Defined Benefit Retirement Research Articles

Valuing Losses of Pension Benefits

Valuing Losses of Pension Benefits

국내 확정급여형 퇴직연금 수급권 보장 방안

국내 확정급여형 퇴직연금 수급권 보장 방안

Fringe Benefits and Chinese Import Competition

While many studies have quantified the impact of Chinese import competition on U.S. wages, to my knowledge this is the first study to also estimate the effect on fringe benefits. This is important because in the United States, fringe benefits are now more than 30% of compensation. I first argue that if trade affects the share of benefits in compensation, focusing on wages and ignoring fringe benefits may give us misleading estimates of the effect of trade on workers' total compensation. Using data from the National Longitudinal Survey of Youth 1979, I track the subsequent outcomes of workers who were working in manufacturing in 1996. Similar to Autor et al. (2014), I find that exposure to Chinese competition negatively affects wage income. As to fringe benefits, the effect on participation in a defined benefit retirement plan and the availability of vacation days is negative and significant. The effects on other benefits are usually negative but imprecisely estimated. The effect on the overall dollar value of benefits is negative and significant. However, in percentage terms, the effect on benefits is smaller than the effect on wages. This suggests that, in percentage terms, the impact of Chinese import competition on overall compensation is less severe than the one found in Autor et al. (2014) for wages.

Rethinking the Structure of Teacher Retirement Benefits: Analyzing the Preferences of Entering Teachers

Most U.S. public school teachers participate in defined benefit retirement plans, which base benefits on years of service and their last few years of salary. These plans are often backloaded and include sharp economic incentives. We consider the implications of transitioning to a cost-equivalent defined benefit plan under which teachers would earn benefits more evenly across their careers. We show that new teachers who are risk averse would prefer the alternative plan. The magnitude is often substantial. For example, for an entering teacher the certainty equivalent for the CB plan is about 2.1 times the certainty equivalent for the respective FAS plan in New York City and 29 times larger than the respective heavily backloaded FAS plan in Philadelphia.

The Only Saving Rate Article You Will Ever Need—Using Just a Handheld Financial Calculator!

Individual retirement savings are becoming the key to retirement security as defined benefit retirement plans slowly disappear. Yet, little guidance is available to show a saver how to safely plan to achieve his or her desired retirement savings target amount. The authors show how to use ordinary annuity payment math—readily adaptable to handheld financial calculators or spreadsheet programs—to calculate the savings needed in a given year in order to make the desired amount of progress toward a particular retirement savings target, regardless of investment returns each year. Portfolio fluctuations from investment returns are properly fed back into the savings rule: Investment losses are amortized automatically over the remaining working years through the annuity payment calculations, so return volatility translates directly to savings volatility, smoothed only by the time remaining in the amortization. This means that the more risk one takes on in the portfolio, the greater the volatility in the required rate of savings, which in turn acts as a dampener on the extent of risk that the investor will find desirable in the portfolio.

Investment-Based Transition Costs Associated with Closing a Public Defined Benefit Pension Plan

Defined benefit retirement plans for state and local government employees are underfunded in most jurisdictions. Policymakers and analysts have proposed closing these traditional pensions and enrolling public-sector workers in defined contribution plans similar to 401(k) retirement plans. One objection to such a change is that once a pension plan is closed to new entrants it must adopt a more conservative, lower-yielding investment portfolio that will require higher taxpayer contributions. These higher contributions are referred to as transition costs and increase the cost of pension reforms. I analyze optimal investment portfolios for open and closed pension plans, showing that portfolio allocations differ only slightly and that these differences appear only over long periods. Thus, the actual transition costs associated with pension reforms are likely to be far smaller than has been claimed.

