"Financial Literacy and Financial Sophistication in the Older Population: Evidence from the 2008 HRS" 

Michigan Retirement Research Center Research Paper No. 2009-216

OLIVIA S. MITCHELL, University of Pennsylvania - Insurance & Risk Management Department, National Bureau of Economic Research (NBER)
Email: mitchelo@wharton.upenn.edu
VILSA CURTO, National Bureau of Economic Research (NBER)
Email: vilsa.curto@post.harvard.edu
ANNAMARIA LUSARDI, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: annamaria.lusardi@dartmouth.edu

This paper analyzes new data on financial literacy and financial sophistication from the 2008 Health and Retirement Study. We show that financial literacy is lacking among older individuals and for the first time explore additional questions on financial sophistication which proves even scarcer. For this sample of older respondents over the age of 55, we find that people lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees. In view of the fact that individuals are increasingly required to take on responsibility for their own retirement security, this lack of knowledge has serious implications.

"Older Men: Pushed into Retirement by the Baby Boomers?" 

IZA Discussion Paper No. 4652

DIANE MACUNOVICH, University of Redlands, Institute for the Study of Labor (IZA)
Email: diane_macunovich@redlands.edu

The United States has experienced over the past forty years an apparent correspondence between the pattern of retirement among men aged 55-69, and the proportion of workers aged 25-34 working part-year and/or part-time. The latter was an effect of overcrowding among the baby boomers as they moved through the labor market. The former is hypothesized here to be a function of the increasing difficulty older men experienced in obtaining "bridge jobs" - part-year and/or part-time - between career and retirement. It has been demonstrated in a series of studies that a large proportion (as many as two-thirds) of older men - especially those in lower-wage jobs - seek such bridge jobs before retirement. And in many cases these bridge jobs are not in the same industry or even occupation as the career job, leading one to suspect that in many cases there might be little transfer of skill or human capital. If this is the case, then the older workers would at least to some extent be in direct competition with younger workers for these jobs. Given difficulty in finding bridge jobs, a higher proportion of older workers might choose to enter retirement directly from career jobs, skipping the bridge jobs. A relative cohort size measure - the number of 25-34 year olds working part-year and/or part-time, relative to the number of older men, at the state level - has been shown here to be highly significant - both statistically and substantively - in explaining changes in older men's annual hours worked, labor force participation, and propensity to retire, and propensity to claim Social Security benefits. In general terms, relative cohort size can be said to have generated between 25-40% of the observed changes in these variables, with the strongest effects being on the propensity to claim Social Security benefits. Somewhat weaker effects were found for older women, in a companion to this study.

"Older Women: Pushed into Retirement by the Baby Boomers?" 

IZA Discussion Paper No. 4653

DIANE MACUNOVICH, University of Redlands, Institute for the Study of Labor (IZA)
Email: diane_macunovich@redlands.edu

Older women's patterns of labor supply over the past forty years have differed markedly from those of younger women. Their labor force participation declined sharply during a period of rapid increase for younger women, and then increased significantly while younger women's plateaued and even declined. But there has been an apparent correspondence between the pattern of retirement among women aged 55-69, and the proportion of workers aged 25-34 working part-year and/or part-time. The latter was an effect of overcrowding among the baby boomers as they moved through the labor market. The former is hypothesized here to be a function of the increasing difficulty older women experienced in obtaining "bridge jobs" - part-year and/or part-time - between career and retirement. It has been demonstrated in earlier studies that older women - especially those in lower-wage jobs - often seek such bridge jobs before retirement. And in many cases these bridge jobs are not in the same industry or even occupation as the career job, leading one to suspect that in many cases there might be little transfer of skill or human capital. If this is the case, then the older workers would at least to some extent be in direct competition with younger workers for these jobs. Given difficulty in finding bridge jobs, a higher proportion of older workers might choose to enter retirement directly from career jobs, skipping the bridge jobs. A relative cohort size measure the number of 25-34 year old women working part-year and/or part-time, relative to the number of older women, at the state level has been shown here to be highly significant - both statistically and substantively - in explaining changes in older women's annual hours worked, labor force participation, and propensity to retire. In general terms, relative cohort size can be said to have generated between 15-30% of the observed changes in these variables, with the strongest effects being on the propensity to claim Social Security benefits. Somewhat stronger effects were found for older men, in a companion to this study.

"Asking for Help: Survey and Experimental Evidence on Financial Advice and Behavior Change" 

RAND Working Paper Series WR-714-1

ANGELA HUNG, RAND Corporation - Labor and Population
Email: ahung@rand.org
JOANNE YOONG, RAND Corporation
Email: jyoong@rand.org

When do individuals actually improve their financial behavior in response to advice? Using survey data from current defined-contribution plan holders in the RAND American Life Panel (a probability sample of US households), the authors find little evidence of improved DC plan behaviors due to advice, although they cannot rule out problems of reverse causality and selection. To complement the analysis of survey data, they design and implement a hypothetical choice experiment in which ALP respondents are asked to perform a portfolio allocation task, with or without advice. Their results show that unsolicited advice has no effect on investment behavior, in terms of behavioral outcomes. However, individuals who actively solicit advice ultimately improve performance, in spite of negative selection on financial ability. One interesting implication for policymakers is that expanding access to advice can have positive effects (particularly for the less financially literate); however, more extensive compulsory programs of financial counseling may be ultimately ineffective.

