A comparison of the performances of pension products that ignores long-term trends might significantly overestimate the long-term impact of volatility risks while underestimating the impact of persistent, low-frequency trends. This paper proposes a comparison making use of projection models based on the long-term risk–return tradeoff proposed by Campbell and Viceira (2005) to explicitly take into account slow-moving economic trends. In order to illustrate the approach and its implications, we discuss the capital protection provided by life-cycle target-date fund strategies and minimum guarantee strategies.

This article explains a curious redirection of economic policies that uses the policy framework of Kalecki and Keynes only to undermine it. It does not negate their theory of demand management, but reformulates it to serve the powerful interests of finance in the era of financial globalisation. As a result, accountability to finance rather than to the citizens becomes more important for democratic governments, and credit rating dominates democratic performance.

We use Canadian data over the period of 1991Q1 to 2019Q2 to examine the effect of higher minimum wages on consumption, measured as the real retail trade sales per adult population. Such an examination is rare in the extant literature and it is timely given the increasing debate concerning the stimulus versus inflationary effects arising from wage polices because of COVID-19 global pandemic. We apply the autoregressive distributed lag model to determine the causal relationship between these variables. We find one long-run cointegrating relationship that runs from the real minimum wage to the real retail trade sales. In addition, we find that a 1% increase in the minimum wage is associated with almost a 0.5% increase in real retail trade sales in the long run. While our findings rest on several statistical assumptions, there is strong evidence in support of the position that minimum wage strengthens aggregate consumer spending, and thereby the standard of living, economic growth and stability. This is a position that differs from the conclusions drawn from mainstream academic and policy debates on the economic usefulness and efficacy of minimum wage increases.

We quantify the importance of idiosyncratic health risk in a calibrated general equilibrium model of Social Security. We construct an overlapping generations model with rational-expectations households, idiosyncratic labor income and health risk, profit-maximizing firms, incomplete insurance markets, and a government that provides pensions and health insurance. We calibrate this model to the US economy and perform two computational experiments: $\left (i\right)$ cutting Social Security’s payroll tax, and $\left (ii\right)$ modifying Social Security’s benefit-earnings rule. Our findings suggest that health risk amplifies the welfare implications of both experiments: downsizing Social Security always leads to higher overall welfare, but the welfare gain is larger when we account for health risk, and increasing the progressivity of Social Security’s benefit-earnings rule has a larger positive effect on welfare in the presence of health risk. We also find that allowing households additional tools to self-insure against health risk weakens the precautionary motive, so our experiments have similar welfare implications both with and without health risk.

We use administrative data on federal civilian workers' accounts in their employer-provided defined contribution plan, called the thrift savings plan (TSP), to provide new evidence on the effects of employer matching and defaults on workers' savings behavior. The empirical analysis relies on exogenous variation stemming from two natural experiments caused by policy changes to the TSP: the establishment of an employer match for workers hired after 1983 and the introduction of automatic enrollment for workers hired after July 2010. We find that the introduction of the employer match lead to a higher increase in both participation and contribution rates compared to the subsequent switch to automatic enrollment. In terms of portfolio allocations, we find that matching and automatic enrollment had small and minimal effects, respectively.

Income drops permanently after an involuntary job displacement, but it has never been clear what happens to long run wealth in the USA. Upon displacement, wealth falls 14% relative to workers of the same age and similar education from the Panel Study of Income Dynamics (PSID). Their wealth is still 18% lower 12 years after the event. A standard life cycle model calibrated to US data with permanent decreases in income after displacement behaves differently than these findings. The agents in the model also experience a large drop in wealth but they recover. The biggest culprit for these differences is small and statistically insignificant changes to consumption in the PSID whereas agents in the model decrease their consumption considerably. Extending the model to include habit formation reconciles some of these differences by generating similar long run effects on wealth. This allows for the examination of wealth at death through the lens of the model.

This paper examines the impact of uncertainties in the future trends of mortality on annuity values in Singapore's compulsory purchase market. We document persistent population mortality improvement trends over the past few decades, which underscores the importance of longevity risk in this market. Using the money's worth framework, we find that the life annuities delivered expected payouts valued at 1.019–1.185 (0.973–1.170) per dollar of annuity premium for males (females). Even in a low mortality improvement scenario, the annuities provide an expected value exceeding 0.950. This suggests that participants in the national annuity pool have access to attractively priced annuities, regardless of sex, product, and premium invested.

