scholarly journals Addressing Longevity Risk: How Best to Annuitize Defined Contribution Assets?

2020 ◽  
Vol 4 (Supplement_1) ◽  
pp. 686-686
Author(s):  
Alicia Munnell ◽  
Gal Wettstein ◽  
Wenliang Hou
Keyword(s):  
Social Security ◽  
Longevity Risk ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Economics Of Aging ◽  
Distribution Rules ◽  
Lifetime Income ◽  
The Social ◽  
Defined Benefit Pensions ◽  
Deferred Annuity

Abstract Unlike defined benefit pensions, 401(k) plans provide little guidance on how to turn accumulated assets into income. The key risk that retirees face is outliving their assets. Insurance against such risk is available through several routes, including immediate annuities, deferred annuities, and additional Social Security through delayed claiming. Under this Social Security bridge option, participants would tap their 401(k) for payments equal to their Social Security to delay claiming. This paper compares these three options in simulations against a baseline in which no assets are used to obtain lifetime income. In each option, assets not allocated to purchasing lifetime income are consumed following the Required Minimum Distribution rules. The analysis finds that, when market and health shocks are included alongside longevity uncertainty, the Social Security bridge option is generally the best for households with median wealth. Wealthier households can benefit from combining the bridge option with a deferred annuity. Part of a symposium sponsored by the Economics of Aging Interest Group.

Individual Biases in Retirement Planning and Wealth Management

2017 ◽  
Author(s):  
James E. Brewer ◽  
Charles H. Self
Keyword(s):  
Retirement Planning ◽  
Developed Countries ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Market Returns ◽  
Wealth Transfer ◽  
Investor Returns ◽  
Certified Financial Planner ◽  
And Behavior ◽  
Defined Benefit Pensions

Around the globe, the gradual move from defined benefit pensions to defined contribution pensions has increased the need for individual retirement planning. Examples of this include U.S. savings rates at historic lows, poor retirement prospects for citizens in developed countries, and the disparaging gap between investor returns and market returns. Research indicates that individuals working with a financial advisor generally receive better results than those who do not. Working with a Certified Financial Planner (CFP) gives an added level of security because a CFP takes an oath to keep the client’s interests ahead of his or her own. This chapter puts describes giving nudges to help individuals close the savings, investing, and behavior gaps that will improve their total wealth and wealth-transfer picture.

scholarly journals Portability Rewards And Avoidance Of Longevity Risk: Factors In The Growth Of Defined Contribution Plans

2010 ◽  
Vol 8 (10) ◽  
Author(s):  
Beverley Hollingsworth ◽  
Wei Wang
Keyword(s):  
Investment Strategy ◽  
Longevity Risk ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Insufficient Evidence ◽  
Font Size ◽  
Defined Contribution Plans ◽  
Investment Returns ◽  
Defined Benefit Plans ◽  
The Relationship

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="color: black; font-size: 10pt; mso-themecolor: text1;"><span style="font-family: Times New Roman;">The decline in defined benefit plans has been offset by a significant growth in defined contribution plans. An important consideration in this phenomenon lies in the fact that employees view this shift as a tradeoff between longevity risk and portability rewards. Companies are shifting from defined benefit plans to avoid the longevity risks associated with such plans. On the other hand, in some instances when given the option, employees chose defined contribution plans, due to the associated portability rewards where participants have a choice of rolling over, or transferring plans from former employers.. This paper examined research relevant in assessing factors contributing to growth in defined contribution with particular interest in 401(k)s and the relationship between investment returns, the availability of loans, and investment strategy that may affect plan growth. It is concluded that there is insufficient evidence for assuming a relationship between investment returns, loan availability and investment strategy and the growth of defined contribution plans. </span></span></p>

Why are US men retiring later?

