Showing papers by "Jeffrey R. Brown published in 2006"

Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut

Abstract: We test whether executive stock ownership affects firm payouts using the 2003 dividend tax cut to identify an exogenous change in the after-tax value of dividends. We find that executives with higher ownership were more likely to increase dividends after the tax cut in 2003, whereas no relation is found in periods when the dividend tax rate was higher. Relative to previous years, firms that initiated dividends in 2003 were more likely to reduce repurchases. The stock price reaction to the tax cut suggests that the substitution of dividends for repurchases may have been anticipated, consistent with agency conflicts. SHAREHOLDER PAYOUTS HAVE CHANGED DRAMATICALLY over the past two decades, with

The Effect of Inheritance Receipt on Retirement

Abstract: This paper uses the receipt of an inheritance to measure the effect of wealth shocks on retirement. Using the Health and Retirement Study (HRS), we first document that inheritance receipt is common among older workers - one in five households receives an inheritance over an eight-year period, with a median value of about $30,000. We find that inheritance receipt is associated with a significant increase in the probability of retirement. In particular, we find that receiving an inheritance increases the probability of retiring earlier than expected by 4.4 percentage points, or 12 percent relative to the baseline retirement rate, over an eight-year period. Importantly, this effect is stronger when the inheritance is unexpected and thus more likely to represent an exogenous shock to wealth.

The Effect of Inheritance Receipt on Retirement

Abstract: This paper uses the receipt of an inheritance to measure the effect of wealth shocks on retirement Using the Health and Retirement Study (HRS), we first document that inheritance receipt is common among older workers %u2013 one in five households receives an inheritance over an eight-year period, with a median value of about $30,000 We find that inheritance receipt is associated with a significant increase in the probability of retirement In particular, we find that receiving an inheritance increases the probability of retiring earlier than expected by 44 percentage points, or 12 percent relative to the baseline retirement rate, over an eight-year period Importantly, this effect is stronger when the inheritance is unexpected and thus more likely to represent an exogenous shock to wealth

The Political Economy of Government-Issued Longevity Bonds

Abstract: This article explores the trade-offs associated with government issuance of longevity bonds as a way of stimulating private annuity supply in the presence of aggregate mortality risk. We provide new calculations suggesting a 5 percent chance that aggregate mortality risk could ex post raise annuity costs for private insurers by as much as 5-10 percentage points, with the most likely effect based on historical patterns toward the lower end of that range. While we suspect that aggregate mortality risk does exert some upward pressure on annuity prices, evidence from private market pricing suggests that, to the extent that private insurers are accurately pricing this risk, the effect is less than 5 percentage points. We discuss ways that the private market can spread this risk, while emphasizing that the government has the unique ability to spread aggregate risk across generations. We note factors that might hamper such an efficient allocation of risk, including potential political incentives for the government to shift more than the optimal amount of risk onto future generations, and the possibility that government fiscal policy might allocate risk less efficiently within each generation than would private markets. We also discuss how large-scale longevity bond issuance might affect government borrowing costs, as well as political economy aspects of how the proceeds from such a bond issuance might be used. INTRODUCTION The provision of longevity insurance is a central function of governments around the world, as evidenced by the large share of public expenditures dedicated to public defined benefit pension systems. In most developed nations, the national government provides pension benefits in the form of annuities, which provide individuals with insurance against outliving their resources. At least since Yaari's (1965) seminal article, it has been known that the theoretical welfare gains to providing individuals with access to annuities are substantial. These gains arise because annuities provide risk averse individuals with a guaranteed lifelong income stream that lasts for as long as the annuitant survives, thus enhancing consumption smoothing by eliminating the individual's mortality risk as a significant source of financial uncertainty. Despite the potential welfare gains from annuitization, the private annuity markets in many countries, including the United States, are not well developed, and a large literature has developed to explore the reasons why this is so. (1) Indeed, the potential "failure" of private annuity markets is often listed as one of several leading rationales for why government intervention in the retirement income market is potentially welfare enhancing. While there are many possible reasons that the annuity market is small, including both rational and behavioral explanations, the private annuity market failure that is most commonly discussed in the literature is adverse selection. There is ample evidence that individuals who purchase private annuity contracts live longer, on average, than individuals who do not, and that this longevity differential leads private insurers to charge higher prices for annuities than they would in the absence of this selection effect (Mitchell et al., 1999). Adverse selection is a form of market failure that can, in principle, be addressed through government intervention. That is, if the government required that individuals annuitize part of their savings, individuals with lower-than-average life expectancies would be forced into the market, thus eliminating the information-based selection effects. Importantly, the government need not be the annuity provider in this scenario; instead, the government must simply use its power of compulsion to force individuals into annuity arrangements. Even if adverse selection were adequately addressed through government intervention, however, another potential market failure is not solved simply by mandating that individuals annuitize. …

Household Ownership of Variable Annuities

Abstract: Variable annuities have been one of the most rapidly growing financial products of the last two decades. Between 1996 and 2004, nominal sales of variable annuities in the U.S. more than doubled, from $51 billion to $130 billion. Variable annuities now account for approximately nearly two thirds of annuity sales. The investment returns associated with variable annuities resemble those from mutual funds, and variable annuity buyers can select among a range of asset allocation options. Variable annuities are considered insurance products under the tax law, so buyers are not taxed on their investment returns until they make withdrawals from their variable annuity accounts. This paper describes the tax treatment of variable annuities, presents summary information on their ownership patterns, and explores the importance of several distinct motives for household purchase of variable annuities. The discussion of tax treatment examines the impact of the 2001 and 2003 tax bills on the relative tax treatment of variable annuities and other financial products. Household data from the 1998 and 2001 Survey of Consumer Finances shows that variable annuity ownership is highly concentrated among high income and high net wealth sub-groups of the population. Variable annuity ownership is less concentrated, however, than ownership of several other types of financial assets. Evidence on the role of tax incentives in encouraging ownership of variable annuities is mixed. The probability of owning a variable annuity rises with the marginal tax rate throughout most of the income distribution, but it is lower for households in the top tax bracket than for those with slightly lower tax rates.

