Leora Friedberg

The Impact of Technological Change on Older Workers: Evidence from Data on Computer Use

New technologies like computers alter skill requirements. This paper explores two related effects of the spread of computers on older workers, using data from the Current Population Survey and the Health and Retirement Study. One conclusion is that impending retirement, rather than age alone, explains why older workers used computers less than prime-age workers did. A second conclusion is that computer users retired later than non-users. Although this pattern may arise because workers planning later retirement decided to acquire computer skills, the empirical analysis suggests that the causation also went in the other direction, with computer users choosing to delay retirement. It will be important to understand these effects as the baby boom cohort nears retirement, while technologies continue to change rapidly.

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.

The Effect of Old Age Assistance on Retirement

Researchers have devoted considerable attention to analyzing the impact of Social Security on retirement, with mixed findings. However, Old Age Assistance (OAA), a means-tested program established at the same time, dwarfed Social Security until the 1950s and coincided with the early decline in elderly participation. In addition, OAA benefit levels were determined by the states - a key source of policy variation that is missing in the case of Social Security. I estimate the relationship between OAA benefit levels and elderly labor force participation using individual data from the 1940 and 1950 Censuses. The effect of OAA is found to be strong and implies that participation would have risen slightly instead of falling if benefits had not been raised during the 1940s. I also present evidence against the endogeneity of state benefit levels.

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.

Labor Market Effects of Pensions and Implications for Teachers

While the retirement security landscape has changed drastically for most workers over the last twenty years, traditional defined benefit (DB) pension plans remain the overwhelming norm for K12 teachers. Because DB plans pay off fully with a fixed income after retirement only if a teacher stays in the profession for decades and yield little or nothing if a teacher leaves early, DB plans induce a strong, nonlinear relationship between years of tenure and benefit accrual. One implication is that as many current teachers approach eligibility for full pensions, there are strong incentives for retirement and associated consequences in the teacher labor market. In this article, we assess the key features of DB plans, discuss the general incentive effects, and consider the application to the particular case of teachers. This work highlights the importance of assessing the characteristics of teachers who respond most to the retirement timing incentives.

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.

Persistence in Labor Supply and the Response to the Social Security Earnings Test

This paper investigates the impact on labor supply of changes in the Social Security earnings test in 1996 and 2000. We highlight how the persistence of labor supply choices influences both responses to policy changes and the estimation of such responses. We do this in two ways. First, we use data from the Health and Retirement Study and the Current Population Survey that allows us to compare employment transitions across cohorts that are differentially affected by changes in the earnings test rules. We show that conditioning on last year’s employment status is important in identifying responses to current earnings test changes. Second, we test the effect of not only current but also anticipated as well as past earnings test parameters which cohorts faced at earlier ages. We find that past and anticipated future rules influence current employment and earnings. Our results help to identify an effect of earnings test changes affecting ages 65-69 on employment at younger and older ages, which suggests caution about the use of neighboring age groups as control groups in analyzing responses to the earnings test. We also show that earnings test changes that were initiated in 1996 had an important effect, in addition to the changes in 2000 that have been extensively studied.

Labor market aspects of state and local retirement plans: a review of evidence and a blueprint for future research

Traditional defined benefit (DB) pension plans remain the overwhelming norm for teachers, policemen and other employees of state and local governments. The incentives for workers with DB pension plans to stay in their jobs shift dramatically over the course of their careers. Moreover, limited transferability of pension wealth across states and between public and private jobs impedes mobility in the labor market. Yet, little is known about the labor market effects of pensions on state and local government workers. The literature on private-employer pensions has made contributions on some of these fronts in recent years that can shed light on policy concerns raised by the possibility that pension plans will be modified in coming years. Moreover, some of the limitations constraining research on pensions may be overcome by focusing on government workers, with recent work on public school teachers pointing the way. Very recent studies are finding strong retirement responses to age- and tenure-related incentives built into state pension plans.