We derive optimal portfolio choice patterns in retirement (ages 66–105) for a constant relative risk aversion utility maximising investor facing risky capital market returns, stochastic mortality risk, and income-reducing health shocks. Beyond the usual stocks and bonds, the individual can invest his assets in tontines. Tontines are cost-efficient financial contracts providing age-increasing, but volatile cash flows, generated through the pooling of mortality without guarantees, which can help to match increasing financing needs at old ages. We find that a tontine invested in the risk-free asset dominates stock investments for older investors without a bequest motive. However, with a bequest motive, it is optimal to replace the tontine investment over time with traditional financial assets. Our results indicate that early in retirement, a tontine is only an attractive investment option, if the tontine funds are invested in a risky asset. In this case, they crowd out stocks and risk-free bonds in the optimal portfolios of younger investors. Over time, the average optimal portfolio weight of tontines decreases. Introducing systematic mortality risks noticeably reduces the peak allocation to tontines.

We compare two contracts for managing systematic longevity risk in retirement: a collective arrangement that distributes the risk among participants, and a market-provided annuity contract. We evaluate the contracts’ appeal with respect to the retiree's welfare, and the viability of the market solution through the financial reward to the annuity provider's equityholders. We find that individuals prefer to bear the risk under a collective arrangement than to insure it with a life insurers' annuity contract subject to insolvency risk (albeit small). Under realistic capital provision hypotheses, the annuity provider is incapable of adequately compensating its equityholders for bearing systematic longevity risk.

The revealed preference for dominated insurance-based personal pension plans (PPPs) in Italy is a decade-long puzzle. I surmise that a motivation from the supply side is a sales force factor deriving from the geographical distribution of financial providers, including the countrywide network of the state controlled Post Office. I provide supporting evidence using three biennial waves of the Bank of Italy's survey on household finances from 2010 to 2014. The time interval includes a public pension system reform sharply raising the statutory age retirement, legislated in December 2011 to defuse a sovereign debt crisis. I show that the salience effect on the awareness of the benefits of supplementing lower perspective public pensions with PPPs increased the explanatory power of financial strength indicators. Exploiting a module in the 2010 wave I estimate a surprising decrease in the probability of subscription to PPPs in 2014 associated with the indicator for the highest financial literacy level.

The paper tests the idea that major demographic shifts can affect housing prices. We first build an overlapping generation model and analytically solve for the equilibrium price of the asset. The model predicts that economies with a higher fraction of old people in the overall population have lower house prices. We empirically test this hypothesis using data on house prices and demographic variables from the Organization for Economic Co-operation and Development (OECD). We find that if population growth increases by one percentage point, house price growth increases by 1.4 percentage points.

Using novel microdata, we explore lifecycle consumption in Sub-Saharan Africa. We find that households' ability to smooth consumption over the lifecycle is large, particularly, in rural areas. Consumption in old age is sustained by shifting to self-farmed staple food, as opposed to traditional savings mechanisms or food gifts. This smoothing strategy indicates two important costs. The first cost is a loss of human capital as children seem to be diverted away from school and into producing self-farmed food. Second, a diet largely concentrated in staple food (e.g., maize in Malawi) in old age results in a loss of nutritional quality for households headed by the elderly.

It has been long suggested that public pension wealth may crowd out household savings. However, there remains controversy about the extent of this displacement effect. In this paper we use an original microsimulation model based on retrospective survey data collected through the third wave of the Survey of Health, Ageing and Retirement in Europe (SHARE) to estimate the displacement effect of public pension wealth on other wealth in Belgium. Combining this rich dataset with an accurate estimation of the individual pension entitlements allows us to circumvent some of the main measurement error problems faced by previous studies. We estimate that an extra euro of public pension wealth is associated with about 14–25 cent decline in households’ non-pension wealth.