Valuation of Spouse and Survivor Benefits In a Defined Benefit Retirement Plan

Abstract A search of the forensic economic literature fails to disclose any discussion of the proper methodology for valuing the loss of survivor benefits in a defined benefit retirement plan when a wrongful death event occurs. A first approximation, which might be used to calculate a widow's loss of retirement benefits resulting from the wrongful death of her spouse, is the retiree's benefit payments minus his personal consumption (or maintenance allowance) minus the widow's survivor benefit, if there is one. Economic analysis reveals that while the actual payment to the retiree includes the spouse's benefit if the retiree does survive, it fails to include the spouse's expected survivor benefit in the event that the retiree does not survive. This omitted benefit is significant and should be included in valuing the spouse's expected benefit from the total retirement plan and the widow's loss. Legal analysis reveals that the widow's benefit is essentially the same as proceeds from privately purchased life insurance, which in common law would be considered a collateral source and protected from disclosure at trial or offset against an award. However, tort reform efforts over the past 30 years have led many states to modify or even repeal the traditional collateral source rules. Therefore, the widow's benefit may or may not be considered in valuing the loss of retirement, depending on the jurisdiction, the cause of death (e.g., medical malpractice), and even the interpretation of the collateral source rules by the trial judge. If it is determined that the collateral source rule excludes introduction of the survivor benefit, a reasonable alternative for the plaintiff would be to claim the loss as the retiree's gross benefit minus his personal consumption weighted by the joint probability of survival.

Nature, Nurture, and Financial Decision-Making

The goal of this application is to fund a research agenda in economics that examines the importance of nature (genes) and nurture (the environment), and their interactions, as drivers of individuals' behavior in the financial domain. The goal of this agenda is to advance our understanding of the fundamental factors that determine the most important financial decisions that people make during their lives, e.g., how much to save for retirement, how to invest and allocate savings to different assets and investment vehicles, and how much personal debt to accept. Many industrialized countries are moving away from defined benefit retirement plans and pay-as-you-go systems like Social Security, meaning that people will be responsible for their own savings. As we move towards more autonomy in the domain of savings and investments it becomes increasingly important for economists and policy makers to understand what determines people's financial decisions and also why people exhibit a long list of investment biases. Is this because of genetic predispositions, or because of social learning (e.g., from parents)? Does the environment moderate innate predispositions to certain financial decisions? The extent to which specific environments and market incentives eradicate or exacerbate genetic predispositions will also be examined. There are at least two reasons why this research agenda is important and has potential for broad impact. First, economists who model or empirically examine individual investor behavior in financial markets should understand the fundamental factors that explain individual differences in behavior in these markets. In this respect, our research contributes to a rapidly expanding literature which analyzes the biological, neural, and genetic factors that influence individuals' financial decisions. Second, from a public policy perspective, it is important to understand the extent to which individuals' financial decisions are influenced by genetic predispositions rather than environmental factors. That is, our results have implications for an evaluation of the effectiveness -- and possibly limitations -- of public policy initiatives with respect to, e.g., financial literacy, retirement savings, income and wealth inequality.

Behavioral economics perspectives on public sector pension plans.

We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted toward defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee's work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers' need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans.

Behavioral Economics Perspectives on Public Sector Pension Plans

We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted towards defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee‘s work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers‘ need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans.

Toward Building a Sustainable Retirement System for Private Colleges and Universities in Japan

As retiring personnel of Japan's private higher educational institutions (HEIs) take a large portion of the accumulated retirement funds at their career exit today, their younger colleagues are left with a bleak future with a quickly depleting reserve for their own retirement allowances. The fact that many insolvent organizations are on the verge of losing their ground with employer-sponsored defined-benefit retirement programmes indicates that the current system can no longer assure sustainable benefits to Japan's future retirees. The purpose of this paper is to correctly understand the status quo and clarify the challenges many Japanese private institutions of higher education are facing today. This paper also examines the financial health of Japan's private colleges and universities and further considers possible alternatives towards building a sustainable retirement system for the community of private HEIs.

Public University Retirement Systems in the Midwest: An Overview

This paper examines the recent financial experience of public university defined benefit retirement plans in several Midwestern states. Generally, funding percentages have declined over the past ten years. In some instances, the decrease in funding level has been on the order of thirty percentage points. Little significant change in average plan asset allocation is seen over the past four years.

