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Do Tax Incentives Increase 401(k) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions

March 19, 2015 Comments off

Do Tax Incentives Increase 401(k) Retirement Saving? Evidence from the Adoption of Catch-Up Contributions
Source: Center for Retirement Research at Boston College

The U.S. government subsidizes retirement saving through 401(k) plans with $61.4 billion in tax expenditures annually, but the question of whether these tax incentives are effective in increasing saving remains unanswered. Using longitudinal U.S. Social Security Administration data on tax-deferred earnings linked to the Survey of Income and Program Participation, the project examines whether the “catch-up provision,” which was enacted in 2001 and allows workers over age 50 to contribute more to their 401(k) plans, has been effective in increasing earnings deferrals. Compared with similar workers under age 50, the study finds that contributions increased by $540 more among age-50-plus individuals who had approached the 401(k) tax-deferral limits prior to turning 50, suggesting that the older individuals respond to the expanded tax incentives. For this group, the elasticity of retirement savings to the tax incentive is quite high: a one-dollar increase in the tax-deferred limit leads to an immediate 49-cent increase in 401(k) contributions.

Are Retirees Falling Short? Reconciling the Conflicting Evidence

March 18, 2015 Comments off

Are Retirees Falling Short? Reconciling the Conflicting Evidence
Source: Center for Retirement Research at Boston College
<blockquote
The brief‘s key findings are:

  • Federal Reserve data show that retirement preparedness has been declining over time, but studies on the level of preparedness offer conflicting assessments.
  • The National Retirement Risk Index (NRRI) finds half of households are “at risk,” while studies of optimal savings suggest less than one-tenth will fall short.
  • The optimal savings results depend crucially on two assumptions:  households spend less when their kids leave home (the NRRI assumes no decline); and households plan for declining consumption in retirement (the NRRI assumes steady consumption).
  • While the issue remains unsettled, the Federal Reserve data are consistent with the NRRI finding that retirement shortfalls are a growing problem.

Why Do SSI and SNAP Enrollments Rise in Good Economic Times and Bad?

February 25, 2015 Comments off

Why Do SSI and SNAP Enrollments Rise in Good Economic Times and Bad?
Source: Center for Retirement Research at Boston College

The number of participants in the Supplemental Security Income Program (SSI) and the Supplemental Nutrition Assistance Program (SNAP) skyrocketed during the Great Recession. But more surprising is that caseloads for both programs increased during the preceding expansion and during the nascent recovery period after the Great Recession. Using both administrative program data and the Survey of Income and Program Participation (SIPP), this project investigates the persistent growth in SSI and SNAP since 2000. Whereas the existing literature on program caseloads in the post-welfare reform era generally excludes the elderly from the analysis, this project is the first to investigate differences in elderly and non-elderly caseloads, allowing for differential responsiveness over time. Preliminary estimates suggest that the correlation between SSI and SNAP caseloads and economic well-being, and, separately, caseloads and health, grew stronger over this time. Coupled with a poverty rate that did not fall along with the unemployment rate, and with an increase in the share of the population reporting poor or fair health, these correlations helped lead to caseloads that remained roughly constant (SSI) or even increased (SNAP) during the most recent expansion, rather than falling as expected. The increases in caseloads stem both from increases in the entry rates among the newly eligible – particularly those in poor health – and from decreases in exit rates among low-income beneficiaries.

New Evidence on the Risk of Requiring Long-Term Care

February 23, 2015 Comments off

New Evidence on the Risk of Requiring Long-Term Care
Source: Center for Retirement Research at Boston College

