Life Cycle Issues

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SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 16: May 3, 2007

Editor: PAMELA J. PERUN
Policy Director, Initiative on Financial Security,
Aspen Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Life Cycle Issues
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T A B L E O F C O N T E N T S

"Behavioral Obstacles to the Annuity Market"
WEI-YIN HU
Financial Engines, Inc.
JASON S. SCOTT
Financial Engines, Inc.

"Savings for Life: A Pathway to Financial Security for All
Americans"
LISA MENSAH
Aspen Institute - Initiative on Financial Security
PAMELA J. PERUN
Initiative on Financial Security, Aspen Institute

"A Comparative Analysis of Limits on Qualified Retirement Plans"
MARK J. WARSHAWSKY
Watson Wyatt Worldwide
BEN WEITZER
Watson Wyatt Worldwide - Research and Innovation Center

"The Political Economy of Government-Issued Longevity Bonds"
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign - Department
of Finance, National Bureau of Economic Research (NBER)
PETER R. ORSZAG
The Brookings Institution, Sebago Associates

"Perspectives: Why We Need a Pension Revolution"
KEITH AMBACHTSHEER
Independent
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"Behavioral Obstacles to the Annuity Market"

Contact: WEI-YIN HU
Financial Engines, Inc.
Email: whu@financialengines.com
Auth-Page: http://ssrn.com/author=504416

Co-Author: JASON S. SCOTT
Financial Engines, Inc.
Email: jscott@financialengines.com
Auth-Page: http://ssrn.com/author=666589

Full Text: http://ssrn.com/abstract=978246

ABSTRACT: As baby boomers enter retirement, they will look to the
investment industry for ways to generate retirement income from a
stock of accumulated saving. A longstanding puzzle is why most
retirees do not purchase longevity insurance in the form of
lifetime annuities. This question is rising in importance due to
the rapid decline of defined benefit pensions, which
traditionally provided such guaranteed lifetime income. This
study applies the lessons of behavioral finance to understand how
well-documented anomalies in decision-making under risk may
affect the annuity purchase decision. We demonstrate how mental
accounting - where an annuity is evaluated as a gamble distinct
from the retirement spending and investment plan - can be a
powerful reason for the unpopularity of annuities. We also
explain the prevalence of "period certain" annuities which
guarantee a minimum number of payouts. Finally, we show that
delayed payout or "longevity annuities," which are purchased
today to begin payouts in the future, may be more desirable than
immediate payout annuities due to the overweighting of small
probabilities.
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"Savings for Life: A Pathway to Financial Security for All
Americans"

Contact: LISA MENSAH
Aspen Institute - Initiative on Financial Security
Email: lisa.mensah@aspeninstitute.org
Auth-Page: http://ssrn.com/author=526247

Co-Author: PAMELA J. PERUN
Initiative on Financial Security, Aspen Institute
Email: pamela@planetnow.com
Auth-Page: http://ssrn.com/author=237591

Full Text: http://ssrn.com/abstract=982931

ABSTRACT: The US savings system consists of a confusing patchwork
of plans, most of them income-based programs that rely on tax
subsidies to generate retirement savings. These subsidies, which
now total more than $300 billion a year, disproportionately favor
those who already fall into higher income brackets and need no
government help to save.

The U.S. needs a sensible savings system that allows all
Americans to save, invest and own at every stage of life. The
government must step up to the challenge by building durable
"on-ramps" to the savings system for low- and moderate-income
citizens. What is needed is the right nexus to bring the
financial services sector and low- and moderate-income Americans
together. Today, nearly half of the nation's households have
virtually no connection to the financial services industry. And
the business community has not adequately engaged them because it
has not perceived their full potential as new consumers.

Given the right savings vehicles with the right incentives for
both individual savers and the financial services industry, more
Americans can access the pathway to greater savings. The
Initiative on Financial Security at the Aspen Institute has
developed a package of four complementary savings vehicles that
can significantly improve the savings options for all Americans
across the lifespan:

? Child Accounts to build savings from the beginning of
life. The government would give a beginning endowment to a
market-based, retail-sold account, giving all children a
financial jump start in life and helping to build financial
literacy in families.

? Home Accounts to be used for a down payment on a home.
These FDIC-insured accounts would enable more low- and
moderate-income families to become homeowners by providing a
modest government match on their savings.

