JOHN M. R. CHALMERS, University of Oregon
Email: jchalmer@uoregon.edu
JONATHAN REUTER, Boston College - Department of Finance
Email: reuterj@bc.edu

Oregon Public Employees Retirement System (PERS) retirees must choose between receiving all of their retirement benefits as life annuity payments and receiving lower life annuity payments coupled with a partial lump sum payout. For the median retiree, the expected present value of the incremental life annuity payments is 1.50 times the lump sum payout, and demand for lump sums is low. This pattern is consistent with value-maximizing decisions by retirees. However, when we exploit variation in the value of the incremental life annuity payments arising from how PERS calculates retirement benefits, we find robust evidence that demand for lump sum payouts is higher when the forgone life annuity payments are more valuable. We also find that demand for lump sum payouts is higher when the lump sum payout is large and when equity market returns over the prior 12 months are higher. Collectively, these findings suggest that retirees value incremental life annuity payments at less than their expected present value, either because they do not know how to accurately value life annuities or because they have strong demand for large lump sum payouts. In contrast, when we measure variation in the value of the incremental life annuity payments along a dimension that is easier for retirees to observe and interpret poor health at retirement - we find evidence consistent with value-maximizing decision-making.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
THOMAS L. STEINMEIER, Texas Tech University - Department of Economics and Geography
Email: thomas.steinmeier@ttu.edu

This paper advances the specification and estimation of models of retirement and saving in two earner families. The complications introduced by the interaction of retirement decisions by husbands and wives have led researchers to adopt a number of simplifications to increase the feasibility of estimating family retirement models. Our model relaxes these restrictions. It includes the extended choice set created when each spouse makes an independent retirement decision. It also includes the full range of complexity found in dynamic-stochastic models of retirement decision making, so far analyzed only in the context of single earner households. Retirement outcomes include full retirement, partial retirement and full-time work. Reverse flows from states of lesser to greater work are also included. The preference structure incorporates heterogeneity in time preference, varying taste parameters for full-time and part-time work, and the possibility of changes in preferences after retirement. The opportunity set reflects the full range of nonlinearities created by pensions and Social Security. Financial returns are stochastic. Exogenous shocks such as layoffs are also included. Estimation is based on data from the Health and Retirement Study.The solution method is based on backward induction. We show that this method is superior to a method based on a Nash equilibrium, providing plausible behavioral predictions when Nash equilibrium criteria fall silent. In contrast to some recent studies, the findings suggest the flow of wives into the labor force in the last few decades has probably reduced the amount of husbands’ work. The model also provides plausible responses to various policies. For example, we find that any effort to promote opportunities for partial retirement as a means to increase overall work is likely to be unsuccessful as any induced decline in full retirements is offset by a decrease in full-time work.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

MICHAEL D. HURD, The RAND Corporation, SUNY at Stony Brook University, College of Arts and Science, Department of Economics, National Bureau of Economic Research (NBER)
Email: mhurd@RAND.ORG
PIERRE-CARL MICHAUD, RAND Corporation, Institute for the Study of Labor (IZA)
Email: Pierre-Carl_Michaud@rand.org
SUSANN ROHWEDDER, The RAND Corporation
Email: Susannr@rand.org

The generosity of public pensions may depress private savings and provide incentives to retire early. While there is plenty of evidence supporting the latter effect, there remains considerable controversy as whether or not public pensions crowd out private savings. This paper uses international micro-datasets collected over recent years to investigate whether public pensions displace private savings. The identification strategy relies on differences in the progressivity or non-linearity of pension formulas across countries. We also make use of large heterogeneity in earnings across education group and country. The evidence we present is consistent with previous studies using cross-sectional and time-series variation in savings and pensions. We estimate that an extra dollar of pension wealth depresses accumulated financial assets at the time of retirement by 23 to 44 cents and that an extra ten thousand dollars in pension wealth reduces the average retirement age by roughly 1 month.

CHARLOTTE CRANE, Northwestern University - School of Law
Email: ccrane@law.northwestern.edu

Beginning in January 2010, taxpayers may convert balances in traditional IRAs into tax prepaid Roth IRAs. Those who decide to do so will be relying on current law that allows the payment of a tax now to replace any future income tax on the earnings within the Roth IRA and on withdrawals therefrom.

In this paper, I explore whether these taxpayers should be afforded any exception from the generally accepted idea that changes in tax laws that affect pre-existing investments raise no special concerns. I conclude that although the Roth IRA holder, especially of the Roth IRA holder who has converted a traditional IRA into a Roth IRA through the prepayment of income taxes on the account, is qualitatively different from most investors facing tax changes, this difference gives rise only to political, and not constitutional, concerns.

I further conclude that the current Congress would be wise to remove the ability of current IRA holders to convert their accounts into Roth IRAs, and thus to minimize the political challenge future Congresses will face given the expectations of the holders of such accounts.

