Assessing Knowledge of Retirement Behavior (1996) / Chapter Skim
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2 INCOME AND WEALTH OF OLDER AMERICAN HOUSEHOLDS: MODELING ISSUES FOR PUBLIC POLICY ANALYSIS
2 INCOME AND WEALTH OF OLDER AMERICAN HOUSEHOLDS: MODELING ISSUES FOR PUBLIC POLICY ANALYSIS
Pages 11-60
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From page 11... ...
Thomas Juster This paper is concerned with the economic behavior determining the income and wealth of older American households, and with our capacity to analyze the effects of public policies determining their income and wealth. It begins by providing a structure for relating the outcomes of interest to leading behavioral models.
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From page 12... ...
They include the basic decisions of labor supply and savings, as well as other behaviors that must receive attention for a full understanding of wealth and income. Below that in Box C is an array of market-determined outcomes that are taken as exogenous to the individual, such as the features of the pension plan, determined by the employer subject to market constraints.
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From page 13... ...
As a result of our analysis, we conclude that among the key dimensions of behavior, we have greater confidence in the retirement models for use in policy analysis than in models of saving or pensions. Models of savings and pensions continue to wrestle with behavioral issues that remain unresolved at a more fundamental level than the questions that confront retirement modeling.
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From page 14... ...
For example, one would generally prefer to include imputed income from housing equity in the income definition and might well include imputed values for services provided by Medicare and Medicaid. The wealth data might include present discounted values for Supplemental Security Income, other welfare payments, and transfers.
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From page 15... ...
, and for AHEAD (for age groups TABLE 2-2 Income Components, HRS and AHEAD, in Thousands of Dollars Age of Household Head Income Source 51 55a56 61a 70 74b 75 79b 80-84b 85+b Earnings 40.632.4 4.0 1.5 1.0 0.2 Pensions 1.02.8 16.6 15.9 12.4 10.4 Social Security 0.10.2 10.2 10.4 9.4 8.2 Private pension 0.92.6 6.4 4.5 3.0 2.2 Capital Income 5.15.9 2.1 2.9 2.6 1.8 Disability 0.40.6 Welfare 0.30.3 ~1.1 0.8 0.7 0.8 Unemployment 0.40.3 J Other 0.20.2 Total 48.042.4 24.8c 2l.9c l7.8C l5.7C Household members other than respondent or spouse 4.94.7 3.0 2.8 3.7 5.0 Total 52.947.1 27.8 24.7 21.5 20.7 al991 HRS data. bl992 AHEAD data.
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From page 16... ...
10 25 50 75 90 Wage Income 70-74 4,059 18,989 0 0 0 08,000 75-79 1,463 14,934 0 0 0 00 80-84 1,013 15,586 0 0 0 00 85+ 162 12,776 0 0 0 00 Capital Income 70-74 2,089 6,923 0 0 0 2404,620 75-79 2,941 9,396 0 0 0 3184,800 80-84 2,605 9,182 0 0 0 3005,000 85+ 1,798 6,987 0 0 0 03,600 Social Security Income 70-74 10,246 10,2594,4406,5169,48013,000 15,900 75-79 10,374 10,3904,8006,4209,21012,696 16,308 80-84 9,384 9,4114,6086,0008,20811,724 14,712 85+ 8,248 8,2764,2365,5507,5789,492 12,000 Pension Income 70-74 6,404 10,660002,6807,218 16,080 75-79 4,539 8,647001,2004,644 11,604 80-84 2,964 6,7140002,964 9,540 85+ 2,247 6,3660002,247 6,900 Other Income 70-74 1,109 6,1260000 2,400 75-79 773 4,6520000 1,861 80-84 740 4,0760000 1,861 85+ 773 4,1890000 2,160 Other Family Members' Income 70-74 3,026 19,870 0 0 0 0 13,162 75-79 2,839 19,719 0 0 0 0 13,162 80-84 3,689 22,379 0 0 0 0 13,162 85+ 4,979 21,386 0 0 0 6,571 13,162 Total Family Income 70-74 27,778 8,280 12,460 19,304 29,723 49,200 75-79 24,754 7,428 10,374 16,539 25,004 42,374 80-84 21,515 6,528 9,398 13,992 22,561 38,352 85+ 20,723 6,564 8,400 13,000 20,476 35,064 in their 70s and 80s)
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From page 17... ...
and Table 2-A5 (net worth excluding home equity) , as well as for racial/ethnic groups in Tables 2-A6 (total net worth)
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From page 18... ...
