DORA L. COSTA, University of California, Los Angeles - Department of Economics, National Bureau of Economic Research (NBER)
Email: costa@mit.edu

I examine the effects of an unearned income transfer on the retirement rates and living arrangements of a very poor population by studying the effects of pensions on the decisions of black Union Army veterans. I find that blacks were 2 to 5 times as responsive as whites to income transfers in their retirement decisions and 6 to 8 times as responsive in their choice of independent living arrangements. I argue that blacks' greater poverty explains their responsiveness to pensions. My findings have implications for understanding racial differences in trends in retirement and independent living. I show that the retirement rates of both blacks and whites rose between 1900 and 1930 but that convergence in black and white rates and in living arrangements only occurred between 1930 and 1950. I argue that income effects from the institution of Social Security explain up to half of the convergence in black-white retirement rates and in living arrangements.

NORMA B. COE, Tilburg University
Email: N.Coe@uvt.nl
MAARTEN LINDEBOOM, Free University of Amsterdam - Department of Economics, Tinbergen Institute Amsterdam, Institute for the Study of Labor (IZA)
Email: mlindeboom@econ.vu.nl

The effect that health has on the retirement decision has long been studied. We examine the reverse relationship, whether retirement has a direct impact on later-life health. To identify the causal relationship, we use early retirement window offers to instrument for retirement. We find no negative effects of early retirement on men's health, and if anything, a temporary increase in self-reported health and improvements in health of highly educated workers. While this is consistent with previous literature using Social Security ages as instruments, we also find that anticipation of retirement might be important, and bias the previous estimates downwards.

PETER J. BRADY, Investment Company Institute
Email: pbrady@ici.org
STEPHEN SIGRIST, Investment Company Institute
Email: sigrist@ici.org

There is considerable interest in developing public policies that can increase savings and help individuals prepare for retirement. One line of effort aims to increase participation in employer-sponsored pension plans, such as 401(k) plans, at firms that currently offer plans. Another line of effort aims to encourage firms that do not currently offer a retirement plan to adopt a plan. As the retirement industry and policymakers try to increase coverage, it is important to understand the motives at play and why more employers do not currently sponsor plans. To that end, it is necessary to understand which workers currently have access to and participate in employer-sponsored retirement plans, and why certain employees desire and certain employers offer compensation in the form of retirement benefits. This paper examines the various factors that lead some workers to favor compensation that includes both cash compensation and retirement benefits over cash alone, and it discusses the factors that lead some employers to offer retirement benefits. One finding is that differences in workforce composition, rather than administrative costs, appear to be a primary cause for the low rate at which small employers sponsor retirement plans. As a group, the characteristics of small-firm employees differ substantially from the characteristics of large-firm employees. Nevertheless, workers at small firms that sponsor plans are very similar to workers at large firms that sponsor plans, and workers at small firms that do not sponsor plans are very similar to workers at large firms that do not sponsor plans.

EMMA AGUILA, RAND Corporation
Email: eaguila@rand.org
ORAZIO P. ATTANASIO, affiliation not provided to SSRN
COSTAS MEGHIR, University College London - Department of Economics, Centre for Economic Policy Research (CEPR), Institute for the Study of Labor (IZA)
Email: c.meghir@ucl.ac.uk

Previous empirical literature has found a sharp decline in consumption during the first years of retirement implying that individuals do not save enough for their retirement. This phenomenon has been called the retirement consumption puzzle. In contrast to some of the previous studies, the authors find no evidence of the retirement consumption puzzle during the first years of retirement. Consumption is defined as nondurable expenditure, a more comprehensive measure than only food used in many previous studies. Food expenditure at retirement decreases. The latter could be explained by a reallocation of the budget shares after retirement to adjust to a new stage in the life cycle. These results suggest that food expenditure is not an accurate measure to test the Life Cycle Model.

GLENN SPRINGSTEAD, Social Security Administration
Email: glenn.springstead@ssa.gov
ANDREW G. BIGGS, American Enterprise Institute
Email: andrew.biggs@aei.org

Discussions of retirement planning and Social Security policy often focus on replacement rates, which represent retirement income or Social Security benefits relative to pre-retirement earnings. Replacement rates are a rule of thumb designed to simplify the process of smoothing consumption over individuals' lifetimes. Despite their widespread use, however, there is no common means of measuring replacement rates. Various measures of pre-retirement earnings mean that the denominators used in replacement rate calculations are often inconsistent and can lead to confusion.

