Maurer, Raimond
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Publication Optimal Social Security Claiming Behavior under Lump Sum Incentives: Theory and Evidence(2023-01-13) Maurer, Raimond; Mitchell, Olivia S; Rogalla, Ralph; Schimetschek, TatjanaPeople who delay claiming Social Security receive higher lifelong benefits upon retirement. We survey individuals on their willingness to delay claiming later, if they could receive a lump sum in lieu of a higher annuity payment. Using a moment-matching approach, we calibrate a lifecycle model tracking observed claiming patterns under current rules and predict optimal claiming outcomes under the lump sum approach. Our model correctly predicts that early claimers under current rules would delay claiming most when offered actuarially fair lump sums, and for lump sums worth 87% as much, claiming ages would still be higher than at present.Publication Dynamic Asset Allocation with Regime Shifts and Long Horizon CVaR-Constraints(2013-04-01) Vo, Huy Thanh; Maurer, RaimondWe analyse portfolio policies for investors who invest optimally for given investment horizons with respect to Conditional Value-at-Risk constraints. We account for nonnormally distributed, skewed, and leptokurtic asset return distributions due to regime shifts. The focus is on standard CRRA utility with a money back guarantee at maturity, which is often augmented to individual retirement plans. Optimal solutions for the unconstrained as well as the constrained policy are provided and examined for risk management costs calculated as welfare losses. Our results confirm previous findings that money back guarantees yield mild downside protection at low economic costs for most long term investors.Publication How Family Status and Social Security Claiming Options Shape Optimal Life Cycle Portfolios(2013-10-01) Hubener, Andreas; Maurer, Raimond; Mitchell, Olivia SHousehold decisions are profoundly shaped by a complex set of financial options due to Social Security rules determining retirement, spousal, and survivor benefits, along with benefit adjustments that vary with the age at which these are claimed. These rules influence optimal household asset allocation, insurance, and work decisions, given life cycle demographic shocks such as marriage, divorce, and children. Our model generates a wealth profile and a low and stable equity fraction consistent with empirical evidence. We also confirm predictions that wives will claim retirement benefits earlier than husbands, while life insurance is mainly purchased by younger men. Our policy simulations imply that eliminating survivor benefits would sharply reduce claiming differences by sex while dramatically increasing men’s life insurance purchases.Publication Integrated Risk Management for Defined Benefit Pensions: Models and Metrics(2013-09-01) Maurer, RaimondThe Pension Benefit Guaranty Corporation (PBGC) insures private sector defined benefit (DB) pension plans when an employer becomes insolvent and is unable to pay its pension liabilities. In principle, the insurance premiums collected by PBGC should be sufficient to cover potential losses; this would ensure that PBGC could pay the insured benefits of terminated pension plan without additional external funding (e.g. from taxpayers). Therefore, the risk exposure of the PBGC from insuring DB pension plans arises from the probability of employer insolvencies; and the terminating plans’ funding status (the excess of the value of insured plan liabilities over plan assets). This paper focuses on only the second component, namely the impact of plan underfunding for the operation of the PBGC. When a DB plan is fully funded, the PBGC’s risk exposure for an ongoing plan is low even if the plan sponsor becomes insolvent. Thus the questions most pertinent to the PBGC are what key risk factors can produce underfunding in a DB plan, and how can these risk factors be quantified? We explore the most important risk factors that produce DB pension underfunding, namely investment risk and liability risk. Both are interrelated and must be considered simultaneously in order to quantify the risk exposure of a DB pension plan. We propose that an integrated risk management model (an Integrated Asset/Liability Model) can help better understand DB pension plan funding risk. We also examine the Pension Insurance Modeling System developed by the PBGC in terms of its own use of some of the building blocks of an integrated risk management model.Publication How Will Persistent Low Expected Returns Shape Household Economic Behavior?