefits increase by RMB 1, their consumption will increase by RMB 0.34. Overall, our findings suggest that pension expectations are critical to the consumption decisions of working-age adults and can, therefore, positively affect total domestic consumption.

Willingness to participate in financial markets is important for financial well-being, including the accumulation of retirement savings through self-directed pension programs. We consider the roles of two key factors, trust and financial literacy in financial market participation. We find both are strongly related to participation. Although trust is more uniformly correlated with increases in financial market participation, the relationship between financial literacy and engagement is u-shaped, with increases in financial literacy first associated with reductions and subsequently with increases in the levels of participation. Our findings suggest trust and financial literacy play different roles and that each is related to investment behaviors in important ways.

Conditional indexation has recently attracted interest with pension funds that are looking for a middle way between defined benefit and defined contribution. In this paper, we analyze conditional indexation schemes from a life-cycle investment perspective. Welfare analysis is applied to investigate the performance of such schemes relative to alternative investment strategies such as fixed-mix policies. We carry out this analysis in the context of a broad family of utility functions, which takes into account the possible presence of two benchmark levels corresponding to a minimum guaranty and to full indexation, respectively. For the purpose of comparability, we construct a self-financing continuous-time implementation of the conditional indexation scheme. The implementation involves continual adjustment of the parameters of the contingent claim representing final payoff. Our findings indicate that, in situations where large weight is placed on the benchmark levels, conditional indexation is fairly close to being optimal.

For many people, working after beginning retirement benefit collection is a way to enhance financial security by increasing income. Existing research has shown that retirees are sensitive to the Social Security earnings test, which restricts the amount of earnings some beneficiaries can receive. However, little is known about the effects of other types of policies on post-retirement employment. Instead of restricting earnings, many public pension plans restrict the number of hours beneficiaries can work. I use return-to-work rules limiting the number of hours of employment in a state's public pension plan and administrative data on employment and retirement to determine the rules’ effects on retirement decisions and post-retirement labor supply. I find that the increases in the maximum number of hours of post-retirement employment lead to no change in retirement benefit collection and to increases in part-time work among retirees. As such, these policies appear to be binding on the labor supply decisions of some employees. These results are relevant for designing policies aimed at extending work-lives or improving the health of pension systems.

Using recovery plan data of 213 underfunded Dutch pension funds for the years 2011, 2012 and 2013, discrete choice models are estimated describing pension funds' choices between three recovery measures: higher contributions, no indexation and pension cuts. The estimation results suggest, first, that pension cuts are more likely when the funding ratio is very low, there is little time left for recovery, the pension fund is not a corporate pension fund, and its participants are still relatively young. Second, the results suggest that Dutch pension funds consider contribution increase first, no indexation second and pension cuts only as a last resort.

While no longer common in the private sector, most public sector employers offer retiree health insurance (RHI) as a retirement benefit to their employees. While these plans are thought to be an important tool for employers to attract, retain, motivate, and ultimately retire workers, they represent a large and growing cost. This paper reviews what is currently known about RHI in the public sector, while highlighting many important unanswered questions. The analysis is informed by data produced in accordance with the 2004 Government Accounting Standards Board Rule 45 (GASB 45). We consider the extent of the unfunded liabilities states face and explore what factors may explain the variation in liabilities across states. The importance and sustainability of RHI plans in the public sector ultimately depend on how workers view and value this post-retirement benefit, yet little is known about how RHI directly impacts the public sector labor market. We conclude with a discussion of the future of RHI plans in the public sector.

This paper analytically solves a life-cycle model that compares traditional and Roth retirement accounts. It includes realistic features such as tax deductibility of contributions and taxation of withdrawals, tax bracket structure with deductions, taxation of Social Security benefits, and tax risk at retirement. With current taxes, choosing a traditional account over a Roth creates small welfare losses in only a few cases, largely for those with higher incomes and pensions who are subject to the taxation of Social Security benefits. We also investigate tax variability and find that diversified strategies offer only small risk reduction benefits in our illustrations.

The booms and busts of the late 1990s and 2000s have taken 401(k) plan participants on a rollercoaster ride. Using data from administrative tax records and household surveys, this paper examines how participants responded to these periods of economic expansions and contractions by documenting changes in 401(k) participation, contributions, and contribution rates from 1990 to 2009. Controlling for earnings, job changes, and other household factors, we find that workers reduce their 401(k) participation and contributions during recessions – suggesting that they may be responding to changes in their expectations about the economy and stock market. We estimate that changes in participant behavior during the Great Recession, in particular, could lower 401(k) assets of the typical 30-year-old by as much as 8% at age 62.

