Showing papers in "Journal of Pension Economics & Finance in 2020"
TL;DR: In this article, the factors affecting financial literacy in Japan using data from the Preference Parameter Study were examined using several demographic, socio-economic, and psychological variables drawn from the social learning, consumer socialization, and psychology theories of learning.
Abstract: This study investigates the factors affecting financial literacy in Japan using data from Osaka University's Preference Parameter Study We examine several demographic, socio-economic, and psychological variables drawn from the social learning, consumer socialization, and psychological theories of learning The results indicate that the demographic factors of gender, age, and education; the socio-economic factors of income and occupation; and the psychological factor of perceptions of the future significantly affect the level of financial literacy The results are robust to different measures of financial literacy and emphasize that social contact and people's future orientation can improve financial literacy levels in Japan
62 citations
TL;DR: This paper used experimental evidence from Chile to explore how these factors appear related to poor financial decisions and found that their measure of impatience is a strong predictor of wealth and investment in health.
Abstract: Two competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement wellbeing would do well to consider the importance of both factors.
56 citations
TL;DR: Bravo et al. as mentioned in this paper studied the long-run effects of early and late-career unemployment spells on pension entitlements and concluded that career breaks, broken pensions, and broken pensions are correlated.
Abstract: Bravo, J. M., & Herce, J. A. (2020). Career breaks, broken pensions? Long-run effects of early and late-career unemployment spells on pension entitlements. Journal of Pension Economics and Finance. [Advanced online publication on 22 July 2020]. Doi: https://doi.org/10.1017/S1474747220000189
23 citations
TL;DR: In this article, the authors analyzed gender and socioeconomic differences in the length of working lives and pension income in Finland and found that unequal life-time earnings and occupational segregation remain main challenges for equalizing pension income.
Abstract: In this paper, we analyze gender and socioeconomic differences in the length of working lives and pension income in Finland. Based on internationally unique data covering 50 years of recorded information on individual employment histories and first-year old-age pension income of a cohort retiring in 2011, we trace life-time work histories and their relation to pension income with greater precision than previous studies. While gender and socioeconomic income differences in the lengths of working lives are modest, differences in pension income are more pronounced. The residence-based national pension targeted at those with no or only low earning-related pension accrual plays an important role in cushioning old-age income differences. The results suggest that unequal life-time earnings and occupational segregation remain main challenges for equalizing pension income in old age.
16 citations
TL;DR: In this paper, the causal links between communication, pension knowledge, and conscious pension decision-making were analyzed using Dutch longitudinal data, and a robust finding is that pension knowledge has a positive causal effect on active pension decision making.
Abstract: Many recent pension reforms require individuals to make more decisions on supplementary savings, investment choices, etc. Governments and the pension industry try to assist individuals through pension communication but little is known about the effectiveness of such policies. This paper uses Dutch longitudinal data to analyse the causal links between communication, pension knowledge, and conscious pension decision-making. A robust finding is that pension knowledge has a positive causal effect on active pension decision-making. Providing an annual pension statement might have a small positive effect on pension knowledge, but this result is sensitive to the identifying assumptions.
13 citations
TL;DR: In this paper, the authors provide evidence that a small-scale training intervention has both a statistically and economically significant effect on subjective and objective assessments of financial knowledge, and also show that the intervention increases self-assessed more than actual financial knowledge.
Abstract: Based on a sample of university students, we provide evidence that a small-scale training intervention has both a statistically and economically significant effect on subjective and objective assessments of financial knowledge. We also show that the intervention increases self-assessed more than actual financial knowledge. The intervention consists of measuring financial literacy before and after a small on-line course and is administered through an on-line platform.
13 citations
TL;DR: In this paper, the authors present estimates of Social Security Wealth (SSW) at the individual level based on the SHARE survey, which are based on a rigorous methodology taking into account country-specific legislations, the earning history and the longevity prospects of individuals.
