Alicia Haydock Munnell

Private Pensions and Saving: New Evidence

This paper examines the impact of private pension coverage on the saving behavior of men in their preretirement years. The empirical work is based on the Ando-Modigliani model which permits explicit recognition of differences in expected retirement age between covered and noncovered groups. The data originated in the 5-year Labor Department sample of men aged 45-59 in 1966. The results clearly indicate that, contrary to earlier work by Cagan and Katona, pension coverage reduces saving in other forms.

Will People Be Healthy Enough to Work Longer

If Americans continue to retire at age 63, a great many will risk income shortfalls especially at older ages. Because work directly increases current income, Social Security benefits, retirement saving, and decreases the length of retirement, a logical solution would be to increase the age of retirement. But are Americans healthy enough to work longer? Using the National Health Interview Study, this paper shows that healthy life expectancy increased by about three years over 1970-2000 for the average 50-year old man. This increase is largely the result of men moving up the education ladder, with minimal increases within educational groups. Moreover, major disparities in healthy life expectancy remain between those in the bottom and top quartiles of the population. And these disparities mean that a vulnerable portion of the population – perhaps those who most need to work longer – might not be able to extend their work lives.

Framing the Social Security Debate: Values, Politics, and Economics

In his 1998 State of the Union address, President Clinton challenged Americans to a public debate about how to fix the long-term financial problems of Social Security. This annual volume of the National Academy of Social Insurance provides a framework for that debate. Competing reform proposals reflect contrasting views about the nature of the Social Security problem and how to solve it. This book examines issues about privatization, national savings and economic growth, the political risks and realities in reforms, lessons from private pensions developments in the United States, and the efforts of other advanced industrial countries to adapt their old-age pensions to an aging population. It also poses philosophical arguments about collective versus individual responsibility and the implications of market risks and political risks for stable and secure retirement income policy. The contributors are Theo Angelis, Michael J. Boskin, Peter A. Diamond, John Geanakoplos, Hugh Heclo, Karen C. Holden, Howell Jackson, Olivia Mitchell, Dallas L. Salisbury, Lawrence H. Thompson, Kent Weaver, and Stephen P. Zeldes. Copublished with the National Academy of Social Insurance

How Do Pensions Affect Expected and Actual Retirement Ages

This paper uses the first six waves of the Health and Retirement Study to investigate the impact of pensions on expected retirement age, on the probability of being retired in each wave given employment in the previous wave, and on the probability of retiring earlier than planned. Pension coverage per se and the type of pension are important in each case. Pension wealth reduces the expected retirement age by 0.6 year, and the incentives in defined benefit plans lower the expected age by another 1.1 years. Pension wealth increases the probability of retiring in a given wave, and pension accruals reduce the probability. Other characteristics of defined benefit plans, as measured by the pension dummy, further raise the probability of being retired. Finally, with regard to the probability of retiring earlier than planned, a change in defined contribution wealth increases the probability, but pension coverage per se reduces it. That is, those with pensions tend to be more accurate planners than those without.

The Effects of the Great Recession on the Retirement Security of Older Workers

The Great Recession had a profound effect on the retirement security of older Americans, and the slow recovery from the downturn will have a lasting impact on their quality of life. The nature of today’s retirement system left older households exposed to the collapse in the equity and housing markets and induced many to plan for a later retirement. More late-career workers experienced job loss than in previous recessions, often with long jobless spells, encouraging a record number of early Social Security retirement claims and disability applications. Going forward, workers who lost a job can expect lower earnings and more instability and, potentially, poorer health. Even households that avoided job loss will have less money available for spending in retirement due to low interest rates and reduced home values. These findings emphasize the importance of Social Security as income insurance and the need for a more robust retirement income system.

The Housing Bubble and Retirement Security

House prices rose 60 percent between 2000 and 2007 before the housing bubble burst. The question is whether the housing boom made people better or worse prepared for retirement. If they extracted the equity from their home through some form of housing-related debt and consumed all their borrowings, they will be left with additional debt and no additional assets and probably will be worse off in retirement. If they did not borrow and consume their equity, they will have more housing wealth to tap in retirement and will be better off. This brief explores how the rise in house prices affected individual households. The first section discusses the impact of an increase in house prices on the homeowner’s balance sheet and describes the evidence to date suggesting that the housing boom led to an increase in debt and to increased consumption. The second section uses the 2004 Survey of Consumer Finances (SCF) to explore the actual response of individual households. The third section discusses events since the 2004 SCF – the continued inflating of the housing bubble and its ultimate bursting in 2007. The final section concludes that a substantial proportion – perhaps a third – of older households will be less secure in retirement because of the housing bubble.

The Outlook for Pension Contributions and Profits in the U.S.

This paper addresses the relationship between defined benefit pension plans and corporate profits and examines the outlook for defined benefit plans in the wake of the bear market. Due to a soaring stock market during the extended bull market of 1982-2000, together with federal regulations and legislation that shifted funding requirements forward, pension contributions virtually disappeared as a corporate expense for much of the previous two decades. Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firms contribution to its pension plan would have been 50 percent higher during the 1982-2001 period - 9.9 percent of payroll instead of 6.6 percent of payroll. The downturn in contributions had a significant impact on corporate profits. Lower pension contributions, all else equal, will produce a dollar-for-dollar increase in before-tax profits. Our analysis implies that corporate profits were roughly 5 percent higher than they would have been otherwise. Higher profits produce a feedback effect as they lead to further capital gains and further reductions in contributions. Given the current bear market and an aging workforce, the feedback now goes in the opposite direction. Now that the stock market bubble has burst, our analysis suggests that contributions relative to wages would return to their pre-1982 levels of about 10 percent. This implies that - on a permanent basis - contributions would double from their current level of

What Explains State Variation in SSDI Application Rates

40 billion to

Pension type, tenure, and job mobility

80 billion. Assuming that investors view the increase as permanent, the feedback effect would lower the value of equities held by pension funds by

How Much do State Economics and Other Characteristics Affect Labor Force Participation of Older Workers

20 billion. In short, as the economy emerges from recession and the bear market draws to a close, firms and investors must be prepared to contend with a strong headwind from pension funding obligations that could slow the recovery.