Inflation for retirees is different from and mostly higher than the macro-economic (average) inflation rate for the entire population. In the U.S.A, for example, the Consumer Price Index for the Urban population (CPI-U) calculated and reported by the Bureau of Labor Statistics (BLS) has a lesser known cousin called the CPI-E (for the elderly) in which the sub-component weights are based on the consumption patterns of Americans above the age of 62. This suggests that Inflation-Linked Bond Funds (ILBFs) – whose individual component bond adjustments are based on broad population (CPI-U) inflation – might not be the best hedge for individual retirees’ cost of living. But then again, broad shocks to inflation are likely to impact both indices. So, motivated by the question – is it good enough? – the current paper uses lifetime ruin minimization (LRM) techniques to investigate the optimal allocation between an ILBF and a nominal investment fund for a retiree facing an exogenous liability. Our model trades off the benefit of an imperfect hedge against the cost of lower investment growth. However, our numerical results suggest that although ILBFs can be a large part of the optimal retirement portfolio, it should be treated as just another asset class in the broad optimization problem as opposed to a special or unique category.

To lower the forecasted increase in the social security burden linked to population aging, delaying the legal age of retirement has been privileged throughout industrialized countries. Compared with a uniform delay, some argue that those who have entered precociously the labor market should be allowed to retire earlier. They assert that such a ‘long career’ exception is all the more justified that those unskilled workers live also less long due to heavier and potentially health-damaging jobs. In this paper, we then study macroeconomic and distributional consequences of global gain in life expectancy, with or without the postponement of the legal age of retirement and with or without a ‘long career’ exception. By considering a framework where individuals decide to acquire skills depending on economic incentives and differential mortality, we focus particularly on spillover effects possibly generated by education. We show in particular that introducing a ‘long career’ exception cannot be to the advantage of future unskilled workers unless education yields no spillover effects.

We propose a model in which financial sophistication improves portfolio returns and therefore the incentive to substitute consumption intertemporally. The model delivers an Euler equation in which consumption growth is positively correlated with financial sophistication. We test the model's prediction using panel data on consumption and financial sophistication drawn from the Italian Survey of Household Income and Wealth. We find that consumption growth is positively correlated with financial sophistication, as predicted by the model. We also provide estimates of the intertemporal elasticity of substitution in the range between 0.4 and 0.6.

Following the methodological approach taken by Ibbotson and Kaplan (2000), we provide evidence of a major contribution of strategic asset allocation to Spanish equity personal pension plan performance, finding that on average more than 90% of variability of returns over time, and about 70% of the variation of returns among plans, are explained by strategic policy.

Furthermore, we also have evidence that survivor and look-ahead bias detected in previous research have very little impact on the conclusions about the importance of asset allocation on the variability of returns over time.

The importance of asset allocation to explain the variability of returns over time is quite similar for the different investment vocations considered in our study, Euro zone and global equity. Very similar results are also found when we consider the size of the Spanish plans as an explanatory factor for the contribution of asset allocation to performance.

Finally, the value that active management adds to the mere passive tracking of the strategic policy is not statistically different to the management costs of the plans.

This work has three objectives: first, to provide a comprehensive review of administrative fees; second, to construct a comparative data set for 53 countries; and third, to perform an empirical analysis that highlights the main determinants of pension fees from a world-wide perspective. The paper provides an econometric analysis by using panel data techniques. It finds the greater statistical significance of market size, result that is reinforced by mandatory pension schemes. Other factors, such as structural country conditions, market's vertical integration and the presence of an occupational pension scheme, seem to be less relevant.

The occurrence in firms of occupational pensions is investigated with a linked employer–employee dataset, supplemented with actuarial calculations of tax savings when labour compensation is in the form of pensions compared to wages. Tax gains, which can be shared between employers and employees, and expected increases in average tenure are both clearly associated with the occurrence of an occupational pension. Occupational pensions are typically found in large firms, with decentralized wage negotiations, a high degree of unionization, and the requirement of long training. The results and the approach provide a basis for analyzing also the trend towards DB pensions.

Social Security provides survivor benefits to lower-earning spouses of deceased workers entitled to a retirement benefit. The value of the survivor benefit depends on a number of factors including the deceased worker's claim age. We use the Health and Retirement Study and a discrete time hazard model to analyze how the claim age of married men influences the likelihood that their spouse will enter poverty in widowhood. We find that delayed claiming is associated with reduction in a widow's poverty risk. The magnitude of this relationship varies significantly with the claim age, Social Security dependence, and survivor benefit dependence.

This study examines the expected retirement replacement rates (RRs) of several cohorts of Dutch employees at the time of their planned retirements. It also computes RRs based on the available pension records. We find that the expected replacement rate (E(RR)) is, in general, higher than the ones we compute. Larger discrepancies are found for younger cohorts and for individuals with less education and working experience. We also examine the difference between the expected and computed RRs and find that the mismatch is mostly related to poor institutional knowledge. We also show the role of assumptions about institutions and wage profiles in determining our results.