Anthony Webb

Retirement and the Evolution of Pension Structure

Defined benefit pension plans have become considerably less common since the early 1980s, while defined contribution plans have spread. Previous research showed that defined benefit plans, with sharp incentives encouraging retirement after a certain point, contributed to the striking decline in American retirement ages. In this paper we find that the absence of age-related incentives in defined contribution plans leads workers to retire almost two years later on average, compared to workers with defined benefit plans. Thus, the evolution of pension structure can help explain recent increases in the typical retirement age, after decades of decline.

Household annuitization decisions: simulations and empirical analyses

Annuities provide insurance against outliving ones wealth. Previous studies have indicated that, for many households, the value of the longevity insurance should outweigh the actuarial unfairness of prices in the voluntary annuity market. Nonetheless, voluntary annuitization rates are extremely low.Previous research on the value of annuitization has compared an optimal decumulation of unannuitized wealth with the alternative of annuitizing all unannuitized wealth at age 65. We relax these assumptions, allowing households to annuitize any part of their unannuitized wealth at any age and to return to the annuity market as many times as they wish.Using numerical optimization techniques, assuming the levels of actuarial unfairness of annuities calculated in previous research, and retaining the assumption made in previous research that one half of household wealth is pre-annuitized, we conclude that it is optimal for couples to delay annuitization until they are aged 73–82, and in some cases never to annuitize. It is usually optimal for single men and women to annuitize at substantially younger ages, between 65 and 70. Households that annuitize will generally wish to annuitize only part of their unannuitized wealth.Using data from the Asset and Health Dynamics Among the Oldest Old and Health and Retirement Study panels, we show that much of the failure of the average currently retired household to annuitize can be attributed to the exceptionally high proportions of the wealth of these cohorts that is pre-annuitized. We expect younger cohorts to have smaller proportions of pre-annuitized wealth and project increasing demand for annuitization as successive cohorts age.

Evaluating the Advanced Life Deferred Annuity: An Annuity People Might Actually Buy

Although annuities provide longevity insurance that should, in theory, be attractive to risk-averse households facing an uncertain lifespan, rates of voluntary annuitization remain extremely low. We evaluate a proposed annuity product, the Advanced Life Deferred Annuity, an annuity purchased at retirement, providing an income commencing in advanced old age. Using numerical optimization techniques, we show that this product would provide a substantial proportion of the longevity insurance provided by an immediate annuity, at a small fraction of the cost. At plausible levels of actuarial unfairness, households should prefer it to both immediate and postponed annuitization, and an optimal decumulation of unannuitized wealth. We show that few households would suffer significant losses were it used as a 401(k) plan default.

Mortality Heterogeneity and the Distributional Consequences of Mandatory Annuitization

This article investigates the distributional consequences of mandatory annuitization. Using Health and Retirement Study (HRS) data and accounting for longevity risk pooling within marriage and preannuitized wealth, we find substantial redistribution away from disadvantaged groups in expected utility terms. Using HRS data on subjective survival probabilities, we construct a subjective life table for each individual in the HRS. We calculate the value each household would place on annuitization, based on the husband and wifes subjective life tables, and the households degree of risk aversion and proportion of preannuitized wealth. A significant minority would perceive themselves as suffering a loss from mandatory annuitization.

Annuitization: Keeping Your Options Open

Annuities provide insurance against outliving one’s wealth. Previous studies have indicated that, for many households, the value of the longevity insurance should outweigh the actuarial unfairness of prices in the voluntary annuity market. Nonetheless, voluntary annuitization rates are extremely low. Previous research on the value of annuitization has compared the alternative of an optimal decumulation of unannuitized wealth with the alternative of annuitizing all unannuitized wealth at age 65. We relax these assumptions, allowing households to annuitize any part of their unannuitized wealth at any age and to return to the annuity market as many times as they wish. Using numerical optimization techniques, and retaining the assumption made in previous research that half of the household wealth is pre-annuitized, we conclude that it is optimal for couples to delay annuitization until they are aged 74 to 89, and in some cases never to annuitize. It is usually optimal for single men and women to annuitize at substantially younger ages, around 65 and 70 respectively. Households that annuitize will generally wish to annuitize only part of their unannuitized wealth. Using data from the Asset and Health Dynamics Among the Oldest Old and Health and Retirement Study panels, we show that much of the failure of the average currently retired household to annuitize can be attributed to the exceptionally high proportion of the wealth of these cohorts that is pre-annuitized. We expect younger cohorts to have smaller proportions of pre-annuitized wealth and we project increasing demand for annuitization as successive cohorts age.

