Saving for Retirement

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E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                 Vol. 3, No. 1: January 17, 2002
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               Urban Institute
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                      Topic of This Issue:
                     Saving for Retirement
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES

"Characteristics of Individual Retirement Account Owners"
      EBRI Notes, Vol. 22, No. 6, June 2001
     CRAIG COPELAND
        Employee Benefit Research Institute (EBRI)

"Contribution Behavior of 401(k) Plan Participants"
      EBRI Issue Brief, No. 238, October 2001
     JACK VANDERHEI
        Temple University
        Department of Risk, Insurance and Healthcare
        Management
     SARAH HOLDEN
        Investment Company Institute

"Who Takes Advantage of Tax-Deferred Saving Programs? Evidence
from Federal Income Tax Data"
      National Tax Journal, Vol. 54, No. 3, Pp. 669-88, September
      2001
     DAVID JOULFAIAN
        U.S. Department of Treasury
        Office of Tax Analysis
     DAVID P. RICHARDSON
        U.S. Department of Treasury
        Office of Tax Analysis

WORKING PAPERS

"Life-Cycle Saving, Limits on Contributions to DC Pension Plans,
and Lifetime Tax Benefits"
     JAGADEESH GOKHALE
        Federal Reserve Bank of Cleveland
     LAURENCE J. KOTLIKOFF
        Boston University
        National Bureau of Economic Research (NBER)
     MARK J. WARSHAWSKY
        U.S. Department of Treasury
        Office of Economic Policy

"The Transition to Personal Accounts and Increasing Retirement
Wealth: Macro and Micro Evidence"
     JAMES M. POTERBA
        Massachusetts Institute of Technology (MIT)
        Department of Economics
        National Bureau of Economic Research (NBER)
        Stanford University
        Hoover Institution
     STEVEN F. VENTI
        Dartmouth College
        National Bureau of Economic Research (NBER)
     DAVID A. WISE
        National Bureau of Economic Research (NBER)
        Harvard University

"Savings of Young Parents"
     RICARDO COSSA
        Chicago Partners, LLC
     ERIN L. KRUPKA
        Federal Reserve Bank of Chicago
     ANNAMARIA LUSARDI
        Dartmouth College
        Department of Economics

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Benefits, Compensation and Pension Law we do not referee working
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Benefits, Compensation and Pension Law whose topics suit the
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scholarly discourse.

N E W and F O R T H C O M I N G Articles
_________________________________________________________________

"Characteristics of Individual Retirement Account Owners"
EBRI Notes, Vol. 22, No. 6, June 2001

BY: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=273732

Contact: CRAIG COPELAND
   Email: Mailto:copeland@ebri.org
Postal: Employee Benefit Research Institute (EBRI)
           Suite 600
           2121 K Street, NW
           Washington, DC 20037-1896 USA
   Phone: 202-775-6356
     Fax: 202-775-6312

    Note: The PDF for this title, published in the June 2001
          issue of EBRI Notes, also contains the full text of
          another June 2001 EBRI Notes article abstracted on
          SSRN: "Income of the Retired Population."

Paper Requests:
Contact Alicia Willis at Mailto:publications@ebri.org, or 2121 K
St., NW, Suite 600, Washington, DC 20037-1896.
Phone:(202)572-7422, Fax:(202)775-6312. Full-Text downloads are
available from SSRN Online for $7.50.

ABSTRACT:
Using Survey of Income and Program Participation (SIPP) data
from the U.S. Census Bureau, characteristics of individual
retirement account (IRA) owners ages 21 and over are examined.
Approximately, 16 percent of Americans ages 21 and over owned an
IRA early in 1997, with an average balance of $27,025.
Furthermore, nearly 4 percent of those 21 and over contributed
to an IRA in 1996, with the average contribution being $1,729
(almost 66 percent of those contributing contributed the maximum
amount). Significant differences were found in ownership,
balances, and contributions across various demographic and
economic groups, e.g., age, family income, education
race/ethnicity, etc.