BRIAN A. BENKO, McDermott Will & Emery
Email: bbenko1064@gmail.com

Employee Benefits Law is complex and often misunderstood. This article explains the regulatory systems developed by Congress over nearly a century. Initially Congress created tax preferences to encourage employers to offer retirement and healthcare benefits to employees. Several decades later, Congress enacted the Employee Retirement Income Security Act of 1974 ("ERISA"), providing substantive regulation under labor law and tax law. Since ERISA, there have been about three dozen public laws which have changed the systems. Not surprisingly, confusion has accompanied the regular modifications to a very technical area of law. Nevertheless, the multitude of laws can be simplified. This is possible with an understanding of how the parts combine to form cohesive regulatory systems. In short, Congress overlapped tax law and labor law to create the bounds of the regulatory systems for employer-provided retirement and healthcare benefits. Within these systems, two types of rules were employed: incentives and sanctions. This article explains how all of the pieces fit together to promote retirement and healthcare security, and suggests that a systematic method of analysis may be the best approach for creating the benefits law of tomorrow.

LOUIS KAPLOW, Harvard University - Harvard Law School, National Bureau of Economic Research (NBER)
Email: moverholt@law.harvard.edu

The possibility that individuals may derive utility from the mere fact of holding wealth has long been recognized. A simple intertemporal model featuring utility from accumulation is used here to examine consumption and savings, the choice between inter vivos gifts and bequests (both to descendants and to charities), and levels of annuitization. Introducing utility from accumulation helps to explain a number of empirical regularities that otherwise seem inconsistent with optimizing behavior. Moreover, because individuals who derive significant utility from accumulation will tend to save more and, in the long run, give more than others do, this source of utility may be especially important in analyzing savings behavior, gifts and bequests, and charitable contributions.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

RONALD D. LEE, University of California, Berkeley - Department of Demography, National Bureau of Economic Research (NBER)
Email: rlee@demog.berkeley.edu
ANDREW W. MASON, University of Hawaii at Manoa, East-West Center - Research Program
Email: amason@hawaii.edu

Across the demographic transition, declining mortality followed by declining fertility produces decades of rising support ratios as child dependency falls. These improving support ratios raise per capita consumption, other things equal, but eventually deteriorate as the population ages. Population aging and the forces leading to it can produce not only frightening declines in support ratios, but also very substantial increases in productivity and per capita income by raising investment in physical and human capital. Longer life, lower fertility, and population aging all raise the demand for wealth needed to provide for old age consumption. This leads to increased capital per worker even as aggregate saving rates fall. However, increased capital per worker may not occur if the increased demand for wealth is satisfied by increased familial or public pension transfers to the elderly. Thus institutions and policies matter for the consequences of population aging. The accumulation of human capital also varies across the transition. Lower fertility and mortality are associated with higher human capital investment per child, also raising labor productivity. Together, the positive changes due to human and physical capital accumulation will likely outweigh the problems of declining support ratios. We will draw on estimates and analyses from the National Transfer Accounts project to illustrate and quantify these points.

ALBERT FEUER, Law Offices of Albert Feuer
Email: afeuer@aya.yale.edu

The extent, if any, to which a participant’s spouse or former spouse is entitled to the participant’s employee benefits is often an important issue in divorces and marital separations. State courts thus frequently issue domestic relations orders (“DROs”) pertaining to such benefits. Benefit entitlements of ERISA plans, i.e., pension plans and welfare plans (which include life insurance plans), are determined by the terms of those plans. See generally Kennedy v. Plan Administrator of the DuPont Savings and Investment Plan, 555 U.S. (2009), 129 S. Ct. 865, 2009 U.S. LEXIS 869 (January 26, 2009).

ERISA plans generally need not follow state-court orders. On the other hand, ERISA plans must follow the designation terms of those DROs which are qualified domestic relations orders (“QDROs”). Questions have been raised about whether life insurance plans and top-hat plans (which are pension plans maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees), must follow the designation terms of a DRO that “satisfies the QDRO requirements,” but contradicts a designation made pursuant to the plan terms.

Many courts, including quite recently a federal district court in Rhode Island and one in New Hampshire recently and incorrectly disregarded the QDRO requirement that the plan be subject to the ERISA Alienation Prohibition. See Metropolitan Life v. Drainville, 2009 U.S. Dist. LEXIS 63613 (D.C. R.I. July 23, 2009) and Metropolitan Life v. Hanson, 2009 U.S. Dist. LEXIS 92044 (D. N.H. Oct. 1, 2009), respectively. The Alienation Prohibition does not apply to life insurance plans or to top-hat plans. Thus, the QDRO requirement that ERISA plans follow the designations of such orders s are not applicable to such plans. Therefore, the court should have directed the Metropolitan Life plan to disregard the DRO at issue in Drainville and Hanson, and should have held that the participant’s designee pursuant to the plan terms, his second wife and third wife, respectively, was entitled to receive and keep the proceeds.

ANDREW STUMPFF, Davis Polk & Wardwell, University of Michigan Law School
Email: stumpff@dpw.com
NORMAN P. STEIN, University of Alabama - School of Law, Vermont Law School
Email: nstein@law.ua.edu

The proposal would repeal special tax incentives given to employee stock ownership plans, as well as the exemption granted to those plans from the investment diversification requirement of the ERISA.

The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop - and perfect proposals to help Congress when it is ready to raise revenue. Shelf Project proposals are intended to raise revenue without raising rates because the best systems have the lowest feasible tax rates and taxes that are unavoidable. Shelf projects defend the tax base and improve the rationality and efficiency of the tax system.Alonger description of the Shelf Project is found at ‘‘The Shelf Project: Revenue-Raising Proposals that Defend the Tax Base,’’ Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, or 2007 TNT 238-37.

Shelf Project proposals follow the format of a congressional tax committee report in explaining current law, what is wrong with it, and how to fix it.