Abstract: We present novel estimates of Social Security Wealth (SSW) at the individual level based on the SHARE survey. Our estimates are based on a rigorous methodology taking into account country-specific legislations, the earning history and the longevity prospects of individuals. The key advantage over existing estimates is that our measures of SSW are fully comparable across countries. This allows us to construct indexes of the redistribution enacted by the pension systems in Europe. Finally, we provide descriptive evidence of the relationship between SSW and private wealth.
13 citations
TL;DR: In this paper, the authors study the immediate impact of the 2010 reform of the French pension system by carrying out a short-term evaluation on the increase of the statutory eligibility age from 60 to 61.
Abstract: Increasing the minimum retirement age is a widespread option chosen by policy makers to reduce spending in financially constrained public pension systems. Yet, the effectiveness of such a reform strongly depends on the ability of individuals to postpone their withdrawal from the labor force. In this paper, we study the immediate impact of the 2010 reform of the French pension system by carrying out a short-term evaluation on the increase of the statutory eligibility age from 60 to 61. We use a differences-in-differences methodology, comparing the trajectories from work to retirement for succeeding generations facing a different statutory age. Using a detailed social security administrative database, we provide a global assessment of the effects of the reform, accounting for the potential substitution effects from old-age insurance toward unemployment, sickness or disability insurance schemes. Our findings suggest that despite a sizable effect on the employment rate, the reform also strongly increased unemployment and disability rates.
13 citations
TL;DR: In this article, the authors set up an overlapping-generations model with endogenous fertility to study pensions policies in an ageing economy and showed that an increasing life expectancy may not be detrimental for the economy or the pension system itself.
Abstract: We set up an overlapping-generations model with endogenous fertility to study pensions policies in an ageing economy. We show that an increasing life expectancy may not be detrimental for the economy or the pension system itself. On the other hand, conventional policy measures, such as increasing the retirement age or changing the social security contribution rate could have undesired general equilibrium effects. In particular, both policies decrease capital per worker and might have negative effects on the fertility rate, thus exacerbating population ageing.
12 citations
TL;DR: The authors found that self-employment is even more prevalent at older ages than suggested by existing data, especially after accounting for individuals who are miscoded as employees, and they provided evidence that differences in opportunities for independent contractor work play an important role in the lower employment rates of less-educated older adults.
Abstract: The share of workers who are self-employed rises markedly with age. Given policy concerns about inadequate retirement savings, especially among those with lower education, and the resulting interest in encouraging employment at older ages, it is important to understand the role that self-employment arrangements play in facilitating work among seniors. New data from a survey module fielded on a Gallup telephone survey distinguish independent contractor work from other self-employment and provide information on informal and online platform work. The Gallup data show that, especially after accounting for individuals who are miscoded as employees, self-employment is even more prevalent at older ages than suggested by existing data. Work as an independent contractor is the most common type of self-employment. Roughly one-quarter of independent contractors aged 50 and older work for a former employer. At older ages, self-employment generally – and work as an independent contractor specifically – is more common among the highly educated, accounting for much of the difference in employment rates across education groups. We provide suggestive evidence that differences in opportunities for independent contractor work play an important role in the lower employment rates of less-educated older adults.
11 citations
TL;DR: The authors examined the empirical conditions under which retirees benefit (or may not) from longevity risk pooling by linking the economics of annuity equivalent wealth to actuarially models of aging, and focused attention on the Compensation Law of Mortality which implies that individuals with higher relative mortality age more slowly and experience greater longevity uncertainty.
Abstract: Who values life annuities more? Is it the healthy retiree who expects to live long and might become a centenarian, or is the unhealthy retiree with a short life expectancy more likely to appreciate the pooling of longevity risk? What if the unhealthy retiree is pooled with someone who is much healthier and forced to pay an implicit loading? To answer these and related questions this paper examines the empirical conditions under which retirees benefit (or may not) from longevity risk pooling by linking the economics of annuity equivalent wealth to actuarially models of aging. I focus attention on the Compensation Law of Mortality which implies that individuals with higher relative mortality (e.g., lower income) age more slowly and experience greater longevity uncertainty. Ergo, they place higher utility value on the annuity. The impetus for this research today is the increasing evidence on the growing disparity in longevity expectations between rich and poor.