Keywords: Individual retirement accounts (IRAs)

JEL Classification: D31
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"Contribution Behavior of 401(k) Plan Participants"
EBRI Issue Brief, No. 238, October 2001

      BY: JACK VANDERHEI
              Temple University
              Department of Risk, Insurance and Healthcare
              Management
           SARAH HOLDEN
              Investment Company Institute

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=290907

Contact: JACK VANDERHEI
   Email: Mailto:temple@vanderhei.com
Postal: Temple University
           Department of Risk, Insurance and Healthcare
           Management
           489 Ritter Annex
           Fox School of Business and Management
           Philadelphia, PA 19122 USA
   Phone: 610-525-6139
     Fax: 435-603-1422
Co-Auth: SARAH HOLDEN
   Email: Mailto:sholden@ici.org
Postal: Investment Company Institute
           Research Department
           1401 H Street, NW
           Washington, DC 20005 USA

ABSTRACT:
This Issue Brief examines the 1999 contribution behavior of 1.7
million 401(k) plan participants drawn from the EBRI/ICI
Participant-Directed Retirement Plan Data Collection Project.
The findings in this paper build on previous academic research
examining the contribution activity of 401(k) participants, by
using a large sample of participants in a wide range of plan
sizes and by examining in detail the factors that influence
contribution activity.

Keywords: 401(k) plans, Employment-based benefits, Participant
contributions

JEL Classification: D9
______________________________

"Who Takes Advantage of Tax-Deferred Saving Programs? Evidence
from Federal Income Tax Data"
National Tax Journal, Vol. 54, No. 3, Pp. 669-88, September
2001

      BY: DAVID JOULFAIAN
              U.S. Department of Treasury
              Office of Tax Analysis
           DAVID P. RICHARDSON
              U.S. Department of Treasury
              Office of Tax Analysis

Contact: DAVID JOULFAIAN
   Email: Mailto:david.joulfaian@do.treas.gov
Postal: U.S. Department of Treasury
           Office of Tax Analysis
           1500 Pennsylvania Ave. NW
           Washington, DC 20220 USA
Co-Auth: DAVID P. RICHARDSON
   Email: Mailto:david.richardson@do.treas.gov
Postal: U.S. Department of Treasury
           Office of Tax Analysis
           1500 Pennsylvania Ave. NW
           Washington, DC 20220 USA

ABSTRACT:
This paper provides insight into the attributes of wage-earning
households that participate in tax-deferred retirement savings
plans. Examining data from federal tax returns, we find that
approximately 52 percent of individuals and 55 percent of
households participated in a retirement savings program in 1996.
Excluding households with wages within the 1996 poverty
thresholds and individuals under age 21 or over age 70, the
age-wage restricted participation rates were 66 percent and 79
percent for individuals and households, respectively. Estimating
probit equations, we find that households with a single-earner
or having dependents are less likely to participate in a plan.
Higher wage-earnings, non-labor income, and marginal tax rates
tend to increase the probability of participation.

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W O R K I N G P A P E R Abstracts
_________________________________________________________________

"Life-Cycle Saving, Limits on Contributions to DC Pension Plans,
and Lifetime Tax Benefits"

      BY: JAGADEESH GOKHALE
              Federal Reserve Bank of Cleveland
           LAURENCE J. KOTLIKOFF
              Boston University
              National Bureau of Economic Research (NBER)
           MARK J. WARSHAWSKY
              U.S. Department of Treasury
              Office of Economic Policy