"Adapt or Withdraw? Evidence on Technological Changes and Early Retirement Using Matched Worker-Firm Data" 

NHH Dept. of Economics Discussion Paper No. 22/07

TORBJORN HAEGELAND, Statistics Norway, University of Oslo - Ragnar Frisch Centre for Economic Research
Email: thd@ssb.no
DAG RONNINGEN, Statistics Norway
Email: rda@ssb.no
KJELL G. SALVANES, Norwegian School of Economics and Business Administration (NHH) - Department of Economics, Institute for the Study of Labor (IZA)
Email: Kjell.Salvanes@nhh.no

Older workers typically possess older vintages of skills than younger workers, and they may suffer more from technological change. Experienced workers never the less have accumulated human capital that make them suitable for adopting new technologies. On the other hand, to adjust to new technology, workers must invest in training and this may not be worthwhile for the oldest workers. We exploit the approach by Bartel and Sicherman (1993) to identify this effect by estimating the retirement response to technological change dependent on how often it occurs. If technological change occurs often, workers continuously invest in on-the-job training which may isolate them from the negative effect of technological change. We examine two hypotheses about the effects of technological changes on early retirement measured for workers from the age of 50 to mandatory age of retirement at 67. First, we examine whether workers in firms with higher rates of anticipated technological change retire later than workers in firms with lower rates of technological change. Second, we examine if (unanticipated) technological change are positively correlated with earlier retirement. We use a matched employer-employee data set with a rich set of controls for worker, firm and local labour market characteristics, and firm level measures of anticipated and not-anticipated technological change. We find a negative correlation between early retirement and anticipated technological change only for the oldest male workers (62 to 66). Further, we find a higher probability of transition to retirement for workers above 60 for firms introducing new process technologies.

"To (B) or Not to (B): Is that the Question? Twenty-First Century Schizoid Plans Under Section 403(B) of the Internal Revenue Code" 

Albany Law Review, Vol. 73, p. 139, 2009
Albany Law School Research Paper No. 25

DAVID A. PRATT, Albany Law School
Email: dprat@albanylaw.edu

The year 2008 marked the 50th anniversary of the enactment of Section 403(b) of the Internal Revenue Code, which provides a special type of tax favored retirement arrangement available to certain employers. Revisiting a previous article by the same author, this article provides a comprehensive review of the rules governing 403(b) plans, as well as recent developments in the rules' application. Topics covered include: important 403(b) plan rules; the major remaining differences between 403(b) plans and qualified plans; reform proposals; and whether the retention of section 403(b) plans can be justified on policy (as opposed to historical) grounds.

"Assessing the Performance of Life-Cycle Portfolio Allocation Strategies for Retirement Saving: A Simulation Study" 

Social Security Bulletin, Vol. 70, No. 1, pp. 23-43, 2010

BENJAMIN BRIDGES, U.S. Social Security Administration
Email: benjamin.bridges@ssa.gov
ROBERT GESUMARIA, Government of the United States of America - Office of Research, Evaluation and Statistics
Email: robert.gesumaria@ssa.gov
MICHAEL V. LEONESIO, Social Security Administration - Office of Research, Evaluation and Statistics
Email: Michael.V.Leonesio@ssa.gov

This article examines the performance of four life-cycle portfolio allocation strategies through stochastic simulation based on observed U.S. asset returns during 1926-2008. Annual worker contributions to retirement savings accounts are based on the actual lifetime earnings histories maintained by the Social Security Administration for 12,871 workers born during 1915-1942. Each strategy’s performance is evaluated primarily on the basis of the distributions of internal rates of return on investments calculated at the time of retirement. Comparisons are made with the performance of four other investment strategies that vary in terms of their exposure to stock and bond market risk. Life-cycle plans with larger portfolio weights assigned to equities have higher average returns, but those gains come at the cost of increased risk of infrequent bad outcomes.

"Gender-Based Risk Aversion and Retirement Asset Allocation" 

Economic Inquiry, Vol. 48, No. 1, pp. 147-155, January 2010

KATHLEEN ARANO, Fort Hays State University
Email: karano@fhsu.edu
CARL PARKER, Fort Hays State University
Email: cparker@fhsu.edu
RORY L. TERRY, Fort Hays State University
Email: rterry@fhsu.edu

This research examines whether women have higher risk aversion than men as demonstrated by their retirement asset allocation. The analysis is extended to investigate how retirement asset investment decisions are made in married households. Initial results suggest controlling for demographic, income, and wealth differences lead to no significant difference in the proportion of retirement assets held in stocks between women and male faculty. For married households with joint investment decision making, results indicate that gender differences are a significant factor in explaining individual retirement asset allocation. Our estimates imply that women faculty are more risk averse than their male spouse.