TL;DR: In this paper, the authors examined the impact of the discount rate on the degree of redistribution, and the analytics behind it, and identified the distribution of the market value of the pension guarantee.
Abstract: 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.
TL;DR: In this paper, the authors provide empirical evidence on the mechanisms through which financial literacy may be associated with saving for retirement, in the three phases of the decision-making process: information perception, information search and evaluation, and decision making and implementation.
Abstract:
This study provides empirical evidence on the mechanisms through which financial literacy may be associated with saving for retirement, in the three phases of the decision-making process – information perception, information search and evaluation, and decision-making and implementation. The results indicate that financial literacy has significantly positive effects on one's awareness of post-retirement financial needs, comparing alternatives when purchasing financial products, displaying fewer present-time bias, and planning for and setting aside funds for retirement. Financial literacy not only directly contributes to planning for the future, but also indirectly via a reduction in behavioral biases.
TL;DR: The points system proposed by the Belgian Commission for Pension Reform 2020-2040 as mentioned in this paper can be seen as an extension of the points system in the context of the automatic adjustment mechanism, in which a key role is played by the career length.
Abstract: We describe the points system as proposed by the Belgian Commission for Pension Reform 2020–2040. Intragenerational equity can be realised through the allocation of points within a cohort. The intergenerational distribution is determined by fixing the value of a point for the newly retired and a sustainability parameter for the actual retirees. The value of the point links pensions to the average living standard of the employed population. We propose an automatic adjustment mechanism, in which a key role is played by the career length. This mechanism induces a balanced distribution of the burden of demographic and economic shocks over the different cohorts.
TL;DR: In this paper, the authors use a general equilibrium life cycle model, calibrated to micro and macro data in Spain, to study the scal and welfare consequences of three options for increasing pension generosity in Spain.
Abstract: The 2013 Spanish Pension Reform, aimed at guaranteeing the nancial sustainability of the system, introduced, among other measures, the Pension Revaluation Index (PRI), which uncouples annual pension updates from the Consumer Price Index (CPI) increases and makes the annual rise in all pensions conditional upon the system's revenue and expenditure being balanced, with ceilings and oors set in place. This automatic adjustment mechanism, however, has posed serious concerns about future pension adequacy, this being the degree of poverty alleviation and consumption smoothing that the pensions system provides to retirees, due to the expected large future reductions in the real value of the average pension. In this paper, we use a general equilibrium life cycle model, calibrated to micro and macro data in Spain, to study the scal and welfare consequences of three options for increasing pension generosity in Spain; (i) disability and minimum pensions are again fully indexed with the CPI; (ii) minimum and lower value pensions are fully indexed with the CPI; and (iii) returning to full price indexation of all Spanish pensions. While these three reforms increase, on average, pension adequacy, the tax increases needed to nance the higher future pension expenditure dier signicantly. Moreover, most current cohorts prefer returning to the full price indexation of all Spanish pensions, but future cohorts prefer that only disability and minimum pensions be fully indexed with the CPI.
TL;DR: In this article, the multiplier effects of pensions received at each Portuguese municipality since 2003 were studied and it was shown that pensions stimulate the incomes of municipalities, considering the spillovers from/to the surrounding areas.
Abstract: One of the major findings of this paper, which studied the multiplier effects of pensions received at each Portuguese municipality since 2003, is that pensions stimulate the incomes of municipalities. We studied these effects also considering the spillovers from/to the surrounding areas. After discussing several models of spatial analysis, we chose the Dynamic Spatial Durbin Model. Our results were obtained after considering a proper set of control variables.
TL;DR: In this paper, a notional defined contribution (NDC) approach aimed at helping pensioners to cope with the cost of long-term care (LTC) is proposed, which develops the necessary technicalities to fully integrate an LTC benefit, graded according to the annuitant's degree of disability, into a generic NDC retirement framework with a minimum pension benefit.
