IDEAS home Printed from https://ideas.repec.org/p/crr/crrwps/wp2008-19.html
   My bibliography  Save this paper

Risky Pensions and Household Saving Over the Life Cycle

Author

Listed:
  • David A. Love
  • Paul A. Smith

Abstract

Recent defined benefit (DB) pension freezes in large healthy firms such as Verizon and IBM, as well as terminations of plans in the struggling steel and airline industries, highlight the fact that these traditional pensions cannot be viewed as risk-free promises from the employee's perspective. In this paper we develop an empirical dynamic programming framework to investigate household saving decisions in a model economy with risky DB pensions. The model incorporates important sources of uncertainty facing households, including asset returns, employment, income, and mortality, as well as pension freezes. Applying a compensating variation measure of welfare, we find that pension freezes reduce welfare by a maximum of about $6,000 for individuals with a high school degree and about $2,000 for individuals with a college degree.

Suggested Citation

  • David A. Love & Paul A. Smith, 2008. "Risky Pensions and Household Saving Over the Life Cycle," Working Papers, Center for Retirement Research at Boston College wp2008-19, Center for Retirement Research, revised Dec 2008.
    • Handle: RePEc:crr:crrwps:wp2008-19
    as

    Download full text from publisher

    File URL: http://crr.bc.edu/working-papers/risky-pensions-and-household-saving-over-the-life-cycle/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Love, David, 2006. "Buffer stock saving in retirement accounts," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1473-1492, October.
    2. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
    3. Jeremy I. Bulow, 1982. "What are Corporate Pension Liabilities?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(3), pages 435-452.
    4. Michael G. Palumbo, 1999. "Uncertain Medical Expenses and Precautionary Saving Near the End of the Life Cycle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(2), pages 395-421.
    5. Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(2), pages 275-298.
    6. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    7. Mariacristina De Nardi & Eric French & John Bailey Jones, 2005. "Differential mortality, uncertain medical expenses, and the saving of elderly singles," Working Paper Series WP-05-13, Federal Reserve Bank of Chicago.
    8. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
    9. Jeffrey R. Brown & James M. Poterba, 1999. "Joint Life Annuities and Annuity Demand by Married Couples," NBER Working Papers 7199, National Bureau of Economic Research, Inc.
    10. Hugo Benítez-Silva, 2003. "The Annuity Puzzle Revisited," Working Papers wp055, University of Michigan, Michigan Retirement Research Center.
    11. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. David Laibson & Andrea Repetto & Jeremy Tobacman, 2005. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Levine's Bibliography 784828000000000643, UCLA Department of Economics.
    2. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series 2009-14, Board of Governors of the Federal Reserve System (U.S.).
    3. Pang, Gaobo & Warshawsky, Mark, 2010. "Optimizing the equity-bond-annuity portfolio in retirement: The impact of uncertain health expenses," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 198-209, February.
    4. Love, David & Phelan, Gregory, 2015. "Hyperbolic discounting and life-cycle portfolio choice," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(4), pages 492-524, October.
    5. Groneck, Max & Ludwig, Alexander & Zimper, Alexander, 2016. "A life-cycle model with ambiguous survival beliefs," Journal of Economic Theory, Elsevier, vol. 162(C), pages 137-180.
    6. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    7. Love, David, 2006. "Buffer stock saving in retirement accounts," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1473-1492, October.
    8. Hans Fehr & Fabian Kindermann, 2010. "Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes," CESifo Economic Studies, CESifo, vol. 56(3), pages 404-443, September.
    9. Love, David A. & Palumbo, Michael G. & Smith, Paul A., 2009. "The trajectory of wealth in retirement," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 191-208, February.
    10. Thomas Post & Helmut Gründl & Hato Schmeiser, 2006. "Portfolio management and retirement: what is the best arrangement for a family?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 20(3), pages 265-285, September.
    11. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
    12. Carroll Christopher Dixon, 2001. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-38, April.
    13. Blake, David & Cairns, Andrew & Dowd, Kevin, 2008. "Turning pension plans into pension planes: What investment strategy designers of defined contribution pension plans can learn from commercial aircraft designers," MPRA Paper 33749, University Library of Munich, Germany.
    14. Jessica A. Wachter & Motohiro Yogo, 2010. "Why Do Household Portfolio Shares Rise in Wealth?," The Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 3929-3965, November.
    15. Alessandro Bucciol, 2007. "Life-Cycle Models, Economic Puzzles and Temptation Preferences," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(1), pages 115-144, March.
    16. David A. Love, 2010. "The Effects of Marital Status and Children on Savings and Portfolio Choice," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 385-432, January.
    17. Mann, Katja & Davenport, Margaret, 2016. "Demography, Capital Flows and Asset Allocation over the Life-cycle," VfS Annual Conference 2016 (Augsburg): Demographic Change 145948, Verein für Socialpolitik / German Economic Association.
    18. Marco Cagetti, 2001. "Interest Elasticity in a Life-Cycle Model with Precautionary Savings," American Economic Review, American Economic Association, vol. 91(2), pages 418-421, May.
    19. Andersen, Torben M & Bhattacharya, Joydeep & Grodecka-Messi, Anna & Mann, Katja, 2022. "Pension reform and wealth inequality: evidence from Denmark," CEPR Discussion Papers 17078, C.E.P.R. Discussion Papers.
    20. Hans Fehr & Fabian Kindermann, 2010. "Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes," CESifo Economic Studies, CESifo Group, vol. 56(3), pages 404-443, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:crr:crrwps:wp2008-19. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Grzybowski or Christopher F Baum (email available below). General contact details of provider: https://edirc.repec.org/data/crrbcus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.