"Evaluating Public and Private Sector Pensions: The Importance of Sectoral Pay Differentials" 

Pension Corporation Research Paper

FRANK EICH, Pension Corporation
Email: eich@pensioncorporation.com

There is currently a strong perception in the UK that public sector pensions are generous relative to those offered in the private sector, leading them to be branded "gold plated." This study argues that pensions should be considered deferred pay; as such any discussion on the relative generosity of pension entitlements in the public and private sectors ought to be conducted against the backdrop of relative public and private sector pay levels.

The available evidence in the UK shows that median pay is higher in the public sector than in the private sector, but using this to assess relative pay levels is misleading. This is because median pay hides significant variations in relative pay across the genders, occupations and by location. For example, the range of occupations available in the private sector is wider at the lower end of the skills distribution range than in the public sector; for female workers the highest median annual pay in 2008 could be found in education, which is overwhelmingly in the public sector. There is evidence that public sector pay is relatively generous for employees at the lower end of the income distribution but this does not hold for employees at the upper end of the income distribution. In addition, there is substantial evidence that public sector pay is relatively less generous in the south east of England generally and in London in particular. Compared with the private sector, the public sector compensates its employees too little for living in low amenity and/or high cost areas. As a consequence, the quality of public services varies across the UK, with the public sector especially in the south east finding it difficult to recruit and retain skilled staff.

Anyone contemplating a reform of public sector pensions ought to take into account the knock-on effects on recruitment and retention of highly-skilled staff in all parts of the UK, and in the south east in particular.

"Wages and Ageing: Is There Evidence for the ‘Inverse-U’ Profile?" 

Oxford Bulletin of Economics and Statistics, Vol. 72, Issue 3, pp. 282-306, June 2010

MICHAL MYCK, affiliation not provided to SSRN

How individual wages change with time is one of the crucial determinants of labour market decisions including the timing of retirement. The focus of this paper is the relationship between age and wages with special attention given to individuals nearing retirement. The analysis is presented in a comparative context for Britain and Germany looking at two longitudinal data sets (BHPS and SOEP, respectively) for the years 1995–2004. We show the importance of cohort effects and selection out of employment which determine the downward-sloping part of the ‘inverse-U’ profile observed in cross-sections. There is little evidence that wages fall with age.

"Getting to the Top of Mind: How Reminders Increase Saving" 

DEAN S. KARLAN, Yale University - Economic Growth Center, Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab, Center for Global Development
Email: dean.karlan@yale.edu
MARGARET MCCONNELL, Harvard University
Email: mmcconne@hsph.harvard.edu
SENDHIL MULLAINATHAN, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)
Email: mullain@fas.harvard.edu
JONATHAN ZINMAN, Dartmouth College, Innovations for Poverty Action; Jameel Poverty Action Lab
Email: jzinman@dartmouth.edu

We develop and test a simple model of limited attention in intertemporal choice. The model posits that individuals fully attend to consumption in all periods but fail to attend to some future lumpy expenditure opportunities. This asymmetry generates some predictions that overlap with other models of present-bias. Our model also generates the unique predictions that reminders will increase saving, and that a reminder that makes a specific expenditure more salient will be especially effective. We find support for these predictions in three field experiments that randomly assign reminders to new savings account holders.

"The Payout Phase of Pension Systems: A Comparison of Five Countries" 

World Bank Policy Research Working Paper No. 5288

ROBERTO DE REZENDE ROCHA, National Bureau of Economic Research (NBER)
Email: rrocha@worldbank.org
DIMITRI VITTAS, World Bank - Financial Sector Development
Email: dvittas@worldbank.org
HEINZ RUDOLPH, The World Bank
Email: hrudolph@worldbank.org

This paper provides a comparative summary of the payout phase of pension systems in five countries -- Australia, Chile, Denmark, Sweden, and Switzerland. All five countries have large pension systems with mandatory or quasi-mandatory retirement savings schemes. But they exhibit important differences in the structure and role of different pillars, regulation of payout options, level of annuitization, market structure, capital regulations, risk management, and use of risk sharing arrangements. The paper summarizes the experience of these countries and highlights the lessons they offer to other countries.