? America's IRA, to build retirement savings among
Americans who do not have access to an employer plan at work.
These simple Individual Retirement Accounts would feature a
government match and a one-time account opening incentive for
low- and moderate-income savers.

? Security "Plus" Annuities to provide an additional layer
of lifetime, guaranteed income in retirement. This program would
partner the familiar and universal Social Security program with
the private market to provide many of the 80 million
soon-to-retire baby boomers with a simple, low-cost annuity
product that protects them from outliving their savings or losing
them in a market downturn.
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"A Comparative Analysis of Limits on Qualified Retirement Plans"
Tax Notes, Vol. 115, No. 3, April 16, 2007

Contact: MARK J. WARSHAWSKY
Watson Wyatt Worldwide
Email: MARK.WARSHAWSKY@DO.TREAS.GOV
Auth-Page: http://ssrn.com/author=148491

Co-Author: BEN WEITZER
Watson Wyatt Worldwide - Research and Innovation
Center
Auth-Page: http://ssrn.com/author=794586

Abstract: http://ssrn.com/abstract=980184

ABSTRACT: The authors explain that because the legislated limits
on considered compensation, benefits, and contributions in
tax-qualified retirement plans have been changed many times -
generally in a downward direction - even with indexation to
consumer prices, their absolute (that is, nominal) dollar values
have been flat or have increased only modestly from 1987 to 2007.
By contrast, Social Security's main parameters, which are indexed
to average wages and some of which were increased by legislation,
have increased significantly over the same period. They argue
that if a public policy approach goal is to maintain fairly
stable relative roles for public and private retirement plans and
stable redistribution when both public programs and private plans
are considered together over time, the legislated limits on
tax-qualified retirement plans should be stable and be indexed to
the same average index used by Social Security.
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"The Political Economy of Government-Issued Longevity Bonds"
Journal of Risk & Insurance, Vol. 73, No. 4, pp. 611-631,
December 2006

Contact: JEFFREY R. BROWN
University of Illinois at Urbana-Champaign -
Department of Finance, National Bureau of Economic
Research (NBER)
Email: brownjr@uiuc.edu
Auth-Page: http://ssrn.com/author=155077

Co-Author: PETER R. ORSZAG
The Brookings Institution, Sebago Associates
Email: PORSZAG@BROOK.EDU
Auth-Page: http://ssrn.com/author=244915

Full Text: http://ssrn.com/abstract=947958

ABSTRACT: This article explores the trade-offs associated with
government issuance of longevity bonds as a way of stimulating
private annuity supply in the presence of aggregate mortality
risk. We provide new calculations suggesting a 5 percent chance
that aggregate mortality risk could ex post raise annuity costs
for private insurers by as much as 5-10 percentage points, with
the most likely effect based on historical patterns toward the
lower end of that range. While we suspect that aggregate
mortality risk does exert some upward pressure on annuity prices,
evidence from private market pricing suggests that, to the extent
that private insurers are accurately pricing this risk, the
effect is less than 5 percentage points. We discuss ways that the
private market can spread this risk, while emphasizing that the
government has the unique ability to spread aggregate risk across
generations. We note factors that might hamper such an efficient
allocation of risk, including potential political incentives for
the government to shift more than the optimal amount of risk onto
future generations, and the possibility that government fiscal
policy might allocate risk less efficiently within each
generation than would private markets. We also discuss how
large-scale longevity bond issuance might affect government
borrowing costs, as well as political economy aspects of how the
proceeds from such a bond issuance might be used.
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"Perspectives: Why We Need a Pension Revolution"
Financial Analysts Journal, Vol. 63, No. 1, pp. 21-25,
January/February 2007

Author: KEITH AMBACHTSHEER
Independent
Auth-Page: http://ssrn.com/author=444119

Abstract: http://ssrn.com/abstract=960543

ABSTRACT: A broad consensus exists that workplace pension
arrangements around the world are sick and in need of strong
medicine. Rather than resurrect the traditional defined-benefit
(DB) plan or broaden defined-contribution (DC) plan coverage,
this article argues that we move from an either/or to an and/and
mindset to improve global workplace pension coverage, adequacy,
and certainty. Pension arrangements can combine the best of DB
and DC plans and minimize the impact of their less-attractive
features. However, we must also redesign the institutions through
which workplace pensions are delivered. The ideal
pension-delivery institution is expert, has scale, and acts
solely in the best interests of plan participants.
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