Pension Research Council Working Papers
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Publication Reforming the US Long-Term Care Insurance Market(2024-10-03) Braun, R. Anton; Kopecky, Karen A.Nursing home risk is significant and costly. Yet, most Americans pay for long-term care (LTC) expenses out-of-pocket. This chapter examines reforms to both public and private LTCI provision using a structural model of the US LTCI market. Three policies are considered: universal public LTCI, no public LTCI coverage, and a policy that exempts asset holdings from the public insurance asset test on a dollar-for-dollar basis with private LTCI coverage. We find that this third reform enhances social welfare and creates a vibrant private LTCI market while preserving the safety-net provided by public insurance to low-income individuals.Publication Patterns of Consumption and Savings around Retirement(2024-10-03) Olafsson, Arna; Pagel, MichaelaThis chapter analyzes how consumption, savings, and other positions on household balance sheets change around retirement. Four patterns stand out. First, many households have barely any savings and hold substantial amounts of consumer debt at the time of retirement. Second, consumption falls at retirement, possibly due to work-related expenses, bargain shopping, or because households face unexpected adverse shocks. Third, liquid savings increase at retirement. Fourth, wealth increases more over the course of retirement for the average household. We discuss why and how analyzing these patterns helps us to answer the ultimate question of whether households save enough for retirement.Publication Wealth Accumulation: The Role of Others(2024-10-03) Haliassos, MichaelThis chapter reviews evidence from several recent projects exploring how neighbors, peers, financial advisors, and exogenous stressors affect wealth accumulation. Having neighbors with college economics or business education promotes retirement saving. Greater local wealth inequality and mobility at the start of economic life motivate college graduates to take portfolio risks and achieve greater wealth, leaving others behind. Financial advice from unbiased professionals differs from peer advice in how it relates to advisor and advisee characteristics. Background stressors, such as crises, wars, and personal problems, occupy savers’ minds. In an incentivized online experiment, background cognitive load consistently dampened consumption and promoted saving.Publication Plan Design and Participant Behavior in Defined Contribution Retirement Plans: Past, Present, and Future(2024-10-03) Reuter, JonathanThis chapter reviews the academic literature on defined contribution retirement plan design and participant behavior. While adoption of automatic enrollment has significantly increased participation rates, recent studies find the long-run effects on savings are smaller than the short-run effects, with some savings financed via debt. I also review efforts to expand access to employer-based retirement savings and liquid savings, the pros and cons of target date funds as default investment options, potential conflicts of interest in plan design, and potential benefits of customized defaults. I conclude by discussing how SECURE 2.0 may impact US workers and highlighting topics for future research.Publication Insights on Economic Well-being at Older Ages from Analyses of Household Spending(2024-10-03) Hurd, Michael D.; Rohwedder, SusannConsumption is a direct measure of individuals’ economic well-being. It is, therefore, the core argument in economic models. Following a brief overview of life-cycle models of consumption, we present empirical evidence about longitudinal spending patterns at older ages. We show how spending changes at common retirement ages, the evolution of spending over the remainder of the life cycle, shifts in the composition of spending with age and how these patterns vary by demographic characteristics. We use spending data to learn about economic well-being, poverty status, and economic preparation for retirement. We conclude with a discussion of avenues for future research.Publication Deepening our Understanding of Savings Automation in Retirement and Non-retirement Contexts(2024-10-02) Chin, Alycia; Johnson, Heidi; Middlewood, BriannaTwenty years of research focusing on retirement savings demonstrate that automating components of the savings process can increase participation in retirement plans, contribution rates, and balances. We review the literature on these benefits and the potential negative consequences of automation, such as reduced liquidity. We also highlight areas of examined and unexamined heterogeneity, including prior work on the relationships among time preferences, savings automation, and financial health. Recent policies like the SECURE 2.0 Act of 2022 and a growing number of state auto-IRA programs are encouraging greater automation of both retirement savings and liquid emergency savings, and may provide new avenues for understanding the impacts of savings automation. We conclude by calling on researchers to further explore non-retirement and retirement savings automation, longitudinal outcomes of retirement success, and potential social wealth inequalities exacerbated by automation in employer plans.Publication Aging in America: An Examination of Financial and Health Decision Making among Older Adults(2024-10-03) Mottola, Gary R; Yu, Lei; Boyle, PatriciaThe US population is aging, and aging is associated with cognitive, contextual, psychosocial, and other changes that can impact people’s ability to make effective decisions. Ineffective decision making, particularly related to finances and healthcare, can have significant and irreversible effects on wellbeing. Better understanding the relationships between aging and decision making is needed to identify ways to maintain or even enhance decision making ability as we grow older. This chapter reviews research that examines how aging impacts decision making and susceptibility to financial fraud, including the role that financial literacy plays, and discusses how findings from this research inform policies aimed at protecting older adults from the problems that can arise from suboptimal decisions.Publication Does It All Add Up? New Experimental Evidence for ‘Undersum Bias’ as an Impediment to Precautionary Saving(2024-10-02) Timmons, Shane; McGowan, FéidhlimUndersaving generates multiple sources of risk for consumer detriment. Cognitive biases, such as present bias and exponential growth bias, have been proposed to explain under-saving. We present novel evidence for another explanation: ‘Undersum’ bias describes a systematic tendency for consumers to underestimate the accumulation of monetary amounts, even in the absence of compound interest. We discuss recent lab and field experiments demonstrating its implications for saving. Undersum bias may demotivate saving as consumers fail to appreciate the benefits of starting to save early in life, and lead consumers to underestimate future expenditure and inaccurately judge the cumulative risk of financial shock.Publication Noncognitive Determinants of Retirement Saving Behavior(2024-10-02) Parise, Gianpaolo; Peijnenburg, KimThis paper examines the impact of noncognitive skills like conscientiousness, stress resistance, and grit on retirement readiness using Dutch household survey data. Conscientiousness significantly influences financial decisions related to savings, investments, and retirement planning. Individuals with these noncognitive skills exhibit behaviors such as increased savings and financial buffers. These skills are positively associated with participation in the stock market and the propensity to plan for retirement, seeking greater flexibility in savings and investments. Additionally, there is a positive correlation between noncognitive ability and the likelihood of opting out of the default pension plan.Publication Subjective Beliefs, Saving, and Spending for Retirement(2024-10-02) Heimer, RawleyBeliefs about future events are crucial to the decisions that people make when developing financial plans over the life cycle. Yet peoples’ subjective beliefs can often differ from the objective probabilities that economists and financial planners use in their models. This chapter discusses findings on subjective beliefs, how people might form their beliefs, and how these beliefs affect conclusions drawn from a classical economic life cycle model. I highlight a specific divergence between subjective beliefs and objective probabilities: subjective beliefs about peoples’ mortality.