Whether a given replacement rate represents an adequate retirement income depends on whether the denominator in the replacement rate calculation is an appropriate measure of pre-retirement earnings. This article illustrates replacement rates using four measures of pre-retirement earnings: final earnings; the constant income payable from the present value (PV) of lifetime earnings (PV payment); the wage-indexed average of all earnings prior to claiming Social Security benefits; and the inflation-adjusted average of all earnings prior to claiming Social Security benefits (consumer price index (CPI) average).

The article then measures replacement rates against a sample of the Social Security beneficiary population using the Social Security Administration's Modeling Income in the Near Term (MINT) microsimulation model. Replacement rates are shown based on Social Security benefits alone, to indicate the adequacy of the current benefit structure, as well as on total retirement income including defined benefit pensions and financial assets, to indicate total preparedness for retirement.

The results show that replacement rates can vary considerably based on the definition of pre-retirement earnings used and whether replacement rates are measured on an individual or a shared basis. For current new retirees, replacement rates based on all sources of retirement income seem strong by most measures and are projected to remain so as these individuals age. For new retirees in 2040, replacement rates are projected to be lower, though still adequate on average based on most common benchmarks.

GORDON LESLIE CLARK, Oxford University Center for the Environment
Email: gordon.clark@ouce.ox.ac.uk
ROBERTO DURÁN-FERNÁNDEZ, University of Oxford
Email: roberto.duran-fernandez@geog.ox.ac.uk
KENDRA STRAUSS, affiliation not provided to SSRN
Email: kendra.strauss@geog.ox.ac.uk

It is widely observed that being in the market gives financial traders access to knowledge and information not available to remote traders. A truism of the geography of finance, it is also a perspective that can shed light on the interaction between market location, global financial movements, and personal welfare. In this paper, we analyse the intended retirement savings portfolios of nearly 2400 participants in a defined contribution pension plan sponsored by a London-based investment bank. Having demonstrated the empirical significance of the UK house-price bubble, respondents' retirement savings portfolios are evaluated against their socio-demographic characteristics, expressed attitudes to retirement planning, and risk tolerance. It is shown that relatively few respondents would have included property in their retirement portfolios; those that would were more risk tolerant than the average respondent. It is also shown that respondent age, household status, job classification, and income were related to the diversity of retirement portfolios with younger, less well-paid respondents having less diverse portfolios than their older colleagues. Implications are drawn for understanding savings behaviour, the design of employer-sponsored retirement income schemes, and national pension policy.

ANUP K BASU, Queensland University of Technology
Email: a.basu@qut.edu.au
ALISTAIR BYRNE, University of Edinburgh - Business School
Email: alistair.byrne@ed.ac.uk
MICHAEL E. DREW, Griffith University
Email: michael.drew@griffith.edu.au

Lifecycle funds offered to retirement plan participants gradually reduce their exposure to stocks as they approach the target date of retirement. This movement away from equities and towards less volatile assets like bonds and cash is done to emphasize growth of the portfolio in the initial years and preservation of capital in the later years. We show that such deterministic switching rules produce inferior wealth outcomes for the investor compared to strategies that dynamically alter the allocation between growth and conservative assets based on cumulative portfolio performance relative to a set target. The dynamic allocation strategies exhibit clear second-degree stochastic dominance and almost first-degree stochastic dominance over strategies that switch assets unidirectionally without consideration of portfolio performance.

WOLFRAM J. HORNEFF, Goethe University Frankfurt - Department of Finance
Email: horneff@finance.uni-frankfurt.de
RAIMOND MAURER, University of Frankfurt - Faculty of Business and Economics
Email: Rmaurer@wiwi.uni-frankfurt.de

We derive the optimal portfolio choice and consumption pattern over the lifecycle for households facing labor income, capital market, and mortality risk. In addition to stocks and bonds, households also have access to deferred annuities. Deferred annuities offer a hedge against mortality risk and provide similar benefits as Social Security. We show that a considerable fraction of wealth should be annuitized to skim the return enhancing mortality credit. The remaining liquid wealth (stocks and bonds) is used to hedge labor income risk during work life and to earn the equity premium. We find a marginal difference between a strategy involving deferred annuities and one where the investor can purchase immediate life annuities.