The principal message from this set of net-worth tables is that wealth is highly unevenly distributed among the older population: both in the HRS and the AHEAD samples, married couples have substantially higher levels of wealth than single men or single women, even after implicit correction for household size; the disparities are substantially larger for net worth less housing equity than for total net worth, since housing equity itself is somewhat more evenly distributed than most other assets; minority households have substantially fewer assets than whites by an order of magnitude of 4 or 5 to 1 in mean values, and an order of magnitude more like 10 to 1 for net worth less housing equity. For the AHEAD data, there are of course substantial differences by age group as well as by family composition and racial/ethnic group.
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From page 19... ...
On that model, households with substantial pensions would have had less current income than other comparably situated households; during retirement, they would be expected to have more pension income than others, but less income from capital and from Social Security benefits. In an alternative model, the market is such that jobs that carry pensions are also apt to carry higher current income than other jobs, perhaps because only those with high wage rates want pensions, given the tax advantages of pensions and the low Social Security replacement rate for high wage jobs.
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From page 20... ...
It is clear enough from the data, especially the AHEAD data, that favorable economic circumstances cumulate rather than offset. Both for the HRS age range and for the various AHEAD age ranges, households either expecting or receiving pension income have substantially higher nonpension income (capital income and job earnings in the case of HRS households, Social Security benefits and capital income in the case of AHEAD households)
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From page 21... ...
The discussion covers labor supply decisions, savings behavior, pension plan determination, and the determination of Social Security income at the level of the individual. Also discussed are the behaviors determining family structures and transfers, and the demand for housing.
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From page 22... ...
of that portion of the trend to earlier retirement observed from 1970 through the mid-1980s (see Gustman and Steinmeier, 1986b, 1994a; Anderson, Gustman and Steinmeier, 1994~. Recent contributions have been made on a number of dimensions, adding to the richness of the dynamic specification, considering reaction to risk as well as expected values, incorporating interdependence of decisions at the level of the family, entertaining the possibility of retirement behavior that is influenced by liquidity constraints, and enriching the array of nonfinancial considerations employed in the model.2 Despite all of this work, there are many basic questions about retirement behavior that have not yet been addressed.
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From page 23... ...
With the use of structural retirement models, some of the trend (about a quarter of the trend in the 1970s and 1980s) can be explained by the changes in pensions and Social Security.4 We still do not have enough confidence in the implied substitution and income effects from these models to have a firm handle on the causes of these trends.5 Also disturbing in this context are the strong implications of the pension literature that pensions are designed to meet the preferences of covered workers (Gustman, Mitchell, and Steinmeier, 1994)
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From page 24... ...
More generally, we need to know how expectations are formed, how they are revised, and what differences there are in the formation of expectations and behavior for those who correctly report their constraints and for those who do not. When the role of health status is measured in structural retirement models, it is measured by relatively direct questions about whether the individual suffers from health problems that impede work or other activities.6 Researchers are aware that reported health status may involve an ex post rationalization, with an individual reporting he retired owing to ill health when that was not the motivating factor.
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From page 25... ...
If there are high rates of time preference, then the precautionary motive may dominate savings behavior even if the capital market is perfect. In precautionary models where agents display prudence, a precautionary motive may lead them to choose not to borrow, so they appear to be credit constrained.
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From page 26... ...
. Although the life-cycle model considers the calculations of the individual or couple in isolation, research on bequest motives involves adopting intergenerational or family-based models for analyzing consumption and savings.
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From page 27... ...
The relative weight given in these models to life-cycle retirement savings and precautionary savings varies. Nevertheless, the models do incorporate responses to risks such as those from earnings variation, health outcomes, and uncertain length of life.
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From page 28... ...
