Mitchell, Olivia S
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PublicationHow Will Persistent Low Expected Returns Shape Household Economic Behavior?(2018-10-02) Horneff, Vanya; Maurer, Raimond; Mitchell, Olivia S; Horneff, Vanya; Maurer, Raimond; Mitchell, Olivia SMany believe that global capital markets will generate lower returns in the future versus the past. We examine how persistently lower real returns will reshape work, retirement, saving, and investment behavior of older persons using a calibrated dynamic life cycle model. In a low return regime, workers build up less wealth in their tax-qualified 401(k) accounts versus the past, claim social security benefits later, and work more. Moreover, the better-educated are more sensitive to real interest rate changes, and the least-educated alter their behavior less. Interestingly, wealth inequality is lower in periods of persistent low expected returns. PublicationAsset Rich and Cash Poor: Retirement Provision and Housing Policy in Singapore(2002-11-01) Mitchell, Olivia S; Mitchell, Olivia S; Piggott, JohnNational defined contribution pension systems have long been a mainstay of retirement income in Asia. One of the oldest and best known of these systems is the Singaporean Central Provident Fund, a mandatory retirement scheme managed by the central government for almost a half-century. With required contribution rates that have ranged up to 50%, this program has powerfully shaped asset accumulation patterns and housing portfolios. This paper explores how the structure and design of the Singaporean retirement and housing schemes influence wealth levels and asset mix at retirement. Our model indicates that outcomes rest critically on the interlinked national retirement and housing programs. We show that policies to enhance one program may boost retirement replacement rates but can also lower total wealth in unexpected ways. The lessons we draw may serve as guidance for other countries constructing a national defined contribution retirement system. PublicationTesting Methods to Enhance Longevity Awareness(2020-11-02) Mitchell, Olivia S; Mitchell, Olivia S; Sade, OrlyMany people have only a vague notion of the concept of life expectancy and the longevity risk they face at older ages, which in turn implies that they are likely to undersave for retirement. This paper employs an online experiment to investigate alternative ways to describe both life expectancy and longevity risk, with the goal of assessing whether these can raise peoples’ awareness of possible retirement shortfalls. We also evaluate whether providing this information promotes interest in saving activity and demand for longevity insurance products. We find that providing longevity risk information impacts respondents’ subjective survival probabilities, while simply describing average life expectancy does not. Yet providing life expectancy or longevity information significantly affects financial decisions, mostly regarding annuitization. Interestingly, we also find that merely prompting people to think about financial decisions changes their perceptions regarding subjective survival probabilities. PublicationFactors Influencing the Choice of Pension Distribution at Retirement(2022-05-01) Mitchell, Olivia S; Mitchell, Olivia SOne of the most important financial decisions that pension participants make concerns how they access their pension assets when they terminate employment with their plan sponsor. Their choices depend both on own preferences and the options offered by their retirement plan. This paper examines both past and future pension withdrawal choices for those with defined benefit and defined contribution pensions, separately. Our data are drawn from a set of pension distribution questions we fielded in the Understanding American Study. Results show significant differences in distribution choices based on the type of retirement plan, with individuals covered by defined benefit plans significantly more likely to select annuities compared to similar employees covered by defined contribution plans. We also find differences in how higher annual income affects annuity choices based on coverage by DB plans. Individuals with lower levels of financial literacy and lower annual income have less knowledge of basic pension characteristics. PublicationComplexity as a Barrier to Annuitization: Do Consumers Know How to Value Annuities?(2013-03-01) Brown, Jeffrey R; Kapteyn, Arie; Luttmer, Erzo FP; Mitchell, Olivia S; Brown, Jeffrey R; Kapteyn, Arie; Luttmer, Erzo FP; Mitchell, Olivia SThis paper provides experimental evidence that individuals have difficulty valuing annuities, and this difficulty – rather than a preference for lump sums – can help explain observed low levels of annuity purchases. Although the median price at which people are willing to sell an annuity is close to median actuarial values, this masks notable heterogeneity in responses including substantial numbers of respondents whose responses are difficult to reconcile with optimizing behavior under any reasonable parameter assumptions. We also discover that people are willing to pay substantially less to buy a larger annuity, a result not due to liquidity constraints or endowment effects. Strikingly, we also learn that individual responses to the buy versus sell decisions are negatively correlated, an effect that is stronger for the less financially sophisticated. Our findings are consistent with boundedly rational consumers who adopt a “buy low, sell high” heuristic when faced with a complex trade-off. Moreover, at the margin, subjective valuations vary nearly one-for-one with actuarial values but are uncorrelated with utility-based measures designed to measure the insurance value