The impact of aggregate mortality risk on defined benefit pension plans

We calculate the risk faced by defined benefit plan providers arising from uncertain aggregate mortality — the risk that the average participant will live longer than expected. First, comparing the widely cited Lee-Carter model to industry benchmarks, we show that plan providers appear to substantially underestimate the longevity of their employees. The resultant understatement of liabilities is 15.2 percent, when weighted by the characteristics of typical male participants in defined benefit plans, and reaches as much as 25.2 percent for male workers aged 22. Next, we consider the substantial mortality risk that arises even if plan providers were to use the Lee-Carter model or other unbiased forecasts of mortality reductions. We calculate the consequences for plan liabilities if aggregate mortality declines unexpectedly faster than is predicted by an unbiased projection. There is a 5 percent chance that liabilities of a terminated plan would be 2.9 to 5.1percent higher than what is expected, depending on the mix of workers covered. Lastly, we explain how longevity bonds might be used to transfer mortality risk from defined benefit plans to the capital markets, and we calculate a risk premium for a hypothetical frozen plan.

Optimal Retirement Asset Decumulation Strategies: The Impact of Housing Wealth

A considerable literature examines the optimal decumulation of financial wealth in retirement. We extend this line of research to incorporate housing, which comprises the majority of most households’ non-pension wealth. We use VARs to estimate the relationship between the returns on housing, stocks, and bonds, and use simulation techniques to investigate a variety of decumulation strategies incorporating reverse mortgages. Under a wide variety of assumptions, we find that the average household would be as much as 33 percent better off taking a reverse mortgage as a lifetime income relative to what appears to be the most common strategy of delaying until financial wealth is exhausted and then taking a line of credit. It would be as much as 62 percent better off relative to not taking a reverse mortgage at all. Housing wealth displaces bonds in optimal portfolios, making the low rate of participation in the stock market even more of a puzzle.

Identifying Local Differences in Retirement Patterns

The ability to retire at an age and in a manner of one’s choosing depends on one’s ability to retain or find employment at older ages, which depends in turn on local labor market conditions. We investigate how local labor markets affect retirement transitions. We match households from the Health and Retirement Study to MSA unemployment rates and estimate multinomial logit regressions on annual job transitions.

The Impact of 401(k) Plans on Retirement

In 1993 38.9 million people were covered by a 401(k) plan, up from 7.1 million in 1983. The rapid growth of 401(k) and other defined contribution pension plans may alter retirement patterns of older workers. Previous research showed that the spread of defined benefit plans, with sharp age-related incentives first discouraging and later encouraging retirement, contributed to the early retirement trend of past decades. Defined contribution plans differ along several dimensions, especially in their smooth rate of pension wealth accrual. We use data from the Health and Retirement Study to show that retirement patterns have begun to change as defined contribution plans have spread. Our estimates indicate that the financial incentives in defined benefit pensions lead people to retire almost two years earlier on average, compared to people with defined contribution plans.

New Evidence on the Risk of Requiring Long-Term Care

Long-term care is one of the major expenses faced by many older Americans. Yet, we have only limited information about the risk of needing long-term care and the expected duration of care. The expectations of needing to receive home health care, live in an assisted living facility or live in a nursing home are essential inputs into models of optimal post-retirement saving and long-term care insurance purchase. Previous research has used the Robinson (1996) transition matrix, based on National Long Term Care Survey (NLTCS) data for 1982-89. The Robinson model predicts that men and women aged 65 have a 27 and 44 percent chance, respectively, of ever needing nursing home care. Recent evidence suggests that those earlier estimates may be extremely misleading in important dimensions. Using Health and Retirement Study (HRS) data from 1992-2010, Hurd, Michaud, and Rohwedder (2013) estimate that men and women aged 50 have a 50 and 65 percent chance, respectively, of ever needing care. But, they also estimate shorter average durations of care, resulting, as we show, from a greater chance of returning to the community, conditional on admission. If nursing home care is a high-probability but relatively low-cost occurrence, models that treat it as a lower-probability, high-cost occurrence may overstate the value of insurance. We update and modify the Robinson model using more recent data from both the NLTCS and the HRS. We show that the low lifetime utilization rates and high conditional mean durations of stay in the Robinson model are artifacts of specific features of the statistical model that was fitted to the data. We also show that impairment and most use of care by age has declined and that the 2004 NLTCS and the 1996-2010 HRS yield similar cross-sectional patterns of care use. We revise and update the care transition model, and we show that use of the new transition matrix substantially reduces simulated values of willingness-to-pay in an optimal long-term care insurance model.