Abstract: This paper explores a notional defined contribution (NDC) approach aimed at helping pensioners to cope with the cost of long-term care (LTC). It develops the necessary technicalities to fully integrate an LTC benefit, graded according to the annuitant's degree of disability, into a generic NDC retirement framework with a minimum pension benefit for both contingencies. It also discusses the policy implications of various issues that should be taken into account before any decision is made to put the model into practice. Finally, to enable policymakers to better understand how the proposal would function, the paper includes a realistic numerical example.
TL;DR: The authors used an original microsimulation model based on retrospective survey data collected through the third wave of the Survey of Health, Ageing and Retirement in Europe (SHARE) to estimate the displacement effect of public pension wealth on other wealth in Belgium.
Abstract: It has been long suggested that public pension wealth may crowd out household savings. However, there remains controversy about the extent of this displacement effect. In this paper we use an original microsimulation model based on retrospective survey data collected through the third wave of the Survey of Health, Ageing and Retirement in Europe (SHARE) to estimate the displacement effect of public pension wealth on other wealth in Belgium. Combining this rich dataset with an accurate estimation of the individual pension entitlements allows us to circumvent some of the main measurement error problems faced by previous studies. We estimate that an extra euro of public pension wealth is associated with about 14–25 cent decline in households’ non-pension wealth.
TL;DR: In this article, the authors examined the benefits of independent workers who do not benefit from employer-provided benefits such as tax deduction, matching contributions, automatic enrollment, and other provisions that encourage saving.
Abstract: This paper examines retirement saving policy for independent – or contingent – workers, a growing segment of the workforce. Because few of these workers are covered by employer-sponsored retirement plans, they often do not benefit from payroll deduction, employer matching contributions, automatic enrollment, and other provisions that encourage retirement saving. Better use of fintech, judicious changes to tax policy, and expanded Automatic IRAs would help independent workers save for retirement. In addition, we propose the creation of retirement saving accounts that attach to the worker as a supplement to, and possible replacement for, the current system of employer-sponsored accounts.
TL;DR: In this article, a hyperbolic discount model was proposed to explain the low demand for immediate annuities at retirement and results in the attractiveness of long-term deferred annuity.
Abstract: The low demand for immediate annuities at retirement has been a long-standing puzzle. We show that a hyperbolic discount model can explain this behaviour and results in the attractiveness of long-term deferred annuities. With a set of benchmark assumptions, we find that retirees would be willing to pay a much higher price than the actuarial fair price for annuities with longer deferred periods. Moreover, if governments were to introduce a pre-commitment device which requires pensioners to make annuitisation decisions around ten years before retirement, the take up rate of annuities could become higher.
TL;DR: In this paper, the authors investigated whether exposure to explanatory diagrams can affect a major financial decision and found that the diagrams had at best a marginal influence on recall or comprehension, while both diagrams influenced the rationale participants gave for decisions.
Abstract: This paper investigates whether exposure to explanatory diagrams can affect a major financial decision. In a controlled experiment, participants were given Pension Benefit Statements with or without one or two diagrams, before answering incentivised questions that measured recall, comprehension and choice of contribution rate. The diagrams had at best a marginal influence on recall or comprehension. Nevertheless, a diagram relating contributions to income projections prompted more participants to advocate higher contributions, while both diagrams influenced the rationale participants gave for decisions. The implication is that although pension products remain hard to understand, diagrams may alter decisions by reinforcing relevant causal thinking.
TL;DR: In this article, the authors estimate the relative contributions to the gender pension gap of career duration and income earned at different points along the pension income distribution, as well as the role played by minimum pensions and other partly or wholly non-contributory policies in reducing this gap.
