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SOCIAL SCIENCE RESEARCH NETWORK
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
& P E N S I O N L A W
Vol. 7, No. 32: October 31, 2006
Editors: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Pensions
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T A B L E O F C O N T E N T S
"An Empirical Analysis of the Annuity Rate in Chile"
CRAIG THORBURN
World Bank
MARCO MORALES
Universidad Diego Portales
ROBERTO DE REZENDE ROCHA
National Bureau of Economic Research (NBER)
"Pension Risk: Do Employees Care?"
VRINDA GUPTA
Watson Wyatt Worldwide
"Defined Contribution Plans, Defined Benefit Plans, and the
Accumulation of Retirement Wealth"
JAMES M. POTERBA
Massachusetts Institute of Technology (MIT) - Department
of Economics, National Bureau of Economic Research
(NBER)
"Measuring Retirement Income Adequacy: Calculating Realistic
Income Replacement Rates"
JACK VANDERHEI
Temple University - Risk Management & Insurance &
Actuarial Science, Employee Benefit Research Institute
(EBRI)
"Is it Time to Admit the Failure of an Employer-Based Pension
System"
SUSAN J. STABILE
St. John's University - School of Law
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"An Empirical Analysis of the Annuity Rate in Chile"
World Bank Policy Research Working Paper No. 3929
Contact: CRAIG THORBURN
World Bank
Email: cthorburn@worldbank.org
Auth-Page: http://ssrn.com/author=626323
Co-Author: MARCO MORALES
Universidad Diego Portales
Auth-Page: http://ssrn.com/author=646362
Co-Author: ROBERTO DE REZENDE ROCHA
National Bureau of Economic Research (NBER)
Email: rrocha@worldbank.org
Auth-Page: http://ssrn.com/author=282003
Full Text: http://ssrn.com/abstract=917500
ABSTRACT: Empirical analyses of annuities markets have been
limited to a few industrial countries and restricted by data
limitations. Chile provides excellent conditions for research on
annuities because of the depth of its market and the availability
of data. The authors use a panel of life insurance company data
to examine econometrically the main determinants of the annuity
rate, defined as the internal rate of return on annuities. The
results indicate that the annuity rate is determined by the
risk-free interest rate, the share of privately-issued higher
yield securities in the portfolioof providers as a proxy for the
spread over the risk-free rate, the leverage of providers, the
level of broker's commissions, the market share of individual
providers, the level of the premium, and the degree of market
competition. The results also show that efforts to improve market
transparency produced structural shifts in the parameters of the
annuity rate equation. The results are consistent with separate
research on money's worth ratios, and indicate the need to
develop appropriate financial instruments, allowing providers to
hedge their risks while extracting higher returns, and also to
ensure competition and transparency in annuities markets, in
order to ensure good outcomes for annuitants.
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"Pension Risk: Do Employees Care?"
Watson Wyatt Technical Paper No. 2006-TR-06
Contact: VRINDA GUPTA
Watson Wyatt Worldwide
Email: vrinda.gupta@watsonwyatt.com
Auth-Page: http://ssrn.com/author=497074
Full Text: http://ssrn.com/abstract=933028
ABSTRACT: The literature shows that different market entities
take into account the level of under-funding in the pension
accounts while valuating firms. This paper analyses whether
employees with a DB pension scheme perceive risk to their
expected income in retirement while forming their opinions about
the long term business success of their employer. Using a matched
dataset of pension risk indicators for FTSE 100 companies and
data from employees' opinion in the UK, the research shows that
employees do seem to care about the level of funding of their
benefits scheme when comparing their benefits with other
companies and the industry average. But these concerns do not
seem to affect their perception of the management or their
confidence in business success and commitment to the firm.
