Supplemental Retirement Savings Plans in the Public Sector: Participation and Contribution Decisions by School Personnel

Virtually all full-time state and local government employees are covered by a retirement plan, typically a defined benefit plan, in which they are required to participate. In addition, most school employees have the option of choosing to contribute to a voluntary retirement savings plan offered by their school district. Relative to private sector workers, public employees face an expanded choice of retirement savings plans. Federal tax policies allow state and local governments the opportunity to offer both 401(k) plans and 457 plans to their employees. In addition to these plans, public schools and certain other organizations can offer 403(b) plans to their employees. This paper examines the decision to participate in a voluntary savings plan and the level of contributions for those that enroll in at least one of the plans. The analysis begins by describing the savings options available to public school employees and how these plans differ. The findings indicate that the same economic and demographic factors that influence saving decisions by private workers also drive the decisions of school employees. The three savings plans offered to public employees have many similar characteristics; however, several differences in the plans imply that certain workers may prefer one plan type over the others. Probit and Tobit models of participation in any plan and total annual contributions are estimated. Finally, we estimate the determinants of the decision to choose any one or a combination of savings plans.     

INFORMING RETIREMENT SAVINGS DECISIONS: A FIELD EXPERIMENT ON SUPPLEMENTAL PLANS

Although supplemental saving plans can be an important part of an individual's financial security in retirement, contribution rates remain low, particularly among those with lower salaries and less education. We report findings from an intervention that provided information on key aspects of the employer‐provided supplemental saving plans to older public employees in North Carolina. Among workers participating in a supplemental plan, individuals who received an informational flyer increased their contributions in the months following the intervention relative to the control group. In contrast, individuals who were not enrolled in a retirement saving plan were not moved to begin contributing to a supplemental plan. The results suggest that informational interventions can induce workers who are already engaged in the saving process to reassess their level of retirement preparedness. (JEL C93, D14, D9)     

Social and Psychological Barriers to Private Retirement Savings in Hong Kong

Using a phone survey conducted among Hong Kong workers, we examined the association of institutional, social, and psychological factors with engagement in both private retirement savings and the total amount of savings. Alarmingly, this study demonstrates that approximately 42% of Hong Kong workers do not save privately for their retirement. We found that age, education, number of children, support from spouse and friends, social regulation, perceived financial knowledge, and financial management capacity are associated with engagement in private retirement savings. Among those who saved, age, education, perceived financial knowledge, and financial management capacity are related to the amount of savings. Measures that could increase the social support for retirement savings as well as enhance their financial knowledge and management ability should be developed and implemented so that more workers engage in private retirement savings. A promising policy option for the Hong Kong government is to offer a tax incentive to promote additional savings for old-age income protection.     

Overcoming Inertia: Do Automated Saving and Investing Strategies Work?

Many workers do not take advantage of savings opportunities provided to them at their workplace, nor do they always make wise investment decisions regarding employer plans. Various automated strategies have been implemented by employers with the objective of increasing retirement plan participation and, hence, the financial security of workers. Automatic strategies work by proactively arranging some type of action (e.g., plan enrollment) to occur unless people specifically opt out. This article examines and synthesizes previous empirical research about five automatic savings and investing strategies: (a) automatic retirement savings plan enrollment, (b) automatic contribution increases, (c) automatic portfolio rebalancing, (d) automatic rollovers, and (e) automatic investment plans. Advantages and disadvantages of each strategy are discussed, along with implications for financial educators.     

THE ROLE OF INFORMATION ON RETIREMENT PLANNING: EVIDENCE FROM A FIELD STUDY

Many households neglect the pivotal task of planning for retirement. Proposals to stimulate employees to save for retirement in the workplace include tax subsidies, which are costly, and using automatic defaults, which may not complement the heterogeneous preferences of savers. This randomized field study shows that an information‐based intervention increases reported retirement plan participation, emergency savings, and using a budget. Employees offered access to education increased actual retirement deferrals by $26 per month. These results suggest that retirement education programs may be an effective strategy to increase retirement planning and saving behavior. (JEL J26, D14, D91)     

