Julia Lynn Coronado

Wealth Effects and the Consumption of Leisure: Retirement Decisions During the Stock Market Boom of the 1990s

It is well accepted that households increase consumption of goods and services in response to an unexpected increase in wealth. Consensus estimates of this wealth effect are in the range of 3 to 5 cents of additional consumption spending in the long run for each additional dollar of wealth. Economic theory also suggests that consumption of leisure, like consumption of goods and services, should increase with positive shocks to wealth. In this paper, we ask whether the run-up in equity prices during the 1990s led older workers to retire earlier than they had previously planned. We identify the effect by exploiting unique data on retirement expectations from the Health and Retirement Survey. Our econometric results suggest that respondents who held corporate equity immediately prior to the bull market of the 1990s retired, on average, 7 months earlier than other respondents.

Footnotes aren’t enough: the impact of pension accounting on stock values

Some research has suggested that companies with defined benefit (DB) pensions are sometimes significantly misvalued by the market. This is because the measures of pension cost and pension net liabilities embedded in financial statements, taken at face value, can provide very misleading picture of pension finances. The more pertinent information on pension finances is relegated to footnotes, but might not receive much attention from portfolio managers. But dramatic swings in the financial conditions of large DB plans around the turn of the decade focused widespread attention on pension accounting practices, and dissatisfaction with current accounting standards has recently prompted the Financial Accounting Standards Board (FASB) to take up a project revamp DB pension accounting. Arguably, the increased attention should have made investors wise to the informational problems, thereby eliminating systematic mispricing in recent years. We test this proposition and conclude that investors continued to misvalue DB pensions, inducing sizable valuation errors in the stock of many companies. Our findings suggest that FASBs current reform efforts could substantially aid the markets ability to value firms with DB pensions.

Distributional Impacts of Proposed Changes to the Social Security System

In this paper we assess the degree to which the current social security system redistributes income from rich to poor. We then estimate the impact of various proposed changes to social security on the overall redistributive effect of the system. Our analysis takes a steady-state approach in which we assume participants work their entire lives and retire under a given system. Redistribution is measured on a lifetime basis using estimated earnings profiles for a sample of people taken from the PSID. We allow for differential mortality, not only by gender and race, but also by lifetime income. Our results indicate that the current social security system redistributes less than is generally perceived, mainly because people with higher lifetime income live longer and therefore draw benefits longer. Remaining progressivity is reduced and even reversed by an increase in the assumed discount rate, since regressive taxes become more important relative to later progressive benefits. We find that many of the proposed changes to social security have surprisingly little effect on the redistribution inherent in the system.

The Effects of Social Security Privatization on Household Saving: Evidence from the Chilean Experience

In recent years, a handful of countries have converted the financing of their social security systems from pay-as-you-go (PAYGO) to partial or full funding. Privatization is viewed as one way to insulate social security from the political and demographic pressures that currently threaten the financial stability of PAYGO systems. However, privatization would improve a nations situation only if such a reform increases domestic saving. In this paper I use evidence from Chile, where social security was privatized in 1981, to assess the impact of such a reform on household saving rates. I find that the reform provided a significant stimulus for saving among higher income households, increasing their saving rates by more than seven percentage points. This increase in saving at the household level translates into an increase in national saving of more than two percent of GDP.

is Social Security Part of the Social Safety Net

Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the poor. This question is important because a social security program that reduces overall inequality by redistributing from high‐income individuals to middle‐income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle‐ to upper‐income households. We have four major findings. First, as we expand the definition of income to use more comprehensive measures of well‐being, we find that Social Security becomes less progressive. Indeed, when we use an “endowment” defined by potential labor earnings at the household level rather than actual earnings at the individual level, we find that Social Security has virtually no effect on overall inequality. Second, we find that this result is driven largely by the lack of redistribution across the middle and upper parts of the income distribution, so it masks some small positive net transfers to those at the bottom of the lifetime income distribution. Third, in cases in which redistribution does occur, we find that it is not efficiently targeted: many high‐income households receive positive net transfers, whereas many low‐income households pay net taxes. Finally, the redistributive effects of Social Security change over time, and these changes depend on the income concept used to classify someone as “poor.”

The Household Spending Response to the 2003 Tax Cut: Evidence from Survey Data

The Jobs and Growth Tax Relief and Reconciliation Act of 2003 has been described as textbook fiscal stimulus. Using household survey data on the self-reported qualitative response to the tax cuts, we estimate that the boost to aggregate personal consumption expenditures from the child credit rebate and the reduction in withholdings raised the average level of real GDP in the second half of 2003 by 0.2 percent and by 0.3 percent in the first half of 2004. We also show that households in the survey were well aware of their tax cuts and tended to spend equally out of the child credit rebate and the reduced withholdings, a result that is contrary to the conventional wisdom.

Are Firms or Workers Behind the Shift Away from DB Pension Plan

One of the most striking changes in the composition of household retirement savings over the past 20 years has been the shift from defined benefit to defined contribution pension plans. Understanding the factors underlying this shift is important for determining its impact on retirement saving adequacy. Yet previous research, which has mostly focused on factors affecting all firms, such as regulation or increased longevity, has yielded little consensus. In this study we estimate the contribution of changing workforce characteristics and production environments to the shift in pension coverage. Our findings suggest that, while aggregate factors explain a large part of the movement, changes in worker demand, due to evolving workforce characteristics, also contributed notably. On the supply side, we find support for the theory that technical change has reduced the value of DB plans. These supply and demand factors are particularly important for explaining the significant variation in cross-industry trends in pension coverage.