Household Ownership of Variable Annuities

Abstract: Variable annuities have been one of the most rapidly growing financial products of the last two decades. Between 1996 and 2004, nominal sales of variable annuities in the U.S. more than doubled, from $51 billion to $130 billion. Variable annuities now account for approximately nearly two thirds of annuity sales. The investment returns associated with variable annuities resemble those from mutual funds, and variable annuity buyers can select among a range of asset allocation options. Variable annuities are considered insurance products under the tax law, so buyers are not taxed on their investment returns until they make withdrawals from their variable annuity accounts. This paper describes the tax treatment of variable annuities, presents summary information on their ownership patterns, and explores the importance of several distinct motives for household purchase of variable annuities. The discussion of tax treatment examines the impact of the 2001 and 2003 tax bills on the relative tax treatment of variable annuities and other financial products. Household data from the 1998 and 2001 Survey of Consumer Finances shows that variable annuity ownership is highly concentrated among high income and high net wealth sub-groups of the population. Variable annuity ownership is less concentrated, however, than ownership of several other types of financial assets. Evidence on the role of tax incentives in encouraging ownership of variable annuities is mixed. The probability of owning a variable annuity rises with the marginal tax rate throughout most of the income distribution, but it is lower for households in the top tax bracket than for those with slightly lower tax rates.

Household Ownership of Variable Annuities

Abstract: Variable annuities have been one of the most rapidly growing financial products of the last two decades. Between 1996 and 2004, nominal sales of variable annuities in the United States more than doubled, from $51 billion to $130 billion. Variable annuities now account for almost two-thirds of annuity sales. The investment returns associated with variable annuities resemble those from mutual funds, and variable annuity buyers can select among a range of asset allocation options. Variable annuities are considered insurance products under the tax law, so buyers are not taxed on their investment returns until they make withdrawals from their variable annuity accounts. This paper describes the tax treatment of variable annuities, presents summary information on their ownership patterns, and explores the importance of several distinct motives for household purchase of variable annuities. The discussion of tax treatment examines the impact of the 2001 and 2003 tax bills on the relative tax treatment of variable ...

Medicaid Crowd-Out of Private Long-Term Care Insurance Demand: Evidence from the Health and Retirement Survey

Abstract: This paper provides empirical evidence of Medicaid crowd out of demand for private long-term care insurance. Using data on the near- and young-elderly in the Health and Retirement Survey, our central estimate suggests that a $10,000 decrease in the level of assets an individual can keep while qualifying for Medicaid would increase private long-term care insurance coverage by 1.1 percentage points. These estimates imply that if every state in the country moved from their current Medicaid asset eligibility requirements to the most stringent Medicaid eligibility requirements allowed by federal law â€" a change that would decrease average household assets protected by Medicaid by about $25,000 â€" demand for private long-term care insurance would rise by 2.7 percentage points. While this represents a 30 percent increase in insurance coverage relative to the baseline ownership rate of 9.1 percent, it also indicates that the vast majority of households would still find it unattractive to purchase private insurance. We discuss reasons why, even with extremely stringent eligibility requirements, Medicaid may still exert a large crowd-out effect on demand for private insurance.

Top Ten Myths Of Social Security Reform

Abstract: This paper critically examines ten leading myths that have gained currency in the debate about reforming the U.S. Social Security system, including myths that have been propagated by both proponents and opponents of including personal accounts as part of any reform package.

Medicaid Crowd-Out of Private Long-Term Care Insurance Demand: Evidence from the Health and Retirement Survey

Abstract: This paper provides empirical evidence of Medicaid crowd out of demand for private long-term care insurance. Using data on the near- and young-elderly in the Health and Retirement Survey, our central estimate suggests that a $10,000 decrease in the level of assets an individual can keep while qualifying for Medicaid would increase private long-term care insurance coverage by 1.1 percentage points. These estimates imply that if every state in the country moved from their current Medicaid asset eligibility requirements to the most stringent Medicaid eligibility requirements allowed by federal law â€" a change that would decrease average household assets protected by Medicaid by about $25,000 â€" demand for private long-term care insurance would rise by 2.7 percentage points. While this represents a 30 percent increase in insurance coverage relative to the baseline ownership rate of 9.1 percent, it also indicates that the vast majority of households would still find it unattractive to purchase private insurance. We discuss reasons why, even with extremely stringent eligibility requirements, Medicaid may still exert a large crowd-out effect on demand for private insurance.

Examining Influence of Multidestination Service Orientation on Transit Productivity Change: Multivariate Analysis

Abstract: Between 1990 and 2000, U.S. transit agencies added service and increased ridership, but the ridership increase failed to keep pace with the service increase. The result was a decline in service effectiveness (or productivity). This marks the continuation of a long-running and often-studied trend. The literature attributes this phenomenon, at least in part, to transit agency decisions to add service in the suburbs rather than focus on serving the traditional CBD market. Many scholars argue that suburban service is wasteful because it attracts few riders and requires large per-rider subsidies. This research tests whether a non-traditional, suburb-focused service orientation, called multidestination service, increases or decreases service productivity. Contrary to what the literature suggests, we find that MSAs whose transit agencies pursued a multidestination service orientation saw productivity increase while those MSAs where agencies focused on serving transit’s traditional CBD market saw productivity fall. These results indicate that policies that have encouraged the growth of suburban transit services have not necessarily been detrimental to the industry.