The use of stock options and retirement plans to retain non-executive employees

Firms expend significant resources to retain employees. In this paper, we examine how firms that use stock options grant them differently when they also utilize retirement plans in non-executive employee compensation contracts. Using a large sample of US firms, we examine the relation between the stock option proportion of pay of non-executive employees and firms’ use of a retirement plan of any type. We then examine how firms’ use of stock options is affected by the type of plan (defined benefit or defined contribution) used by the firm. We find that firms reduce their use of stock options when there are other deferred pay mechanisms in place, suggesting they act as substitutes. We also find that firms with defined benefit retirement plans reduce their use of stock options for non-executives to a greater extent than firms with defined contribution plans, suggesting a greater degree of substitutability between defined benefit plans and stock options than between defined contribution plans and stock options.

A direct path to recognition

FOCUS □ LABOURLAWREFORMANDTHE ORGANISING AGENDA A direct path to recognition IUS aggressive the workers world's avoidance industry union most face theworld's most aggressive union avoidance industry MARY BETH MAXWELL is Executive Director of American Rights atWork in Washington Between States and median roughly 1947 family and doubled. 1973 income In both the in decades productivity the United folBetween and medianfamily incomein the United States roughly doubled.In thedecadesfollowing ,workers' wages have failedto keep up with the continuousincrease in productivity. From2000to2007,incomeforthemedianworking -agehousehold actuallydropped by twothousand dollarsafter inflation. Thetopone percentofwage earners now hold23 percent ofall income - thehighest inequality in incomesince 1928.Asthetablefrom thelatest State ofWorking America report producedbytheEconomic Policy Institute makesclear- workers arenotsharing in theproductivity theyproduce. Thepathfrom egalitarian and steady growth to a low-wage, high-debt economy is a layered and complexstory.Neitherpattern was accidental: policiesdesigned tofoster equality werereplaced by policiesdesignedto foster inequality. Both worked very welltoward their objectives. One key piece in thisstoryis the decimation of trade unions andother 'equalising institutions' as termed by MIT economist FrankLevy(along withthe quality ofeducation, thewelfare state, international traderegulations, and theotherpolitical structures ). And as Harvard economist Richard Freeman has arguedlabouris necessary to serve as a stabilising macroforce. The current financial 'crisis' can be readas simply strong evidenceof howwelltheinequality policy agendahasworked andwillcontinue toworkwithout decisive policy actiontorestore balancetoAmerican society. In I960,private sectorunionmembership was 30 percent; by 2007,ithad droppedto 7.5 percent .As unionsdeclined,bothunionand nonunionworkers losttheeconomicbenefits ofcollectivebargaining . According to theresearchof Professor HenryFärberat Princeton, morethan halfofthedeclineintheaveragewage ofworkerswithno morethana highschooleducation is attributed tothedeclineinuniondensity. The decline in collectivebargaining is also linkedtotheerosionofemployer-provided benefits .Accordingto data collectedby the US Census Department,the percentage of all American workers with employer-provided health benefits droppedfrom 69 percent in 1979 to 55 percent in 2006.The percentage ofprivate sector workers withvastly superior defined benefit retirement plans(as opposedtodefined contribution plans) decreasedfrom roughly 50 percentto less than20 percent. Unlikeothercountries , US workers do nothavea 'justcause' provisionintheir employment contracts unlesstheir union negotiatesit. US workersdo not have access to universalhealthinsurance.And US workersface the world'smostdeveloped and aggressive union-avoidance consultant industry. It is conceivablethatthedeclinein unionisationis nottheresult ofa systematic policyagenda but ratherrepresentsthe preferences of American workers, as theopponentsof unions and theEmployeeFreeChoiceActtheorise. Yet, theactualdataonAmerican workers' preferences tella different story. One consistent survey finding in particularbelies the assertion that Americans embracethe 'on yourown' philosophy :when American workersthinkabout the economy,theyexpressa strong preference for economicsecurity over economicopportunity. AnAugust 2008survey ofnon-supervisory workers conductedby Lake ResearchPartners on behalfof Changeto Win confirms thesesentiments with75 percent preferring economicsecurity over25percent judging economic opportunitymoreimportant tothempersonally. Analysingseveral decades of polling data, Harvardeconomist, Richard Freeman, findsthat workers wanta voice at worknow morethan ever.Andinrecent national polling conducted by Hart Research Associates, 53percent ofnon-union workerssay theywould forma union if they could - a percentage thathas steadily risensince the 1980s - yet farfewerworkersbelong to unions.As labourscholarHarley Shaiken asserts, "theyawning gap betweentherobust demandto joinunions andtheanaemic membership numbers reflects thefactthat, formanyAmericans, joining a unionhasbecomea risk rather thana right". The AmericanLabour Law System The National LaborRelations Actof1935(NLRA) or the WagnerAct as it is commonly known, givesprivate sector workers inAmerica theright tojoinorform a labourunionandtobargain collectively overwages,hours,and otherworking conditions. Over the yearsthisbasic right has been eroded by amendments and lax enforcement within anoverarching socio-political culture ofincreasing corporate power. Weareleft witha labourlawsystem that allows employers tovetothewilloftheworkers, violate theruleas wellas thespirit ofthelawwithrelativeimpunity , and systematically delaynegotiatinga first contract evenafter a unionvictory. This imbalance issuperimposed upontheinherent and compelling authority ofemployers: theycan hire and fire.Thisreality was highlighted back in a 1941decisionbyJudgeLearned Hand:"language mayserveto enlighten a hearer... butthelight it shedswillinsomedegreebe cloudedifthehearerhasno power...Whattoanoutsider willbe no morethanthevigorous presentation ofa conviction , toan employee maybe themanifestation of a determination whichis notsafetothwart". Untilthelate 1960s,employers wererequired to recogniseunionswhenpresented withcards or otherevidence of majority support,unless INTERNATIONAL union rights Page 6 Volume 16Issue 2 2009 theyhad a 'good faith doubt'as to theunion's majority status. The Boardand thecourts specificallyheldthat wherea refusal to recognise was designed togaintimeso that theemployer could attemptto dissipate the union's support or reflected basic oppositionby the employerto unionisation, thatrefusal was unlawful. The changeto the law givingemployers the right torefuse a request forrecognition andforce theunionto petition foran election, no matter how strong theevidenceof majority support or whattheemployer's motive is forrefusing, came aboutas a result ofa seriesofBoarddecisions in thelate1960'sthat...