For a critique of the last study, see Bernheim, 1994.) Either those with pension or housing wealth reduce their holdings of financial assets proportionately, or they do notes Without resolving these questions, which requires resolving ongoing controversies in the literature, we are in no position to judge the effects of a number of important policies that will affect savings.
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From page 29... ...
Pensions and Social Security At the Level of the Individual At the level of the individual's decision, Social Security and pension income are the result of joint choices determining labor supply and benefit acceptance. The provisions of Social Security and pensions are taken as exogenous to the choices the individual will make.
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From page 30... ...
But to predict the second-order effects of these changes will require a greater understanding of savings behavior than we now have. Pension Plan Determination at the Level of the Firm A basic building block in the conventional model explaining the demand for private pensions is the tax-favored status of the pension.
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From page 31... ...
The conventional models also generate other predictions that do not accord with the data, raising concern for our ability to predict how private pensions will respond to changes in pension policies, in tax policies, or in the Social Security system. Among the empirical regularities that pension studies attempt to explain are the basic result that compensation accrual and productivity do not correspond in each year of attachment and the existence of other unique labor market institutions, such as mandatory retirement provisions, which were commonplace before they were banished by law.
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From page 32... ...
After rising during the 1960s and 1970s, pension coverage ceased to grow in the middle 1980s. Now there is evidence that the upward trend in coverage, especially for defined contribution plans, may have resumed in just the last year or two (Employee Benefit Research Institute, 1993~.~8 Despite all of the efforts to explain the regularities in pension-related outcomes, most testing looks for partial relationships in the context of multivariate single-equation models.
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From page 33... ...
We are only beginning to explore the questions related to family structure and transfers, and their linkage to labor supply, savings, and pension determination. Living arrangements are a first outcome that will be investigated with more sophisticated models.
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From page 34... ...
At least until they reach their early 70s, home owners do not draw down on their housing wealth. Although it may be argued that stickiness in housing wealth reflects the fixed costs of location, older home owners do not adjust housing equity even when they move (Vent)
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From page 35... ...
In structural retirement models, for example, savings is assumed either to be motivated by life-cycle savings, with savings choices made in the context of a perfectly operating capital market, or to occur in a world where income and consumption are assumed to be identical.20 Mechanically, with three major behavioral models, there are six linkages that we would like to understand. We would like to understand the linkages from labor supply to savings behavior and pension plan determination, from savings behavior to labor supply and pension plan determination, and from pension plan determination to labor supply and savings.
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From page 36... ...
Consequently, the effects of certain policies will be misunderstood in retirement models that do not incorporate the effects of savings behavior. The difficulties in understanding savings behavior thus have implications not only for the determination of income from nonpension savings, but also for understanding retirement behavior and thus for the path of income from earnings.
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From page 37... ...
The models of savings behavior require further integration of competing motivations into a single framework. Models of pensions will require a further understanding of the motivation of the demand for pensions by workers as well as the behavior underlying human resource policies of the firm and their importance in shaping pensions.
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From page 38... ...
Thus, in deciding on priorities for future research, we must answer questions such as the following: If the motivation for savings takes us well beyond the simple life-cycle model, what are the implications for parameter estimates obtained in most of our life-cycle labor supply models? If pensions are designed to meet the preferences of the work force, how serious is endogeneity of the pension incentives for our measurement of worker preferences?
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From page 39... ...
HRS was designed with dynamic, structural retirement models in mind and provides the depth of information that will help us to improve our understanding of retirement behavior at the level of the individual.25 HRS and AHEAD were designed to provide the basic information needed to model retirement and savings behavior. Special efforts were made to reduce measurement error.
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From page 40... ...
Potential pension reforms continue to be formulated with at least five goals in mind: to increase coverage, to reduce revenue losses through tax deductibility, to protect the implicit pension contract, to increase the incentive to postpone retirement, and to level the distribution of benefits among high- and low-income employees.28 Potential changes in policies could change the tax treatment of pensions, mandate the availability of pensions, alter a variety of eligibility and vesting rules, further change treatment of spouses under pensions, further change funding rules including minimum and maximum funding levels, change treatment of retiree health benefits, change acceptable actuarial assumptions and procedures, alter discrimination rules (including further regulation of matching provisions under 401(k~s) , change rules governing Social Security offsets, change the rules governing pensions of highly paid employees, regulate the backloading of pensions, require that payments to terminated vested employees be based on projected earnings or some related mechanism rather than on the last few years of nominal earnings, adjust rules affecting the returns to invested pension assets by further regulating these investments or mandating certain types of investment, change rules governing asset investments for defined contribution plans, regulate or mandate post-retirement benefit increases, regulate rollovers from pension plans, and introduce an array of policies that would affect the terms of Pension
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From page 41... ...