This paper summarizes recent developments in Dutch occupational pensions of both the defined contribution and defined benefit (DB) types. A reform of DB schemes is discussed that introduces financial assets as individual entitlements. At the same time, the reformed schemes derive (dis)saving, financial risk management and insurance decisions from the explicit objective of adequate and stable lifelong retirement income. The proposed system also involves an insurance contract pooling longevity risks and possibly collective buffers that share systematic risks with future pension savers. The paper identifies the strengths and weaknesses of the Dutch contract design and draws lessons for other countries.

The growth and popularity of defined contribution pensions, along with the government's increasing attention to retirement plan costs and investment choices provided, make it important to understand how people select their retirement plan investments. This paper shows how employees in a large firm altered their fund allocations when the employer streamlined its pension fund menu and deleted nearly half of the offered funds. Using administrative data, we examine the changes in plan participant investment choices that resulted from the streamlining and how these changes might affect participants’ eventual retirement wellbeing. We show that streamlined participants’ new allocations exhibited significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2 M, or in excess of $9,400 per participant. Moreover, after the reform, streamlined participants’ portfolios held significantly less equity and exhibited significantly lower risks by way of reduced exposures to most systematic risk factors, compared with their non-streamlined counterparts.

In this paper, I suggest a novel explanation for a hump-shaped age-consumption profile, based on human aging. The model integrates health in the utility function and utilizes recent estimates of the effects of health on the marginal utility of consumption. The parsimonious model has a closed-form solution for the age of peak consumption and the consumption level at that age relative to initial consumption. A calibration of the model with data from gerontology produces an empirically plausible hump in consumption.

Retirement flexibility is often seen as a hedge against macroeconomic risks such as capital market risks, which justifies more risky asset portfolios. This paper analyses the robustness of this claim in both a partial equilibrium and general equilibrium setting. We show that this positive relationship between risk taking and retirement flexibility is weakened and under some conditions even turned around if not only capital market risks, but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk.

To improve the design of the pay-out phase of DC plans, this paper proposes a new approach to structure pension products: the Personal Pension with Risk sharing (PPR). By unbundling and valuing the investment, (dis)saving, insurance and risk-sharing functions of pensions, PPRs allow risk management and (dis)saving to be customized to the specific features of heterogeneous individuals. Unlike variable annuities, PPRs allow investment risks to be combined with longevity insurance without giving rise to high year-on-year volatility in consumption streams or opaque and rigid valuation and smoothing rules. The synthesis of a PPR structure provides new opportunities for product innovation and for the comparison of retirement products.

This paper studies how hyperbolic discounting affects stock market participation, asset allocation, and saving decisions over the life cycle in an economy with Epstein–Zin preferences. Hyperbolic discounting affects saving and portfolio decisions through at least two channels: (1) it lowers desired saving, which decreases financial wealth relative to future earnings; and (2) it lowers the incentive to pay a fixed cost to enter the stock market. We find that hyperbolic discounters accumulate less wealth relative to their geometric counterparts and that they participate in the stock market at a later age. Because they have lower levels of financial wealth relative to future earnings, hyperbolic discounters who do participate in the stock market tend to hold a higher share of equities, particularly in the retirement years. We find that increasing the elasticity of intertemporal substitution, holding risk aversion constant, greatly magnifies the impact of hyperbolic discounting on all of the model's decision rules and simulated levels of participation, allocation, and wealth. Finally, we introduce endogenous financial knowledge accumulation and find that hyperbolic discounting leads to lower financial literacy and inefficient stock market investment.

We study the impact of capital and labor taxation in an economy where couples bargain over the intrahousehold allocation under limited commitment. In this framework more wealth improves commitment and gives rise to insurance gains within the household. Our theory motivates these gains by the empirical observation that wealth, in contrast to labor income, is a commonly held resource within households. Based on this observation we study whether eliminating capital taxes from the economy, and raising labor taxes to balance the government’s budget, may generate welfare gains to married households. We illustrate that the quantitative effects from this reform are rather small. We attribute the small effects to the life cycle pattern of wealth accumulation and to the impact of labor income taxes on household risk sharing: In particular, we show that higher labor taxes may make the limited commitment friction more severe, even though they may make the distribution of labor income more equitable within the household.