2018 ◽  
Vol 19 (3) ◽  
pp. 442-457
Author(s):  
Wenliang Hou ◽  
Alicia Munnell ◽  
Geoffrey Todd Sanzenbacher ◽  
Yinji Li
Keyword(s):  
Social Security ◽  
Structural Model ◽  
Retirement Age ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Retirement Plans ◽  
Original Cohort ◽  
The Past ◽  
Retirement Timing ◽  
Retirement Study

AbstractOver the past two decades, the share of individuals claiming Social Security at the Early Eligibility Age has dropped and the average retirement age has increased. At the same time, Social Security rules have changed substantially, employer-sponsored retirement plans have shifted from defined benefit (DB) to defined contribution (DC), health has improved, and mortality has decreased. In theory, all of these changes could lead to a trend toward later claiming. Disentangling the effect of any one change is difficult because they have been occurring simultaneously. This paper uses the Gustman and Steinmeier structural model of retirement timing to investigate which of these changes matter most by simulating their effects on the original cohort (1931–1941) of the Health and Retirement Study (HRS). The predicted behavior is then compared with the actual retirements of the Early Boomer cohort (1948–1953) to see how much of the later cohort's delayed claiming and retirement can be explained by these changes. The Early Boomer cohort was less likely to be fully retired than the HRS cohort at both age 62 (36.7% vs. 44.0%) and age 64 (49.5% vs. 53.9%). The model suggests that the shift from DB toward DC plans was the biggest contributor to these declines, followed by better health. Social Security rules and improvements in mortality played smaller roles.

scholarly journals Mismeasurement of pensions before and after retirement: the mystery of the disappearing pensions with implications for the importance of Social Security as a source of retirement support

2013 ◽  
Vol 13 (1) ◽  
pp. 1-26 ◽  
Author(s):  
ALAN L. GUSTMAN ◽  
THOMAS L. STEINMEIER ◽  
NAHID TABATABAI
Keyword(s):  
Social Security ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Bottom Line ◽  
Pension Income ◽  
Before And After ◽  
Social Security Wealth ◽  
Pension Benefits ◽  
Pension Wealth

AbstractA review of the literature suggests that when pension values are measured by the wealth equivalent of promised defined benefit pension benefits and defined contribution balances for those approaching retirement, pensions account for more support in retirement than is suggested when their contribution is measured by incomes received directly from pension plans by those who have already retired. Estimates from the Health and Retirement Study for respondents in their early fifties suggest that pension wealth is about 82% as valuable as Social Security wealth. In data from the Current Population Survey (CPS), for members of the same cohort, measured when they are 65–69, pension incomes are about 58% as valuable as incomes from Social Security. Our empirical analysis uses data from the HRS to examine the reasons for these differences in the contributions of pensions as measured in income and wealth data. Key factors accounting for these differences include: a difference in methodology between surveys affecting what is included in pension income; some pension wealth ‘disappears’ at retirement because respondents change their pension into other forms that are not counted as pension income; and the form of annuitization may influence the measure of pension income. A series of caveats notwithstanding, the bottom line is that CPS data on pension incomes received in retirement understates the full contribution pensions make to supporting retirees.

scholarly journals SINGAPORE’S LIFE PROGRAM: ACTUARIAL FRAMEWORK, LONGEVITY RISK AND IMPACT OF ANNUITY FUND RETURN

2017 ◽  
pp. 1-17 ◽  
Author(s):  
KOON-SHING KWONG ◽  
YIU-KUEN TSE ◽  
WAI-SUM CHAN
Keyword(s):  
Pension System ◽  
The Elderly ◽  
Pension Scheme ◽  
Longevity Risk ◽  
Defined Contribution ◽  
Lifetime Income ◽  
Fund Return ◽  
Provident Fund

The Central Provident Fund (CPF) is a defined-contribution savings plan forming the key pillar of the pension system in Singapore. The CPF Lifelong Income For the Elderly (LIFE) program, which provides lifetime income for retirees, is a mandatory pension scheme for all Singapore residents. In this paper we construct an actuarial framework to analyze the LIFE program. We use this framework to study the plan payout outcomes with respect to changes in mortality and annuity fund return assumptions. We also examine the effects of some possible changes in the program on the payouts and bequests.

scholarly journals Stochastic Actuarial Modelling of a Defined-Benefit Social Security Pension Scheme: An Analytical Approach

2008 ◽  
Vol 3 (1-2) ◽  
pp. 127-185 ◽  
Author(s):  
Subramaniam Iyer
Keyword(s):  
Social Security ◽  
Social Insurance ◽  
Stochastic Methods ◽  
Pension Scheme ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Stochastic Variation ◽  
Simplified Approach ◽  
Pension Schemes ◽  
Social Security Reforms