We will need a better understanding not only of the behaviors of labor supply, savings, and pension plan determination, but of the relationships among these modes of behavior. APPENDIX TABLES AND FIGURES The tables and figures begin on page 42.
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From page 42... ...
10 25 50 75 90 Net Worth Less Housing Equity Couples Single men Single women Total Housing Equity Couples Single men Single women Total Total Net Worth Couples Single men Single women Total 5,229 197.9 741 124.9 1,632 55.0 7,602 163.0 5,229 741 1,632 7,602 5,229 741 1,632 7,602 2.0 o -0.7 o 90.9 0 42.0 0 42.4 0 76.9 0 288.8 166.9 97.5 239.9 15.0 o o 1.1 13.0 1.0 o 6.1 27.0 o o 10.0 56.0 4.0 1.2 32.4 53.0 16.0 7.0 37.1 60.5 6.0 16.5 50.0 132.8 43.0 36.4 101.0 166.0 426.0 81.8 229.0 45.0 140.0 130.0 355.0 110.0 197.0 56.0 126.0 58.0 122.0 100.0 177.5 285.0 157.0 115.5 239.0 602.0 320.5 259.3 512.0 TABLE 2-A2 Net Worth by Ethnicity, HRS Data Mean Sample Value Size ($000) Percentiles ($000)
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From page 43... ...
10 25 50 75 90 Net Worth Less Housing Equity < lOK854 48.6 -0.7 0 0.4 15.048.8 10-25K1,696 66.2 -0.3 0.9 8.2 46.0148.0 25-50K2,405 96.7 1.2 9.5 34.0 97.0224.2 50-1OOK2,077 195.4 7.5 25.5 72.4 193.6423.0 > lOOK570 665.4 32.0 90.0 240.0 695.01,792.2 Total7,602 163.0 0 6.1 37.1 130.0355.0 Housing Equity < lOK854 29.3 0 0 0 35.080.0 10-25K1,696 50.3 0 0 27.0 65.0120.0 25-50K2,405 65.3 0 17.0 48.0 85.0150.0 50-1OOK2,077 93.3 1.0 37.0 70.0 120.0197.0 > lOOK570 181.7 29.0 67.0 125.0 225.0393.0 Total7,602 76.9 0 10.0 50.0 100.0177.5 Total Net Worth < lOK854 78.8 -0.5 0 5.8 54.0169.6 10-25K1,696 116.5 0 7.3 43.5 120.8269.0 25-50K2,405 162.0 8.0 39.0 92.0 188.0350.0 50-1OOK2,077 288.6 35.0 83.7 165.0 313.1590.0 > lOOK570 847.1 100.3 198.0 405.0 923.42,166.0 Total7,602 239.9 1.1 32.4 101.0 239.0512.0
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From page 44... ...
10 25 50 75 90 Age 70-74 Couples 946 276.3 17.0 57.0 140.9 309.0 578.8 Single men 233 201.7 0 10.0 65.0 167.0 367.8 Single women 825 178.1 0 4.1 51.4 132.5 295.0 Total 2,004 209.2 0.3 26.6 90.6 315.0 462.5 Age 75-79 Couples 581 274.1 11.0 50.7 118.0 264.0 610.0 Single men 203 164.3 1.0 14.0 71.0 171.0 319.0 Single women 812 105.1 0 3.7 47.8 116.0 236.0 Total 1,596 177.0 0.1 16.2 71.0 168.8 364.0 Age 80-84 Couples 371 242.2 10.0 43.5 114.2 236.0 495.3 Single men 154 148.6 0.5 10.0 51.0 132.0 289.0 Single women 702 87.5 0 3.5 40.5 101.5 188.5 Total 1,227 142.7 0.1 10.2 60.0 143.0 290.0 Age 85+ Couples 155 162.1 1.0 21.0 75.6 216.0 415.0 Single men 145 121.5 0 1.0 25.9 101.0 287.6 Single women 595 85.8 0 1.5 30.0 100.0 203.0 Total 895 104.7 0 2.0 37.0 111.0 247.0
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From page 45... ...
