My Takeaways

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Comments For: Optimal Illiquidity in the Retirement Savings System By John Beshears, James J. Choi, Christopher Clayton, Christopher Harris, David Laibson, and Brigitte C. Madrian August 2014 John Sabelhaus Board of Governors of the Federal Reserve System, Washington, DC, [email protected]. The analysis and conclusions set forth are those of the author and do not indicate concurrence by other members of the research staff or the Board of Governors

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Comments For: Optimal Illiquidity in the Retirement Savings System By John Beshears , James J. Choi, Christopher Clayton, Christopher Harris, David Laibson , and Brigitte C. Madrian August 2014 John Sabelhaus. - PowerPoint PPT Presentation

Transcript of My Takeaways

Page 1: My Takeaways

Comments For:

Optimal Illiquidity in the Retirement Savings System

By John Beshears, James J. Choi, Christopher Clayton, Christopher Harris, David Laibson, and Brigitte C. Madrian

August 2014John Sabelhaus

Board of Governors of the Federal Reserve System, Washington, DC, [email protected]. The analysis and conclusions set forth are those of the author and do not indicate concurrence by other members of the research staff or the Board of Governors

Page 2: My Takeaways

My Takeaways

• Given present-bias for at least some agents, 30% penalty better than 10%

• Experimental evidence in fact suggests that β<1 for many households

• Once you start thinking about low β households, nothing else matters…

• Institutions in U.S. getting more liquid– DB to DC one example, also housing finance– Need to make system more illiquid

Page 3: My Takeaways

My Questions

1. Who takes early withdrawals, and under what circumstances?

…and what else should those of us who work with retirement/withdrawal data be looking for?

2. How far is the current U.S. retirement system away from the authors’ ideal?

…and are we really moving further away?

Page 4: My Takeaways

Observations on Early Withdrawals

• Large (Argento, Bryant, and Sabelhaus)

• Did not surge in Great Recession, though probably trending up over time

• More likely to occur given income shock or marital disruption, especially at job change

• Widespread across income groups– Surprising? Was to me…– Presumably, high incomes are also high β’s?

Page 5: My Takeaways

2004 2005 2006 2007 2008 2009 20100%

10%

20%

Net Taxable Withdrawals

Penalized Withdrawals

Year

Per

cen

t of

Tax

Un

its

Note: Population is taxpayers ages<55 with evidence of current pension coverage and/or retirement accounts. Net taxable withdrawals exclude Roth conversions.

Source: IRS Statistics of Income

Retirement Account Early Withdrawal Rates by Year

Page 6: My Takeaways

Withdrawal Rates Across Job Change and Shock Groups, 2004-2010 No Job Change Job ChangeNo Shocks 7.7% 13.8%Income Shock Only 20.4% 29.8%Marital Shock Only 9.2% 15.4%Both Income and Marital Shock 21.2% 29.5%Notes: Income shocks based on per capita AGI less taxable pensions. Population is all tax units with evidence of pension coverage or retirement accounts. Income shock is defined as a decline of ten percent or more relative to the prior year value. Marital shock is defined as a movement from joint to non-joint filing or joint filing with a different co-filer within past two years. Job change based on employer EINs changing in prior or current year.

Page 7: My Takeaways

1 2 3 4 5 6 7 8 9 100%

20%

40%Both Shocks No Job ChangeBoth Shocks with Job ChangeNo Shocks and No Job ChangeNo Shocks with Job Change

Decile of (Three Year Average) Income

Per

cen

t of

Tax

Un

its

Note: Population is taxpayers ages<55 with evidence of current pension coverage and/or retirement accounts. See income and net taxable definitions on previous slides.

Retirement Account Withdrawal Rates by Income, Shocks, and Job Change

Source: IRS Statistics of Income

Page 8: My Takeaways

Great Questions Spawn Research!

• Current research (with Alice Henriques and Sebastian Devlin-Foltz)– Use SCF to measure all retirement claims – By lifetime income group and across cohorts– What are the actual distributional consequences

of the shift from DB to DC?

• Future research (with Victoria Bryant)– Add panel dimension, contributions from W2s– Will we find evidence of low vs high β’s?

Page 9: My Takeaways

How Far Are We From the Ideal?

• Social Security is completely-illiquid and dominates retirement cash flow for most– More like a retirement system since 1970s– Very strong distributional component (does

not necessarily mean re-distributional…)

• Is DB to DC pushing us further away?– “Leakage” from DB system just different?

(mid-career job change very costly in DB)– Unclear whether DB retirement claims were

more equal or even overall larger than DC

Page 10: My Takeaways

1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 20400

10

20

30

40

50

60

70

80

Social Security Hypothetical Retired Worker Replacement Rates at Age 65

Year

Bene

fit a

s a P

erce

nt o

f Ave

rage

Ear

ning

s

Source: SSA Office of the Chief Actuary, Table V.C7

Low Earner

Medium Earner

Maximum Earner

Page 11: My Takeaways

198104 198302 198404 198602 198704 198902 199004 199202 199304 199502 199604 199802 199904 200102 200204 200402 200504 200702 200804 201002 201104 2013020

50

100

150

200

250

300

350

400Ratio of Aggregate Retirement Claims to Aggregate Wages and Salaries, 1981-2013

Defined Benefit

Other (DC + IRA)

Year/Quarter

Perc

ent R

atio

Source: NIPA Table 2.1, FAOTUS Table 1.16

Page 12: My Takeaways

Thanks!

[email protected]