Assessing Knowledge of Retirement Behavior (1996) / Chapter Skim
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4 PERSONAL SAVING BEHAVIOR AND RETIREMENT INCOME MODELING: A RESEARCH ASSESSMENT
4 PERSONAL SAVING BEHAVIOR AND RETIREMENT INCOME MODELING: A RESEARCH ASSESSMENT
Pages 123-148
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From page 123... ...
Both of these tasks depend critically on the assumptions maintained about the determinants of personal saving, subjects of perennial controversy in both theoretical and empirical economics. This background paper identifies several aspects of personal saving behavior that bear on projecting the future financial status of elderly households, with a particular focus on the effects of Social Security, pensions, and other government policies that affect personal saving.
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From page 124... ...
The next three sections are concerned with the effect of various policies on personal saving behavior. The third section discusses the interaction between Social Security and private saving, reporting on time series as well as crosssectional studies of the Social Security offset.
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From page 125... ...
Given the complexity of most defined benefit pension plans, another important issue is whether individuals understand the structure of their pension plan and its associated incentives. Some of the same problems arise in estimating Social Security wealth, but they are less severe because the current benefit formulas that apply to individuals are known, and an estimate of future benefits can be made given information on an individual's earnings history.
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From page 126... ...
of this amount in targeted retirement saving accounts such as IRAs and 401(k~s. The Table 4-1 entries for 65- to 69-year-olds include information on the present value of both publicly provided and private pensions.
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, who suggest that one important pattern in the postwar period has been the increasing importance of annuitized wealth in the portfolios of elderly Americans. Except for households at the top of the income and wealth distribution, annuitized wealth, which includes private pension wealth and Social Security wealth, has become a much greater fraction of the household portfolio in the last three decades.
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From page 128... ...
Evaluating these arguments is an important part of long-term financial status forecasting. Age-Specific Patterns of Net Saving The third component of the forecasting equation is projection of the net saving behavior of households as they age.
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The difficulty of extrapolating age-specific saving rates across cohorts is illustrated in the Bosworth, Burtless, and Sabelhaus (1991) comparison of personal saving behavior in the 1960s and 1980s.
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From page 130... ...
Simple models of saving behavior, which yield strong predictions about the age-specific structure of saving rates, tend to be rejected by the data. More complex models are highly dependent upon parameter choices and yield results that are not conducive to simple presentation.
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From page 131... ...
These models emphasize the existence of a precautionary motive for asset accumulation and suggest that the comparative statistics of saving behavior may be substantially different from the comparative statistics suggested by the lifecycle model. For example, if part of the stock of household wealth is accumulated to guard against future consumption downturns, wealth holdings may be relatively insensitive to changes in real rates of return.
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From page 132... ...
A natural avenue for further research lies in drawing out the implications of alternative models of saving behavior and exploring how these models would modify life-cycle-based predictions of pre-retirement saving behavior. The possibility that individuals use rules of thumb or other simple heuristics in deciding how much to save is implicit in many behavioral discussions of personal saving.
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From page 133... ...
Bernheim (1993) implicitly assumes that elderly households are unable or unwilling to draw down their net housing equity to finance consumption during retirement, while the Congressional Budget Office, which focuses on net worth including housing assets, implicitly views housing wealth as fungible and equivalent to holdings of financial assets.
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Bernheim (1994) presents survey evidence suggesting that those households with the least confidence in the future of the system exhibit the highest personal saving rates.
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The paucity of data sets that combine detailed information on the structure of private defined benefit pension plans and other components of household net worth has resulted in fewer studies of private pension wealth offset than of Social Security wealth offset. Cagan (1965)
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They predicted pension income for those who were still in the labor force and found evidence that both expected Social Security and expected pension benefits reduced personal saving. Both effects were estimated to provide less than dollar-for-dollar offset, and the estimated effect of Social Security was much larger than that of private pensions.
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From page 137... ...
If individual characteristics affect choices of whether to work for firms that offer defined benefit or defined contribution pension plans, then simple comparisons between the decumulation behavior of those with defined benefit and defined contribution pension plans may not provide a valid basis for assessing the current spread of defined contribution plans. There is relatively little consensus, however, on how the diffusion of defined contribution as opposed to defined benefit pension plans will affect the financial status of households as they approach retirement or how it will affect the evolution of their financial status during retirement.
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From page 138... ...
Prospective Accumulation in Targeted Saving Accounts The first important issue concerns the asset balances that individuals with targeted retirement saving accounts are likely to accumulate by retirement age. Forecasting future contributions to these accounts raises many of the same problems of separating age effects from cohort effects that arise with respect to saving behavior more generally.
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From page 139... ...
lump-sum distributions, and the disposition of these distributions is one of the top priorities for research on this aspect of the retirement saving system. Net Saving Effects A second critical issue related to the growing importance of assets in targeted retirement saving accounts concerns the interaction between rising balances in these accounts and other forms of personal saving.
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From page 140... ...
contributions remains unclear. A further question related to the net saving effects of targeted retirement saving accounts involves the relationship between contributions to these accounts and aggregate statistics on personal saving.
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From page 141... ...
HOUSING WEALTH AND OTHER PRIVATE SAVING For the typical household reaching retirement age in the early 1990s, home equity is the second most important component of net worth, after Social Security wealth. Housing wealth is typically much greater than net holdings of financial assets.
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From page 142... ...
, call this conclusion into question. Further work both on housing consumption decisions in middle age and on the link between population aging and real house prices is therefore likely to yield important information that bears on the future financial status of elderly households.
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From page 143... ...
The HRS will combine detailed projections of Social Security and private pension benefits once an individual retires with data on wealth holdings before and after retirement, and will permit new estimates of the effect of retirement income streams on other asset accumulation. It will also replace a number of data sets such as the Retirement History Survey that provide a dated indication of the financial status and saving behavior of elderly households.
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From page 144... ...
Among the central issues that warrant study are the rise of defined contribution as opposed to defined benefit pension plans, the growing popularity of targeted retirement saving accounts as vehicles for personal saving, and the impact of growing numbers of two-earner couples who will reach retirement with multiple sources of income. REFERENCES Aaron, H.J.
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From page 145... ...
Diamond, P.A., and J.A. Hausman 1984 Individual retirement and saving behavior.
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Journal of Political Economy 90:630-641. 1995 College scholarship rules and private saving.
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Wise 1994a Targeted retirement saving and the net worth of elderly Americans. American Economic Review 84(2)
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Samwick, A.A. 1994 The Limited Offset Between Pension Wealth and Other Private Wealth: Implications of Buffer Stock Saving.
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