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=263432

Paper ID: NBER Working Paper No. W8170
Date: March 2001

Contact: JAGADEESH GOKHALE
   Email: Mailto:jgokhale@clev.frb.org
Postal: Federal Reserve Bank of Cleveland
           East 6th & Superior
           Cleveland, OH 44101-1387 USA
Co-Auth: LAURENCE J. KOTLIKOFF
   Email: Mailto:kotlikof@bu.edu
Postal: Boston University
           Department of Economics
           595 Commonwealth Avenue
           Boston, MA 02215 USA
Co-Auth: MARK J. WARSHAWSKY
   Email: Mailto:Mark.Warshawsky@do.treas.gov
Postal: U.S. Department of Treasury
           Office of Economic Policy
           1500 Pennsylvania Avenue, N.W.
           Washington, DC 20220 USA

Paper Requests:
Full-Text downloads are available from SSRN Online for $5.

ABSTRACT:
This paper addresses three questions related to limits on DC
contributions. The first is whether statutory limits on
tax-deductible contributions to defined contribution (DC) plans
are likely to be binding, focusing on households in various
economic situations. The second is how large is the tax benefit
from participating in defined contribution plans. The third is
how does the defined contribution tax benefit depend on the
level of lifetime income. We find that the statutory limits bind
those older middle-income households who started their pension
savings programs late in life, those who plan to retire early,
single-earner households, those who are not borrowing
constrained, and those with rapid rates of real wage growth.
Most households with high levels of earnings, regardless of age
or situation, are also constrained by the contribution limits.
Lower or middle-income two-earner households that can look
forward to modest real earnings growth are likely to be
borrowing constrained for most of their pre-retirement years
because of the costs of paying a mortgage and sending children
to college. These households are not in a position to save the
25 percent of earnings allowed as a contribution to DC plans.
Some of these middle-income households, however, are constrained
by the $10,500 limit on elective employee contributions to
401(k) plans if the households have access to only these plans
and their employers make no pension contributions for them. The
borrowing constraints faced by many lower- and middle-income
Americans means that contributions to DC plans must come at the
price of lower consumption when young and the benefit of higher
consumption when old. Indeed, for a stylized household earning
$50,000, consistently contributing 10 percent of salary to a DC
plans that earns a 4 percent real return means consuming almost
two times more when old than when young. Measured as a share of
lifetime consumption, the tax benefit from participating in a DC
plan can be significant.

JEL Classification: D9
______________________________

"The Transition to Personal Accounts and Increasing Retirement
Wealth: Macro and Micro Evidence"

      BY: JAMES M. POTERBA
              Massachusetts Institute of Technology (MIT)
              Department of Economics
              National Bureau of Economic Research (NBER)
              Stanford University
              Hoover Institution
           STEVEN F. VENTI
              Dartmouth College
              National Bureau of Economic Research (NBER)
           DAVID A. WISE
              National Bureau of Economic Research (NBER)
              Harvard University

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=291285

Paper ID: NBER Working Paper No. W8610
Date: November 2001

Contact: JAMES M. POTERBA
   Email: Mailto:poterba@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
           Department of Economics
           E52-350
           50 Memorial Drive
           Cambridge, MA 02142 USA
   Phone: 617-253-6673
     Fax: 617-253-1330
Co-Auth: STEVEN F. VENTI
   Email: Mailto:steven.f.venti@dartmouth.edu
Postal: Dartmouth College
           Department of Economics
           6106 Rockefeller Center
           Hanover, NH 03755 USA
Co-Auth: DAVID A. WISE
   Email: Mailto:dwise@nber.org
Postal: National Bureau of Economic Research (NBER)
           1050 Massachusetts Avenue
           Cambridge, MA 02138 USA

Paper Requests:
Full-Text downloads are available from SSRN Online for $5.