The impact of collectivism on savings behavior: a case study of Mexican-Americans and non-Mexican Latinos

This interdisciplinary study combines anthropological and economic theories and methods to understand how Mexican-Americans’ collectivist cultural values affect their savings behavior and their preparation for retirement. Mexican-Americans are the fastest growing immigrant group in the United States and they are both younger and expected to live longer than other groups. Yet they are the most insecure in relation to funding retirement. Even when Mexican-American workers are eligible to participate in retirement savings plans at work, they have low participation rates. We analyze data from a Chicago area survey in light of broader anthropological and economic scholarship to argue that Mexican-Americans’ collectivist values influence the choices they make about how to build assets and resources differently from other Latino groups. Latinos are a diverse group by national origin, citizenship and immigration status, characteristics that strongly influence their employment prospects, asset building and retirement savings and security. Financial policy makers need to understand the heterogeneity of financial behavior within the Hispanic community. The collectivist informal economy of Mexican immigrants and their children is at odds with the formal defined contribution retirement savings system, which is geared toward both autonomous individuals and higher-income workers who benefit from the program’s tax deductions. Since these plans penalize participants who withdraw funds before retirement age, they can be deleterious to those who expect both to loan funds to and to borrow money from members of their collectivist social networks.     

The 1999 Small Employer Retirement Survey: building a better mousetrap is not enough

As of 1995, there were 5.3 million small-employer firms (100 or fewer employees) in the United States. These small firms employed 38.0 million individuals, representing 38 percent of all employment. Therefore, low retirement plan coverage among small employers directly affects a sizeable fraction of the national work force. There are a number of reasons why more small employers do not offer retirement plans. Cost and administration-related issues do matter, but for many small employers these take a back seat to other issues. For some, the main driver is the financial reality of running a small business: Their revenue is too uncertain to commit to a plan. For others, the most important reasons for not sponsoring a plan are employee-related, e.g., the workers do not consider retirement savings to be a priority, or the employer's work force has such high turnover that it does not make sense to sponsor a plan. Many nonsponsors are unfamiliar with the different retirement plan types available to them as potential plan sponsors, especially the options created specifically for small employers. For example, most nonsponsors said they have never heard of (36 percent) or are not too familiar with (20 percent) SIMPLE plans for small businesses. Fifteen percent of small employers report that they are very likely to start a plan in the next two years, while 24 percent say this is somewhat likely. Nonsponsors report that the two items most likely to lead to serious consideration of sponsoring a plan are an increase in profits (69 percent) and business tax credits for starting a retirement plan (67 percent). Major drivers of low retirement plan sponsorship among small employers are who they employ and the uncertainty of revenue flows. While issues of administrative cost and burden matter, they are only part of the puzzle. Therefore, the solution is not simply "build it and they will come," by creating simpler and simpler retirement plans geared to small businesses. Rather, it is build it and they will come once the business reaches a certain level of profitability and stability, and once retirement planning and saving are more of a priority for the small employer's workers.     

Social Security Reform Ideas in Japan

Abstract

Japan has a complex social security system. This article discusses the demographic and economic situation in Japan as background for understanding the setting in which the social security system functions. Japan has a three-pillar system for retirement income. The first pillar is the social security pension plan; the second pillar is the voluntary occupational pension plan; and the third pillar is personal savings, including the personal pension plan. The most important part of the retirement income system is the social security pension plan, which paid benefits accounting for 64% of the total income of elderly households in 1998. The five Employees' Pension Plans are established on a compulsory social insurance basis. Most large Japanese employers have a mandatory retirement age. Over 90% of all employees, including public sector ones, must retire from their career jobs at age 60.     

Voluntary Retirement Savings: The Case of Australia

The shift to defined contribution plans has increased concerns about retirement adequacy for the working population. Different from prior research in countries where retirement savings are voluntary, this study explored the drivers of additional savings within the Australian superannuation system where mandatory savings are in place. Results suggested that age, economic and financial status, and job characteristics are important indicators for voluntary superannuation savings. Affordability, false beliefs, and lack of awareness about retirement savings inhibit participation. Past saving habits and retirement planning positively affect voluntary retirement savings. Joint modelling of pre- and post-tax savings decisions suggested a substitution effect between the two, adding new evidence to the literature.     