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"Defined Contribution Plans, Defined Benefit Plans, and the
Accumulation of Retirement Wealth"
NBER Working Paper No. W12597
Contact: JAMES M. POTERBA
Massachusetts Institute of Technology (MIT) -
Department of Economics, National Bureau of
Economic Research (NBER)
Email: poterba@mit.edu
Auth-Page: http://ssrn.com/author=21561
Full Text: http://ssrn.com/abstract=937298
ABSTRACT: The private pension structure in the United States,
once dominated by defined benefit (DB) plans, is currently
divided between defined contribution (DC) and DB plans. Wealth
accumulation in DC plans depends on the participant's
contribution behavior and on financial market returns, while
accumulation in DB plans is sensitive to a participant's labor
market experience and to plan parameters. This paper simulates
the distribution of retirement wealth, as well as the average
level of such wealth, under representative DB and DC plans. The
analysis considers the role of asset returns, earnings histories,
and retirement plan characteristics using data from the Health
and Retirement Study (HRS). To simulate wealth in DC plans,
individuals are randomly assigned a share of wages that they and
their employer contribute to the plan. The analysis considers
several possible asset allocation strategies, with asset returns
drawn from the historical return distribution. The DB plan
simulations draw earnings histories from the HRS, and randomly
assign each individual a pension plan drawn from a sample of
large private and public defined benefit plans. The simulations
yield distributions of both DC and DB wealth at retirement as
well as estimates of the certainty-equivalent wealth associated
with representative DB and DC pension structures. The results
suggest that average retirement wealth accruals under current DC
plans exceed average accruals under private sector DB plans,
although the heterogeneity in both types of plans implies many
deviations from this rule. The comparison of current DC plans
with more generous public sector DB plans is less definitive,
because public sector DB plans are more generous on average than
their private sector counterparts. The ranking of the expected
value of retirement wealth accruals, and the certainty equivalent
of those accruals, for these two classes of plans is sensitive to
assumptions about the asset allocation rules of the DC plan
participant.
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"Measuring Retirement Income Adequacy: Calculating Realistic
Income Replacement Rates"
EBRI Issue Brief, No. 297, September 2006
Contact: JACK VANDERHEI
Temple University - Risk Management & Insurance &
Actuarial Science, Employee Benefit Research
Institute (EBRI)
Email: TEMPLE@VANDERHEI.COM
Auth-Page: http://ssrn.com/author=265706
Full Text: http://ssrn.com/abstract=931422
ABSTRACT: A key weakness of many retirement income models is that
they use average estimates for life expectancy, and,
consequently, provide workers with only a 50 percent chance of
having adequate income in retirement. The Employee Benefit
Research Institute (EBRI) has developed a new model - the
EBRI/ERF Retirement Security Projection Model® (RSPM) - that
incorporates a wide range of data in order to produce a far more
inclusive and refined projection of likely retirement income. In
projecting retirement income needs, the new EBRI model
incorporates three of the most critically important, but
difficult-to-model, retirement risks: investment risk, or how
individuals' assets will perform during retirement; longevity
risk, or how long an individual expects to live; and catastrophic
health care costs, which have the potential to wipe out
retirement savings. The EBRI model finds that the amount of money
Americans will need for an adequate retirement varies widely
based on individual factors and often is substantially higher
than previously estimated. This paper presents the results
obtained by utilizing the concepts already adopted by RSPM for
the entire population of certain age cohorts and applying them to
stylized examples. These results will provide useful information
for individuals attempting to include such crucial factors as
longevity, investment, and health care risk into their retirement
planning process.
This paper is the second of a two-part series measuring
retirement income adequacy. A "Part 1" paper by EBRI (VanDerhei,
EBRI Notes, September 2004) reviewed how replacement rates have
traditionally been used to establish minimum targets for future
retirees by calculating the amount needed to provide the same
amount of after-tax income in retirement as that received prior
to retirement after adjusting for differences in savings, age,
and work-related expenses.
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"Is it Time to Admit the Failure of an Employer-Based Pension
System"
St. John's Legal Studies Research Paper No. 06-0054
Lewis & Clark Law Review, Vol. 11
Contact: SUSAN J. STABILE
St. John's University - School of Law
Email: stabiles@stjohns.edu
Auth-Page: http://ssrn.com/author=99858
Full Text: http://ssrn.com/abstract=938713
ABSTRACT: In her contribution to the Twelfth Annual Lewis and
Clark Business Law Forum (The Aging of the Baby Boomers and
America's Changing Retirement System), Susan Stabile paints a
pessimistic picture of the state of retirement security in the
United States. She examines two aspects of the failure of an
employer-based pension system, focusing first on the problems
associated with defined contribution plans such as 401(k) plans,
which have become the dominant means by which employers offer
their employees pension coverage, and second, on the reality that
millions of employees lack any pension coverage at all. She
argues that the failures of the employer-based system can not be
rectified by incremental changes and that serious consideration
must be given to alternative models of providing Americans with
retirement security. Although recognizing that neither of the
models she discusses, i.e., the provision of a government pension
for everyone and movement to a mandatory employment-based system
with more stringent regulation than currently exists, would be
politically easy to enact, she argues that some major overhaul is
needed if we remain convinced that adequate retirement security
is an important social goal.