10 25 50 75 90 Age 70-74 Couples 946 176.6 1.0 11.0 55.7 190.0 420.0 Single men 233 140.3 0 2.1 17.0 89.0 255.4 Single women 825 68.3 0 0.1 7.5 50.0 160.5 Total 2,004 129.6 0 2.2 25.9 109.2 323.0 Age 75-79 Couples 581 176.8 0.8 10.0 38.0 150.0 417.0 Single men 203 80.2 0 2.0 15.5 83.0 205.0 Single women 812 53.0 0 0.2 7.0 39.5 125.0 Total 1,596 103.6 0 1.3 15.8 76.3 247.0 Age 80-84 Couples 371 161.3 1.0 8.0 37.0 139.0 370.3 Single men 154 107.5 0.1 1.2 19.5 66.8 224.0 Single women 702 42.7 0 0.2 5.1 40.0 112.0 Total 1,227 87.2 0 1.0 12.2 64.1 191.0 Age 85+ Couples 155 104.8 0 2.0 20.0 125.0 271.0 Single men 145 74.8 0 0.4 7.0 45.0 114.5 Single women 595 48.1 0 0 5.0 33.2 113.0 Total 895 62.2 0 0.2 6.7 50.0 140.0
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From page 46... ...
46 ASSESSING KNOWLEDGE OF RETIREMENT BEHAVIOR TABLE 2-A6 Total Net Worth by Ethnicity and Age, AHEAD Data Mean Percentiles ($000) SampleValue EthnicitySize ($000)
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From page 47... ...
INCOME AND WEALTH OF OLDER AMERICAN HOUSEHOLDS TABLE 2-A7 Net Worth Excluding Home Equity by Ethnicity and Age, AHEAD Data 47 Mean Percentiles ($000) Sample Value EthnicitySize ($000)
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From page 48... ...
................ i Ail_ Fair Wife's Health Status FIGURE 2-A2 Relationship of health status and median net worth for married-couple households.
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From page 49... ...
SOURCE: Tabulations of the Health and Retirement Survey. Median Household Income $80,000 ; $40,00G o Mint ~ Very good - ire s Health Very good G :~ = Poor Status Poor Husband's Health Status FIGURE 2-A4 Relationship of health status and median income for married-couple households.
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From page 50... ...
If higher wages are responsible for the trend to earlier retirement, why did the trend begin only after the 1930s in the United States? And more generally, why aren't these wage effects picked up by structural retirement models?
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From page 51... ...
. Another set of results suggests that accelerating the 1983 Social Security reforms to eliminate penalties from continuing work after reaching Social Security normal retirement age, or equivalently abolishing the retirement earnings test, will have only a small effect on retirement in the affected cohorts (Gustman and Steinmeier, 1991)
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From page 52... ...
. For data on the changes in early retirement provisions of pension plans over the past two decades, see Ippolito (1990)
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From page 53... ...
American Economic Review 75(4)
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From page 54... ...
Moffitt 1984 The effect of Social Security benefits on the labor supply of the aged.
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From page 55... ...
American Economic Review 84(5)
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From page 56... ...
:733-745. 1992 The stampede towards defined contribution pension plans: Fact or fiction?
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From page 57... ...
:556-569. 1995 Toward explaining the growth of defined contribution pension plans.
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From page 58... ...
1995 Pension substitution in the 1980's: Why the shift toward defined contribution pension plans? Industrial Relations 34(2)
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From page 59... ...
1994 Targeted retirement saving and the net worth of elderly Americans. American Economic Review 84(2)
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From page 60... ...
Chicago, Ill.: University of Chicago Press. 1989 Aging, moving and housing wealth.
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