Abstract: Abstract In this article we estimate the relative contributions to the gender pension gap of career duration and income earned at different points along the pension income distribution, as well as the role played by minimum pensions and other partly or wholly non-contributory policies in reducing this gap. Our research covers all retirees in France in 2012 employed in the public or private sector at least once in their lifetimes. We first highlight that at every point in the distribution, the gender pension gap is wider for private-sector retirees than for those in the public sector. This is because public sector careers are less fragmented and because the calculation of the public sector reference wage does not penalize career interruptions so heavily. This relative advantage of women in the public sector is probably an additional factor explaining their over-representation in this sector. Applying the decomposition method proposed by Firpo et al. (2007, 2009), we show that composition differences in the gender pension gap are essentially due to differences in contribution periods and wages, with a smaller effect of career duration in the public sector than in the private. In the first deciles, the gap can be attributed largely to differences in career duration. This effect gradually weakens, and differences in the reference wage become the main explanation. We also show that minimum contributory pensions play an extremely important role in limiting the gender pension gap in the first deciles, essentially in the private sector. Last, we show that in all cases the unexplained share of the pension gap is substantial only at the bottom of the distribution and, to a lesser extent, in the top decile. The unexplained share is generally smaller than the explained one and favours men.
TL;DR: In this paper, the authors compare two contracts for managing systematic longevity risk in retirement: a collective arrangement that distributes the risk among participants, and a market-provided annuity contract, and evaluate the contracts' appeal with respect to the retiree's welfare, and the viability of the market solution through the financial reward to the annuity provider's equityholders.
Abstract: We compare two contracts for managing systematic longevity risk in retirement: a collective arrangement that distributes the risk among participants, and a market-provided annuity contract. We evaluate the contracts’ appeal with respect to the retiree's welfare, and the viability of the market solution through the financial reward to the annuity provider's equityholders. We find that individuals prefer to bear the risk under a collective arrangement than to insure it with a life insurers' annuity contract subject to insolvency risk (albeit small). Under realistic capital provision hypotheses, the annuity provider is incapable of adequately compensating its equityholders for bearing systematic longevity risk.
TL;DR: This work analyzes the effect of modifications to the survivor benefit information in the Statement on benefit knowledge and expected claiming behavior of married men using an experimental survey of workers to provide evidence that the augmentation of this information can temporarily improvebenefit knowledge and influence expected claim ages.
Abstract: The Social Security Statement is the primary resource most workers prefer to use to learn about their Social Security benefits. The Social Security Administration periodically mails this and supporting documents to all workers to help them make informed decisions about when to start receiving their benefits. Understandably, the Statement provides detailed information about the worker's retirement benefit. However, these documents contain remarkably little information about the survivor benefit despite the financial importance of this particular auxiliary benefit to the widows of deceased workers in widowhood. We analyze the effect of modifications to the survivor benefit information in the Statement on benefit knowledge and expected claiming behavior of married men using an experimental survey of workers. The results provide evidence that the augmentation of this information can temporarily improve benefit knowledge and influence expected claim ages.
TL;DR: In this paper, the authors examined the impact of this trend on investment performance and the factors that led to the reliance on AI, and found that the prospect of relying on AIs to meet investment return expectations remains a long-term challenge for state and local governments.
Abstract: Since 2001, public-pension plans have increasingly relied upon alternative investments (AIs). We examine the impact of this trend on investment performance and the factors that led to the reliance on AI. Using data from 92 largest plans 2001–2014, we found AI, especially private equity, generally had a positive effect on investment performance, but the effect was small and unsustainable. We also found that plans with a lower funded ratio and higher investment return expectation were more likely to allocate more assets to AIs. These findings suggest that the prospect of relying on AIs to meet investment return expectations remains a long-term challenge for state and local governments.
TL;DR: In this article, the authors examine reforms characterized by the establishment of mandatory funded privately-managed schemes in the social security framework and highlight the fundamental importance of economic forces in explaining the speed of reforms after adjusting for confounding effects of demographic and geopolitical factors.
Abstract: In this paper, we examine reforms characterized by the establishment of mandatory funded privately-managed schemes in the social security framework. We construct a new dataset to analyze the determinants of pension reforms over 1980–2012 in about 100 medium and large economies around the world. Our results highlight the fundamental importance of economic forces in explaining the speed of reforms after adjusting for the confounding effects of demographic and geopolitical factors. Countries with greater globalization growth and a history of economic crisis experienced a shorter time until reform. These findings are robust to variations in empirical methodology.
