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Did Retirees Save Enough to Compensate for the Increase in Individual Risk Exposure?

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  • Christian E. Weller

Abstract

The United States experienced an unprecedented financial crisis after 2007. This paper analyzes if retirees had enough wealth built up to weather the financial risks that materialized in the crisis. Financial risks associated with saving for retirement had increasingly shifted onto individuals away from the public and employers during the decades before the crisis. This growing personal responsibility should have gone along with more saving and less risk taking.�This Working Paper uses data from the Federal Reserve’s triennial Survey of Consumer Finances to first define an income threshold for retirees, specifically whether annuity income is greater than twice the poverty line – a common proxy for basic income needs. Weller then calculates the potential retirement income that retirees could expect if they translated all of their wealth into income and if the income is adjusted for market, idiosyncratic, and longevity risks. He compares the potential risk-adjusted income for retirees with annuity income above twice the poverty line to those retirees with annuity income below twice the poverty line. Both groups of retirees should have at least the same level of risk-adjusted potential retirement income. This comparison shows, however, that retirees with annuity income below twice the poverty line did not build up sufficient wealth to compensate for the rising financial risk exposure. Public policy thus should maintain existing sources of annuity income, promote greater annuitization of financial wealth, and encourage additional savings. �

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Bibliographic Info

Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp206.

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Date of creation: 2009
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Handle: RePEc:uma:periwp:wp206

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Keywords: Retirement income adequacy; personal saving; financial risks;

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  1. Leslie E. Papke, 1999. "Are 401(k) Plans Replacing Other Employer-Provided Pensions? Evidence from Panel Data," Journal of Human Resources, University of Wisconsin Press, vol. 34(2), pages 346-368.
  2. David A. Love & Paul A. Smith & Lucy C. McNair, 2007. "Do households have enough wealth for retirement?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2007-17, Board of Governors of the Federal Reserve System (U.S.).
  3. Christopher D. Carroll & Andrew A. Samwick, 1995. "How Important is Precautionary Saving?," NBER Working Papers 5194, National Bureau of Economic Research, Inc.
  4. repec:crr:issbrf:ib2006-44 is not listed on IDEAS
  5. Alan L. Gustman & Thomas L. Steinmeier, 1998. "Effects of Pensions on Saving: Analysis with Data from the Health and Retirement Study," NBER Working Papers 6681, National Bureau of Economic Research, Inc.
  6. James Poterba & Joshua Rauh & Steven Venti & David Wise, 2006. "Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth," NBER Working Papers 12597, National Bureau of Economic Research, Inc.
  7. Hurd, Michael & Panis, Constantijn, 2006. "The choice to cash out pension rights at job change or retirement," Journal of Public Economics, Elsevier, vol. 90(12), pages 2213-2227, December.
  8. Eric M. Engen & William G. Gale, 2000. "The Effects of 401(k) Plans on Household Wealth: Differences Across Earnings Groups," NBER Working Papers 8032, National Bureau of Economic Research, Inc.
  9. Shlomo Benartzi & Richard Thaler, 2007. "Heuristics and Biases in Retirement Savings Behavior," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 81-104, Summer.
  10. David A. Love & Paul A. Smith & Lucy C. McNair, 2008. "A new look at the wealth adequacy of older U.S. households," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2008-20, Board of Governors of the Federal Reserve System (U.S.).
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  12. Gur Huberman & Wei Jiang, 2006. "Offering versus Choice in 401(k) Plans: Equity Exposure and Number of Funds," Journal of Finance, American Finance Association, American Finance Association, vol. 61(2), pages 763-801, 04.
  13. James Poterba & Steven Venti & David A. Wise, 2007. "The Changing Landscape of Pensions in the United States," NBER Working Papers 13381, National Bureau of Economic Research, Inc.
  14. Barbara A. Butrica & Dan Murphy & Sheila R. Zedlewski, 2007. "How Many Struggle to Get By in Retirement?," Working Papers, Center for Retirement Research at Boston College wp2007-27, Center for Retirement Research, revised 2007.
  15. Thesia I. Garner & Randal Verbrugge, 2007. "Puzzling Divergence of U.S. Rents and User Costs, 1980-2004: Summary and Extensions," Working Papers, U.S. Bureau of Labor Statistics 409, U.S. Bureau of Labor Statistics.
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