(2018-10-02) 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.Publication Cognitive Ability, Financial Literacy, and the Demand for Financial Advice at Older Ages: Findings from the Health and Retirement Study(2018-01-01) Kim, Hugh H; Maurer, Raimond; Mitchell, Olivia SThis paper evaluates how cognitive ability and financial literacy shape the demand for financial advice at older ages. We analyze a new module of the Health and Retirement Study which queried older respondents about their usage of financial advice and other financial management activities. Results show that cognitive ability and financial literacy are often positively correlated with advice-seeking for financial matters. Generally speaking, the more cognitively able tend to seek financial advice from professionals outside of family members; nevertheless, they are also more likely to be overconfident regarding their investments. The more financially literate also tend to ask for help with money management, but they are less likely to be overconfident. Overall, our findings are suggestive that cognitive ability as well as financial literacy can help shape older persons’ money management behaviors.Publication Putting the Pension Back in 401(k) Plans: Optimal versus Default Longevity Income Annuities(2023-01-13) Horneff, Vanya; Maurer, Raimond; Mitchell, Olivia SMost retirees take payouts from their defined contribution pensions as lump sums, but the US Treasury recently moved to encourage firms and individuals to convert some of the $15 trillion in plan balances into longevity income annuities paying lifetime benefits from age 85 onward. We evaluate the welfare implications of this reform using a calibrated lifecycle consumption and portfolio choice model embodying realistic institutional considerations. We show that defaulting a fixed fraction of workers’ 401(k) assets over a dollar threshold is a cost-effective and appealing way to enhance retirement security, enhancing welfare by up to 20% of retiree plan accruals.Publication Time is Money: Life Cycle Rational Inertia and Delegation of Investment Management(2013-11-01) Kim, Hugh Hoikwang; Maurer, Raimond; Mitchell, Olivia SWe investigate the theoretical impact of including two empirically-grounded insights in a dynamic life cycle portfolio choice model. The first is to recognize that, when managing their own financial wealth, investors incur opportunity costs in terms of current and future human capital accumulation, particularly if human capital is acquired via learning by doing. The second is that we incorporate age-varying efficiency patterns in financial decisionmaking. Both enhancements produce inactivity in portfolio adjustment patterns consistent with empirical evidence. We also analyze individuals’ optimal choice between self-managing their wealth versus delegating the task to a financial advisor. Delegation proves most valuable to the young and the old. Our calibrated model quantifies welfare gains from including investment time and money costs, as well as delegation, in a life cycle setting.Publication Optimal Life Cycle Portfolio Choice with Variable Annuities Offering Liquidity and Investment Downside Protection(2013-07-01) Horneff, Vanya; Mitchell, Olivia S; Maurer, Raimond; Rogalla, RalphWe evaluate lifecycle consumption and portfolio allocation patterns resulting from access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities, one of the most rapidly-growing financial innovations over the last two decades. A key feature of these products is that they offer access to equity investments with downside protection, hedging of longevity risk, and partially-refundable premiums. Welfare rises since policyholders exercise the product’s flexibility by taking withdrawals and dynamically adjusting their portfolios and consumption streams. Consistent with observed behavior, differences across individuals’ cash out and annuitization patterns result from variations in realized equity market returns and labor income trajectoriesPublication Will They Take the Money and Work? An Empirical Analysis of People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum(2014-10-01) Maurer, Raimond; Mitchell, Olivia S; Rogalla, Ralph; Schimetschek, TatjanaThis paper investigates whether exchanging the Social Security delayed retirement credit, currently paid as an increase in lifetime annuity benefits, for a lump sum would induce later claiming and additional work. We show that people would voluntarily claim about half a year later if the lump sum were paid for claiming any time after the Early Retirement Age, and about two-thirds of a year later if the lump sum were paid only for those claiming after their Full Retirement Age. Overall, people will work one-third to one-half of the additional months, compared to the status quo. Those who would currently claim at the youngest ages are likely to be most responsive to the offer of a lump sum benefit.