of annuities. This supports the hypothesis that people use simplifying heuristics to think about annuities, rather than engaging in optimizing behavior. Results also underscore the difficulty of explaining the cross-sectional variation in annuity valuations using standard empirical models. Our findings raise doubt about whether most consumers can make optimal decisions about annuitization. PublicationManaging Contribution and Capital Market Risk in a Funded Public Defined Benefit Plan: Impact of CVaR Cost Constraints(2008-09-01) Maurer, Raimond; Mitchell, Olivia S; Rogalla, Ralph; Maurer, Raimond; Mitchell, Olivia S; Rogalla, RalphUsing a Monte Carlo framework, we analyze the risks and rewards of moving from an unfunded defined benefit pension system to a funded plan for German civil servants, allowing for alternative strategic contribution and investment patterns. In the process we integrate a Conditional Value at Risk (CVaR) restriction on overall plan costs into the pension manager’s objective of controlling contribution rate volatility. After estimating the contribution rate that would fully fund future benefit promises for current and prospective employees, we identify the optimal contribution and investment strategy that minimizes contribution rate volatility while restricting worst-case plan costs. Finally, we analyze the time path of expected and worst-case contribution rates to assess the chances of reduced contribution rates for current and future generations. Our results show that moving toward a funded public pension system can be beneficial for both civil servants and taxpayers. PublicationFinancial Literacy, Schooling, and Wealth Accumulation(2010-09-28) Behrman, Jere R; Mitchell, Olivia S; Soo, Cindy; Bravo, David; Behrman, Jere R; Mitchell, Olivia S; Soo, Cindy; Bravo, DavidFinancial literacy and schooling attainment have been linked to household wealth accumulation. Yet prior findings may be biased due to noisy measures of financial literacy and schooling, as well as unobserved factors such as ability, intelligence, and motivation that could enhance financial literacy and schooling but also directly affect wealth accumulation. Here we use a new household dataset and an instrumental variables approach to isolate the causal effects of financial literacy and schooling on wealth accumulation. While financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, our approach reveals even stronger and larger effects of financial literacy on wealth. It also indicates no significant positive effects of schooling attainment conditional on financial literacy in a linear specification, but positive effects when interacted with financial literacy. Estimated impacts are substantial enough to suggest that investments in financial literacy could have large positive payoffs. PublicationMovements In and Out of Poverty at Older Ages: Evidence from the HRS(2022-04-01) Clark, Robert L.; Mitchell, Olivia S; Mitchell, Olivia SThe objective of this paper is to determine Americans’ mobility patterns into and out of poverty in their later years. We track how older adults enter into and exit from poverty using the most extensive longitudinal survey on older Americans currently available, the Health and Retirement Study (HRS). Using over 20 years of data from the HRS, we show that the conditional probability of escaping poverty diminishes as the number of years in poverty rise. In particular, older adults’ chances of exiting poverty fall sharply as their time in poverty lengthens, especially between four and eight years. Having been in poverty that long, the chances of exiting poverty then levels out. These results imply that poverty among the US elderly can be quite a persistent state for many older adults although individuals that escape poverty are often able to have income above the poverty line in future years. PublicationCost Structures of Investment Offerings in Singapore’s Central Provident Fund(2007-05-01) Mitchell, Olivia S; Mitchell, Olivia S; Fong, JoelleAs policymakers seek to enhance the returns paid on participants’ investments in their retirement systems, much attention has focused on the Singaporean Central Provident Fund (CPF) and how professionally-managed unit trusts permitted under the CPFIS scheme fit into the system. This paper begins by indicating the investment choices made available to participants; we also summarize the various transaction costs associated with unit trust investments. Next, we examine the determinants of these costs and investigate which factors have a bearing on the cost structure of unit trusts. Our empirical results show that foreign ownership, active style of management, and equity/balanced funds are associated with higher expenses. The paper concludes with a discussion of policy options to reduce cost associated with CPFIS included unit trusts. PublicationThe Dynamics of Lifecycle Investing in 401(k) Plans(2008-08-01) Mitchell, Olivia S; Mitchell, Olivia S; Yamaguchi, Takeshi; Utkus, Stephen; Yamaguchi, TakeshiThe introduction of lifecycle funds into 401(k) plans offers a rich environment in which to assess workers’ portfolio allocation decisions. Consistent with behavioral models, employer design decisions strongly influence lifecycle adoption behavior while fundamentally altering portfolio characteristics, both in the cross-section and longitudinally. Yet there are also elements of rational choice by new employees, as well as choice constrained by information costs among workers with low literacy characteristics. We conclude that recent legislation encouraging riskier 401(k) portfolios will modify investment patterns, with the rate of change varying according to whether behavioral or rational elements dominate in a given setting.