TL;DR: In this paper, the decumulation period of a Personal Pension with Risk sharing (PPR) with risk sharing is modeled and several relationships between the contract parameters are derived, consistent with habit formation.
Abstract: This paper models the decumulation period of a Personal Pension with Risk sharing (PPR). We derive several relationships between the contract parameters. Individuals can adopt two approaches to the decumulation period of a PPR: the investment approach and the consumption approach. In the investment approach, individuals specify how to invest wealth and how much wealth to withdraw. Retirement consumption follows endogenously. In the consumption approach, in contrast, individuals specify retirement consumption exogenously. Investment and withdrawal policies follow endogenously. We explore these two approaches in detail. Consistent with habit formation, we allow for excess smoothness and excess sensitivity in retirement consumption.
TL;DR: In this paper, the authors decompose investment returns of Dutch pension funds according to their key investment decisions, i.e., asset allocation, market timing and security selection, and assess the impact of benchmark selection.
Abstract: Using regulatory data free of self-reporting bias for 2007–16, we decompose investment returns of 455 Dutch pension funds according to their key investment decisions, i.e., asset allocation, market timing and security selection. In extension to existing papers, we also assess the impact of benchmark selection. Over time, asset allocation explains 39% of the variation of returns, whereas benchmark selection, timing and selection explain 11%, 9% and 16%, respectively. Across pension funds, asset allocation explains on average only 19% of the variation in pension fund returns. Benchmark selection dominates this by explaining 33% of cross-sectional returns. We relate the choice for a specific benchmark to investment, risk and style preferences.
TL;DR: In this paper, the authors show that the salience effect on the awareness of the benefits of supplementing lower perspective public pensions with PPPs increased the explanatory power of financial strength indicators.
Abstract: The revealed preference for dominated insurance-based personal pension plans (PPPs) in Italy is a decade-long puzzle. I surmise that a motivation from the supply side is a sales force factor deriving from the geographical distribution of financial providers, including the countrywide network of the state controlled Post Office. I provide supporting evidence using three biennial waves of the Bank of Italy's survey on household finances from 2010 to 2014. The time interval includes a public pension system reform sharply raising the statutory age retirement, legislated in December 2011 to defuse a sovereign debt crisis. I show that the salience effect on the awareness of the benefits of supplementing lower perspective public pensions with PPPs increased the explanatory power of financial strength indicators. Exploiting a module in the 2010 wave I estimate a surprising decrease in the probability of subscription to PPPs in 2014 associated with the indicator for the highest financial literacy level.
TL;DR: The authors used the Gustman and Steinmeier structural model of retirement timing to investigate which of these changes matter most by simulating their effects on the original cohort (1931-1941) of the Health and Retirement Study (HRS).
Abstract: Over the past two decades, the share of individuals claiming Social Security at the Early Eligibility Age has dropped and the average retirement age has increased. At the same time, Social Security rules have changed substantially, employer-sponsored retirement plans have shifted from defined benefit (DB) to defined contribution (DC), health has improved, and mortality has decreased. In theory, all of these changes could lead to a trend toward later claiming. Disentangling the effect of any one change is difficult because they have been occurring simultaneously. This paper uses the Gustman and Steinmeier structural model of retirement timing to investigate which of these changes matter most by simulating their effects on the original cohort (1931–1941) of the Health and Retirement Study (HRS). The predicted behavior is then compared with the actual retirements of the Early Boomer cohort (1948–1953) to see how much of the later cohort's delayed claiming and retirement can be explained by these changes. The Early Boomer cohort was less likely to be fully retired than the HRS cohort at both age 62 (36.7% vs. 44.0%) and age 64 (49.5% vs. 53.9%). The model suggests that the shift from DB toward DC plans was the biggest contributor to these declines, followed by better health. Social Security rules and improvements in mortality played smaller roles.