A Note on Coordinating Defined Benefit and Defined Contribution Benefits in a Multi-Pillar Pension Plan

Current multi-pillar pension plans have adopted the same retirement age for the defined benefit (DB) and defined contribution (DC) components of the plan. This paper considers potential benefits obtainable from coordinating DB and DC benefits. The plan proposed here involves establishing an earlier standard retirement age for the DC component of the multi-pillar pension plan than for the DB component of the multi-pillar pension. Individuals who receive low returns on the DC pension plan are eligible for earlier non-standard disbursements from their DB pension plan. The lower standard retirement age on the DC component of the multi-pillar pension plan than on the DB component of the multi-pillar pension plan reduces costs of funding the DB plan while maintaining a lower overall potential retirement age for individuals. The possibility of non-standard early DB disbursements for retirees who realize low investment income reduces the instability of retiree income due to market fluctuations. A lower standard retirement age on the DC component of the multi-pillar pension plan than on the DB component of the multi-pillar pension plan provides an incentive for workers to delay retirement until reaching the standard DB retirement age. This work incentive does not increase costs for the DB plan.

Biases and Fundamental Investing Knowledge: An Assessment of College Students

Individuals are being forced to take a greater role in personal retirement planning. Until the mid 1970s, the predominant retirement plan was defined benefit, ralher than defined contribution. Since the 1970s, there has been a move towards defined contribution retirement plans and, in the mid 1990s, defined contribution retirement plans outnumbered defined benefit retirement plans. From 1975 to 1998. there was an increase of 42 million Americans enrolled in non-Social Security retirement programs, from 44 million to 86 million. In 1975, the predominant plan was defined benefit with 32 million Americans participating in 103,000 different defined benefit plans. In contrast, 10 million Americans were participating in 208,000 different defined contribution plans. By 1998, the dominant plan had switched. Forty-six million Americans were in defined contribution plans and 40 million were in defined benefit plans (Migration News). Among Fortune 100 companies the shift is just as dramatic. In 2007, only 28% of Fortune 100 companies offered a defined benefit retirement plan to new employees, compared with 89% in 1985 (Geisel, 2008).

Shift From Defined Benefit to Defined Contribution Retirement Plans: Are College Students Ready?