Long-term care is one of the major expenses faced by many older Americans. Yet, we have only limited information about the risk of needing long-term care and the expected duration of care. The expectations of needing to receive home health care, live in an assisted living facility or live in a nursing home are essential inputs into models of optimal post-retirement saving and long-term care insurance purchase. Previous research has used the Robinson (1996) transition matrix, based on National Long Term Care Survey (NLTCS) data for 1982-89. The Robinson model predicts that men and women aged 65 have a 27 and 44 percent chance, respectively, of ever needing nursing home care. Recent evidence suggests that those earlier estimates may be extremely misleading in important dimensions. Using Health and Retirement Study (HRS) data from 1992-2010, Hurd, Michaud, and Rohwedder (2013) estimate that men and women aged 50 have a 50 and 65 percent chance, respectively, of ever needing care. But, they also estimate shorter average durations of care, resulting, as we show, from a greater chance of returning to the community, conditional on admission. If nursing home care is a high-probability but relatively low-cost occurrence, models that treat it as a lower-probability, high-cost occurrence may overstate the value of insurance.

We update and modify the Robinson model using more recent data from both the NLTCS and the HRS. We show that the low lifetime utilization rates and high conditional mean durations of stay in the Robinson model are artifacts of specific features of the statistical model that was fitted to the data. We also show that impairment and most use of care by age has declined and that the 2004 NLTCS and the 1996-2010 HRS yield similar cross-sectional patterns of care use. We revise and update the care transition model, and we show that use of the new transition matrix substantially reduces simulated values of willingness-to-pay in an optimal long-term care insurance model.

The Causes and Consequences of Financial Fraud Among Older Americans

February 18, 2015 Comments off

The Causes and Consequences of Financial Fraud Among Older Americans
Source: Center for Retirement Research at Boston College

Financial fraud is a major threat to older Americans, and this problem is expected to grow as the baby boom generation retires and more retirees manage their own retirement accounts. We use a unique dataset to examine the causes and consequences of financial fraud among older Americans. First, we find that decreasing cognition is associated with higher scam susceptibility scores and is predictive of fraud victimization. Second, overconfidence in one’s financial knowledge is associated with fraud victimization. Third, fraud victims increase their willingness to take financial risks relative to propensity-matched non-victims.

Lifetime Job Demands, Work Capacity at Older Ages, and Social Security Benefit Claiming Decisions

February 18, 2015 Comments off

Lifetime Job Demands, Work Capacity at Older Ages, and Social Security Benefit Claiming Decisions
Source: Center for Retirement Research at Boston College

We use Health and Retirement Study data linked to the Department of Labor’s O*Net classification system to examine the relationship between lifetime exposure to occupational demands and retirement behavior. We consistently found that both non-routine cognitive analytic and non-routine physical demands were associated with worse health, earlier labor force exit, and increased use of Social Security Disability Insurance. The growing share of workers in jobs with high levels of cognitive demand may contribute to growth in DI use.

Are Retirees Falling Short? Reconciling the Conflicting Evidence

February 16, 2015 Comments off

Are Retirees Falling Short? Reconciling the Conflicting Evidence
Center for Retirement Research at Boston College

This paper examines conflicting assessments of whether people will have adequate retirement income to maintain their pre-retirement standard of living. The studies that it examines use data from the Survey of Consumer Finances (SCF), the Health and Retirement Study (HRS), and the HRS supplement Consumption and Activities Mail Survey (CAMS). Critical components of the analysis are behavioral assumptions about household consumption patterns when children leave home and when households retire. A key limitation is that the behavioral assumptions in the different studies are based on incomplete knowledge of actual household behavior.

The paper found that:

  • A simple – assumption-free – calculation of wealth to income by age clearly indicates that households retiring in the future will be less prepared than those in the past.
  • Studies showing that households are saving optimally hinge crucially on assumptions that people are willing to accept declining consumption as they age and that they sharply reduce their consumption when the children leave home.
  • While other studies have found consumption does not decline early in retirement, new analysis suggests that many will be unable to maintain this pace over their full retirement.

The policy implications of the findings are:

  • Households are more likely than not to be falling short in their retirement preparedness.
  • Such shortfalls should be taken into consideration as policymakers discuss options for reforming Social Security.
  • To bolster retirement preparedness, policymakers may want to consider ways to encourage more private saving, such as requiring 401(k)s to adopt auto-enrollment and auto-escalation policies and to apply these policies to current workers as well as new hires.
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