"Designing the Payout Phase of Pension Systems: Policy Issues, Constraints and Options" 

World Bank Policy Research Working Paper No. 5289

ROBERTO DE REZENDE ROCHA, National Bureau of Economic Research (NBER)
Email: rrocha@worldbank.org
DIMITRI VITTAS, World Bank - Financial Sector Development
Email: dvittas@worldbank.org

This paper examines the policy issues, constraints and options facing policymakers in promoting the development of sound markets for retirement products. Itdiscusses the various risks faced by pensioners and the risk characteristics of alternative retirement products and also reviews the risks faced by providers of retirement products and the management and regulatory challenges of dealing with these risks. The paper focuses on policies that could be adopted by developing and transitioning countries where financial and insurance markets are not well developed. It argues for promoting an adequate level of annuitization but avoiding excessive annuitization. It also argues for favoring combinations of payout options, covering different products at a particular point in time as well as different payout options over time. The paper also discusses the choice between centralized and decentralized markets and highlights the basic elements of an effective regulation of risk management.

"Retirement Annuity and Employment-Based Pension Income, Among Individuals Age 50 and Over: 2008" 

EBRI Notes, Vol. 31, No. 5, May 2010

KENNETH J. MCDONNELL, Employee Benefit Research Institute (EBRI)
Email: MCDONNELL@EBRI.ORG

This paper looks at one slice of the income pie of the older population: retirement annuities and employment-based defined benefit (DB) pensions. It analyzes the population age 50 and over in order to take into account the prevalence of early retirement options available to individuals beginning at age 50. Recent data from the March 2009 Current Population Survey, conducted by the U.S. Census Bureau, confirm earlier findings that gender, marital status, age, education, and other demographic variables have a significant impact on the likelihood of a worker receiving a retirement annuity and/or employment-based pension income in retirement. There may also be a strong correlation between these same variables and the amount of pension income received from private and/or public-sector employment-based retirement plans. For example, in 2008, 27.7 percent of men age 50 and older with a graduate-level education received an annuity and/or pension income, compared with 19.3 percent of men without a high school diploma – a differential of 8.4 percentage points (see Figure 1). While notable, this differential in receipt of an annuity and/or pension income pales in comparison with the differential in the amounts these men received: In 2008, men with graduate-level degrees received 4.2 times the median annuity and/or pension income that was received by men without a high school diploma (calculated from Figure 1). Figure 1 also shows how age, education, marital status, and income are related to annuity and/or pension recipiency and to the amounts males received in 2008; Figure 2 shows the same data for females.

Current trends show that future retirees may not have a steady income stream in retirement. Fewer employees are participating in a DB plan, which, in the past, almost always paid benefits in the form of an annuity upon retirement. In today’s work place, an increasing number of DB plans are offering a lump-sum distribution option at retirement. Also, increasing numbers of employees are participating in a defined contribution (DC) plan, primarily a 401(k) plan. This trend has had a positive impact, in that many workers who previously had no retirement plan at all now at least have access to a tax-favored plan. However, DC plans are far less likely to offer an annuity option to retirees than are DB plans.

The PDF for the above title, published in the May 2010 issue of EBRI Notes, also contains the full text of another May 2010 EBRI Notes article abstracted on SSRN: “Total Individual Account Retirement Plan Assets, by Demographics, 2007, With Market Adjustments to March 2010.”

"Total Individual Account Retirement Plan Assets, by Demographics, 2007, With Market Adjustments to March 2010" 

EBRI Notes, Vol. 31, No. 5, May 2010

CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

Workers’ participation in a retirement plan, either through an employment-based arrangement or individually, is a crucial factor in accumulating sufficient resources to pay for expenses in retirement. This paper examines the distribution of total assets held in individual account retirement plans (401(k)-type plans, IRAs, and Keogh plans) across various demographic characteristics of American families, based on the latest data from the Federal Reserve’s Survey of Consumer Finances. The distribution of the retirement plan assets is then compared against the distribution of all assets owned. The analysis also shows the changes in the distribution of these assets from 1992 to 2007, as well as market return-adjusted values for March 2010.

Total individual account retirement assets amounted to $8.979 trillion in 2007. Employment-based plan assets ($4.823 trillion) exceeded individual retirement account/Keogh account assets ($4.157 trillion) by $0.666 trillion. Approximately 70 percent of the employment-based retirement plan assets were held by families headed by individuals ages 45-64. The largest concentration of IRA and Keogh assets is held by families with heads in the next oldest age group (ages 55-74), who own just over 60 percent of these assets. Retirement plan assets are less concentrated than overall financial assets in many categories. For example, families with white, non-Hispanic heads owned 85.1 percent of active employment-based individual account retirement plan assets, compared with 91.9 percent of all financial assets. Families in the top 10 percent of net worth held 50.0 percent of these active employment-based retirement assets, compared with 72.3 percent of all financial assets.

The PDF for the above title, published in the May 2010 issue of EBRI Notes, also contains the fulltext of another May 2010 EBRI Notes article abstracted on SSRN: “Retirement Annuity and Employment-Based Pension Income, Among Individuals Age 50 and Over: 2008.”