ABSTRACT:
Retirement saving has changed dramatically over the last two
decades. There has been a shift from employer-managed defined
benefit pensions to defined contribution retirement saving plans
that are largely controlled by employees. In 1980, 92 percent of
private retirement saving contributions were to employer-based
plans and 64 percent of these contributions were to defined
benefit plans. Today, about 85 percent of private contributions
are to plans in which individuals decide how much to contribute
to the plan, how to invest plan assets and how and when to
withdraw money from the plan. In this paper we use both macro
and micro data to describe the change in retirement assets and
in retirement saving. We give particular attention to the
possible substitution of pension assets in one plan for assets
in another plan such as the substitution of 401(k) assets for
defined benefit plan assets. Aggregate data show that between
1975 and 1999 assets to support retirement increased about
five-fold relative to wage and salary income. This increase
suggests large increases in the wealth of future retirees. The
enormous increase in defined contribution plan assets dwarfed
any potential displacement of defined benefit plan assets. In
addition, in recent years the annual "retirement plan
contribution rate," defined as retirement plan contributions as
a percentage of NIPA personal income, has been over 5 percent.
This is much higher than the NIPA total personal saving rate,
which has been close to zero. Retirement saving as a share of
personal income today would likely be at least one percentage
point greater had it not been for legislation in the 1980s that
limited employer contributions to defined benefit pension plans,
and the reduction in defined benefit plan contributions
associated with the rising stock market of the 1990s. It is also
likely that the "retirement plan contribution rate" would be
much higher today if it were not for the 1986 retrenchment of
the IRA program.

______________________________

"Savings of Young Parents"

      BY: RICARDO COSSA
              Chicago Partners, LLC
           ERIN L. KRUPKA
              Federal Reserve Bank of Chicago
           ANNAMARIA LUSARDI
              Dartmouth College
              Department of Economics

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=254485

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           http://research.frbchi.org/WorkingPapers/wp2000_23.pdf
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Paper ID: FRB of Chicago Working Paper No. 00-23
Date: December 2000

Contact: ANNAMARIA LUSARDI
   Email: Mailto:Annamaria.Lusardi@Dartmouth.edu
Postal: Dartmouth College
           Department of Economics
           6016 Rockefeller Hall
           Room 327
           Hanover, NH 03755 USA
   Phone: 603-646-2099
     Fax: 603-646-2122
Co-Auth: RICARDO COSSA
   Email: Mailto:cossa@chipar.com
Postal: Chicago Partners, LLC
           140 S. Dearborn Street
           Suite 1500
           Chicago, IL 60603
Co-Auth: ERIN L. KRUPKA
   Email: Mailto:erin.krupka@chi.frb.org
Postal: Federal Reserve Bank of Chicago
           230 South LaSalle Street
           Chicago, IL 60604 USA

Paper Requests:
Contact Public Information Center, Federal Reserve Bank of
Chicago, PO Box 834, Chicago IL 60690. Phone:(312) 322-5111.
Fax:(312) 322-5515.

ABSTRACT:
In this paper, we examine household savings using data from the
National Longitudinal Survey, Cohort 1997 (NLSY97). This data
set provides detailed information about assets and liabilities
of parents with teen-age children and allows researchers to
examine patterns of accumulation at early stages of the life
cycle. In our empirical work, we have first to deal with several
problems in measuring wealth. While many respondents report
owning assets and liabilities, they often do not report their
values. This problem is severe, in particular among financial
assets. It is also difficult to devise an appropriate measure of
accumulation when examining young parents, since assets and
liabilities display different degrees of liquidity. To get
around the non-response problem, we impute the missing values
for assets and liabilities. This allows us to calculate
household wealth for the whole sample. We examine household
wealth holdings by considering several measures of accumulation:
total (non-pension) net worth, financial net worth, and
retirement savings. We study their distribution across different
demographic groups and show that many households, in particular
those headed by young parents (younger than 35), minorities, and
individuals with low educational attainment, display very little
accumulation. Many have no financial assets and their total net
worth is also low. Housing equity is the main asset in many
household portfolios and often the only asset families own.
Overall, there is much heterogeneity in wealth holdings not only
across but also within demographic groups. This suggests that
many factors are at play in shaping the wealth accumulation of
parents with young children.