ABSTRACTAmong the systems in place in different countries for the protection of the population against the long-term contingencies of old-age (or retirement), disability and death (or survivorship), defined-benefit social security pension schemes, i.e. social insurance pension schemes, by far predominate, despite the recent trend towards defined-contribution arrangements in social security reforms. Actuarial valuations of these schemes, unlike other branches of insurance, continue to be carried out almost exclusively on traditional, deterministic lines. Stochastic applications in this area, which have been restricted mainly to occasional special studies, have relied on the simulation technique. This paper develops an analytical model for the stochastic actuarial valuation of a social insurance pension scheme. Formulae are developed for the expected values, variances and covariances of and among the benefit expenditure and salary bill projections and their discounted values, allowing for stochastic variation in three key input factors, i.e., mortality, new entrant intake, and interest (net of salary escalation). Each deterministic output of the valuation is thus supplemented with a confidence interval, that is, a range with an attached probability. The treatment covers the premiums under the different possible financial systems for these schemes, which differ from the funding methods of private pensions, as well as the testing of the level of the Fund ratio when the future contributions schedule is pre-determined. Although it is based on a relatively simplified approach and refers only to retirement pensions, with full adjustment in line with salary escalation, the paper brings out the stochastic features of pension scheme projections and illustrates a comprehensive stochastic valuation. It is hoped that the paper will stimulate interest in further research, both of a theoretical and a practical nature, and lead to progressively increasing recourse to stochastic methods in social insurance pension scheme valuations.

scholarly journals Cash balance pension plan conversions and the new economy

2004 ◽  
Vol 3 (3) ◽  
pp. 297-314 ◽  
Author(s):  
JULIA LYNN CORONADO ◽  
PHILIP C. COPELAND
Keyword(s):  
Labor Markets ◽  
New Economy ◽  
Pension Plan ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Cash Balance ◽  
Defined Contribution Plans ◽  
Defined Benefit Pension Plan ◽  
Pension Liabilities ◽  
Defined Benefit Pensions

Many firms that sponsor traditional defined benefit pensions have converted these plans to cash balance plans in the last en years. Cash balance plans in the last ten years combine features of defined benefit and defined contribution plans, and yet their introduction has proven considerably more controversial than has the increasing popularity of defined contribution plans. The goal of this study is to estimate a hierarchy of the influences on the decision of a firm to convert its traditional defined benefit pension plan to a cash balance plan. Our results indicate that cash balance conversions have been undertaken in competitive industries with tight labor markets and thus can be viewed at least in part as a response to better compensate a more mobile labor force. Indeed, many firms appear to increase their pension liabilities through such conversions.

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

2014 ◽  
Vol 14 (3) ◽  
pp. 203-239 ◽  
Author(s):  
IRENA DUSHI ◽  
MARJORIE HONIG
Keyword(s):  
Social Security ◽  
Pension Plans ◽  
Absolute Difference ◽  
Health And Retirement Study ◽  
Defined Benefit ◽  
Defined Contribution ◽  
The Mean ◽  
Wage Earners ◽  
Survey Responses ◽  
Retirement Study

AbstractWe 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 effect of an instantaneous dependency rate on the social equitability of hybrid PAYG public pension schemes

2020 ◽  
pp. 1-20
Author(s):  
Lorenzo Torricelli
Keyword(s):  
Convex Combination ◽  
Rate Of Change ◽  
Public Pension ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Dc System ◽  
The Social ◽  
Intergenerational Fairness ◽  
Rate Processes ◽  
Dependency Rate

Abstract The defined convex combination (DCC) pay-as-you-go public pension systems recently introduced in the literature are a form of hybridization between defined benefit (DB) and defined contribution (DC) designed to maintain intergenerational social equitability by reacting to demographic shocks in an optimal way. In this paper, we augment DCC schemes with the assumption that the dependency ratio between pensioners and workers is driven by an exogenously modelled instantaneous stochastic rate of change. This assumption enjoys support from the empirical data and allows explicit solutions for the contribution and replacement rate processes which make transparent the nature of the dynamic evolution of a DCC system, as well as the role of the variables involved. The analysis of intergenerational social equitability measures under the assumption of an instantaneous dependency rate confirms the view expressed in previous literature that neither DB nor DC achieves social fairness, and that DCC plans have the potential to improve on both. We perform a calibration test, and our findings seem to indicate that in ageing economies the DC system might indeed be superior to the DB one in terms of intergenerational fairness.

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