As defined contribution retirement plans, rather than defined benefit retirement plans, become the norm, it is imperative that people have a thorough understanding of retirement planning. From 1975 to 1998, there was an increase of 42 million Americans enrolled in non-Social Security retirement programs, from 44 million to 86 million. In 1975, the predominant plan was defined benefit with 32 million Americans participating in 103,000 different defined benefit plans. In contrast, 10 million Americans were participating in 208,000 different defined contribution plans. By 1998, the dominant plan had switched. Forty-six million Americans were in defined contribution plans and 40 million were in defined benefit plans (Migration News). The trend is clearly away from defined benefit plans and to defined contribution plans.
 This study fills the gap that currently exists in this area and advances this body of knowledge in three important ways. One, it assesses the financial literacy of current college students in the specific area of retirement planning. Two, it compares three factors that may impact college students' knowledge in retirement planning: (1) taking a college course in finance with exposure to retirement planning, (2) gender, and (3) major. Three, it suggests methods for improving the retirement planning knowledge of college students. Results of this study indicate that college students are deficient in retirement planning knowledge and that even a short topical module on retirement planning included in an introductory finance course significantly improves students' retirement planning literacy.

The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions

The retirement behavior of Pennsylvania public school teachers in 1997–98 and 1998–99, a period when state early retirement incentives were temporarily increased, is modeled using a choice framework that emphasizes both pecuniary and nonpecuniary factors of the retirement decision under a defined benefit retirement plan. We find each to have large and statistically significant effects on the decision to retire.The present value of inflation-adjusted pension benefits of a public defined benefit plan is found to be an important and sizable determinant of retirement. A $1,000 (or .4 percent) increase in the real present value of pension benefits is estimated to increase the probability of retirement for female teachers by .02 to .08 percentage points; this implies an elasticity of retirement for female teachers with respect to the present value of real pensions of between 2.0 to 3.5. These estimated defined benefit pension elasticities for female teachers are higher than for male teachers, whose comparable retirement elasticity was 1.9 to 2.5.A $1,000 increase in current salary is found to reduce themean probability of retirement by .1 percentage points, implying an elasticity of −1.4. Thus, substantial salary increases systematically reduce the probability of older teachers retiring.

Shifting the burden: the private sector's response to the AIDS epidemic in Africa.

As the economic burden of human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) increases in sub-Saharan Africa, allocation of the burden among levels and sectors of society is changing. The private sector has more scope to avoid the economic burden of AIDS than governments, households, or nongovernmental organizations, and the burden is being systematically shifted away from the private sector. Common practices that transfer the burden to households and government include pre-employment screening, reductions in employee benefits, restructured employment contracts, outsourcing of low skilled jobs, selective retrenchments, and changes in production technologies. Between 1997 and 1999 more than two-thirds of large South African employers reduced the level of health care benefits or increased employee contributions. Most firms also have replaced defined-benefit retirement funds, which expose the firm to large annual costs but provide long-term support for families, with defined-contribution funds, which eliminate risks to the firm but provide little for families of younger workers who die of AIDS. Contracting out previously permanent jobs is also shielding firms from benefit and turnover costs, effectively shifting the responsibility to care for affected workers and their families to households, nongovernmental organizations, and the government. Many of these changes are responses to globalization that would have occurred in the absence of AIDS, but they are devastating for the households of employees with HIV/AIDS. We argue that the shift in the economic burden of AIDS is a predictable response by business to which a deliberate public policy response is needed. Countries should make explicit decisions about each sector's responsibilities if a socially desirable allocation is to be achieved.

Stochastic control of funding systems

This paper is concerned with funding systems, i.e. systems which accumulate funds for the future payment of financial obligations. Commonly, such funding requires a balance between (1) the desire to minimise the contributions that need to be diverted from other use to the support of the Fund, and (2) the need to maintain reasonable solvency in the Fund. Such funding is discussed here in a general framework. Applications are numerous. The specific applications mentioned in the paper are: • Defined benefit retirement funding, • Maintenance of a prudential margin by a non-life insurer, • Dividend payment strategy. The paper applies stochastic optimal control theory to determine how rates of contribution to the Fund and allocation of its assets by asset sector should respond to changing solvency. These results are obtainable from a particular differential equation, which may be solved numerically. Detailed numerical examples are provided.