Irena Dushi

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.

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.

Offers or Take-up: Explaining Minorities’ Lower Health Insurance Coverage

There is considerable evidence that minorities are less likely than whites to be covered under employment-based health insurance. In 2001, rates of Hispanic full-time workers were 21 and 15 percentage points lower than those of non-Hispanic white men and women. For policy purposes, understanding whether these disparities are generated by differences in the likelihood of being in a job offering coverage or in decisions regarding take-up of offered coverage is critical. We find significant effects of race and ethnicity on offers but not on take-up, controlling for job and demographic characteristics including nativity. Magnitudes of these effects differ by gender and household composition.

How much do respondents in the health and retirement study know about their contributions to tax-deferred contribution plans? A cross-cohort comparison *

We use information from Social Security earnings records to examine the accuracy of survey responses regarding participation in tax-deferred pension plans. As employer-provided defined benefit pensions are replaced by voluntary contribution plans, employees’ understanding of the link between their annual contributions and their post-retirement wealth is becoming increasingly important. We examine the extent to which wage-earners in the Health and Retirement Study (HRS) correctly report their inclusion in tax-deferred contribution plans and, conditional on inclusion, their annual contributions. We use three samples representing different cohorts in three different periods: the original HRS cohort interviewed in 1992 at ages 51–56, the War Babies cohort interviewed in 1998 at ages 51–56, and the Early Baby Boomer cohort interviewed in 2004 at the same ages. Our findings indicate that while respondents interviewed in 1998 and 2004 were more likely to correctly report whether they were included in defined contribution plans, they were no more accurate when reporting whether they had contributed to their plans than respondents interviewed in 1992. Contributors in the three cohorts, moreover, overstated their annual contributions and thus would be likely to realize lower than expected account balances at retirement. The magnitude of this error is not negligible. In all three cohorts, the mean reporting error (the absolute difference between respondent-reported and Social Security earnings record contributions) was approximately 1.5 times larger than the mean contribution in the W-2 earnings record.

The Impact of Employment and Earnings Shocks on Contribution Behavior in Defined Contribution Plans: 2005–2009

This article investigates the relationship between job changes and earnings changes and workers’ participation and contributions to defined contribution (DC) plans. We use longitudinal information from Social Security W-2 taxrecords matched to a nationally representative sample of respondents from the Survey of Income and Program Participation. Our findings reveal that both job changes and earnings losses lead to an increase in the probability of stopping contributions and to a decrease in contribution amounts and contribution rates. This pattern was true not only during the Great Recession of 2007-2009 but also during the nonrecessionary period prior to it, suggesting that contributions to DC plans are not necessarily driven by inertia but instead are quite dynamic and vary over time. Our simulations indicate that observed changes in contributions during the Great Recession are likely to have a nontrivial impact on retirement preparedness of future retirees, particularly for those who experienced job changes.

Do Households Increase Their Savings When the Kids Leave Home

Much of the disagreement over whether households are adequately prepared for retirement reflects differences in assumptions regarding the extent to which consumption declines when the kids leave home. If consumption declines substantially when the kids leave home, as some life-cycle models of retirement saving assume, households need to achieve lower replacement rates in retirement and need to accumulate less wealth. Using administrative tax data from the Health and Retirement Study (HRS), as well as the Survey of Income and Program Participation (SIPP), this paper investigates whether household consumption declines when kids leave the home and, if so, by how much. Because consumption data are noisy and savings is the flip side of consumption, this paper examines whether savings in 401(k) plans increase when the kids leave home. The paper also investigates alternative methods of saving, including non-401(k) savings and increased mortgage payments.

Accounting for the Process of Disablement and Longitudinal Outcomes Among the Near Elderly and Elderly

Using a new disability measure applicable to both the near elderly and elderly population, we track respondents aged 51–61 in 1992 from the Health and Retirement Study and account for their status over 20 years. We demonstrate that to screen in as disabled and to screen out as nondisabled require different analytic strategies and use multiple indicators to establish three groups: disabled, nondisabled, and a residual category with ambiguous status. We use work-disability and Supplemental Security Income/Disability Insurance (SSI/DI) receipt for testing distributional outcomes and assessing face validity of our disability measure. Selective attrition due to death and institutionalization is substantial over 20 years. Persistent disability is the dominant adverse outcome of initial disability shock. Overtime exits due to death become progressively more important; 44% disabled at baseline are dead by Wave 11 compared to 21% for nondisabled. Disability status at baseline is associated with financial insecurity persisting to Wave 11 among survivors.