Individual Pension Plans in Spain: How Expected Change in Future Income and Liquidity Constraints Shape the Behavior of Households

Understanding the motives that underlie Spaniards’ retirement saving decisions is important because many, if not most, future retirees will need to rely on personal savings to maintain a decent standard of living. The governor of the Bank of Spain has stated recently that the current public pension system will not guarantee an adequate pension to the citizens, advising to save now for retirement. In this debate on public pensions, and the complementary role that private pensions might play in Spain, this article has shed light on the decision of Spanish households to engage in individual pension plans and it has identified which factors determine the total amount saved in such retirement plans. Using micro data from the Bank of Spain (Survey of Household Finances 2011), the analysis has revealed that the expectations of lower future income, along with preferences for the financial risk and education, exert an important influence on the likelihood of enrolling in a private pension plan. University education minimizes the myopic behavior of households in the sense of making them more forward-looking and cautious in the face of their future well-being. Additionally using Heckman’s methodology to correct for the problem of selection bias, our results have revealed that liquidity constraints affect negatively the total amount of money saved for retirement.     

Financing Children's Futures: Economic Strategies for Postsecondary Education Among Middle‐Income Families

This paper, based on three waves of qualitative data with middle‐income families outside of Philadelphia, explores how families deal with the challenge of financing postsecondary education over time. Because of economic setbacks, these families adopt a variety of financial maneuvers to support their young adult children's postsecondary educational plans. In particular, families are driven to sacrifice familial savings accounts and retirement funds, take on significant student loan burdens, and downgrade children's college plans to cheaper, often less prestigious, options. These results highlight the financial vulnerability of families in the middle of the income distribution and the complicated relationship between family economics and postsecondary educational plans for children.     

EMPLOYEE FINANCIAL LITERACY AND RETIREMENT PLAN BEHAVIOR: A CASE STUDY

This article uses administrative data on all active employees of the Federal Reserve (FR) System to examine participation in and contributions to the Thrift Saving Plan, the System's defined contribution (DC) plan. We link to administrative records a unique employee survey of economic/demographic factors including a set of financial literacy questions. Not surprisingly, FR employees are substantially more financially literate than the population at large. Most importantly, financially savvy employees are also most likely to participate in their DC plan. Sophisticated workers contribute three percentage points more of their earnings to the DC plan than do the less knowledgeable, and they hold more equity in their pension accounts. We examine changes in employee plan behavior 1 year after employees completed a Learning Module about retirement planning, and we compare it to baseline patterns. We find that those employees who completed the Learning Module were more likely to start contributing and less likely to have stopped contributing to the DC plan postsurvey. In sum, employer‐provided learning programs are shown to significantly impact employee retirement saving decisions and consistent with a lot of other research, higher levels of financial literacy are found to have a beneficial impact on retirement saving patterns. (JEL J3, H7)     

I Do … Want to Save: Marriage and Retirement Savings in Young Households

Increased policy and academic attention has been placed on promoting retirement savings early in the life course. This study investigates the extent to which retirement savings behavior among young persons, a population for which retirement savings is important but typically low, differs by marital status. We draw national survey data on young adult households (ages 22–35; N = 3,894) from the U.S. Federal Reserve Board's Survey of Consumer Finances (SCF). Results reveal considerable differences by marital status. Controlling for important characteristics, young adults who were married were more likely than all other groups (including cohabitors) to perceive retirement as an important savings goal and to have an individual retirement account. Married persons were more likely than their single counterparts to participate in a defined contribution pension plan. Single women fared particularly poorly on retirement savings outcomes. A range of possible theoretical links between marriage and retirement savings at young adulthood are discussed.     

The Effects of Vesting and Locking in Pension Assets on Participation in Employer-Sponsored Pension Plans

This study assesses whether pension vesting and lock-in regulations affect participation in employer-sponsored pension plans. Specifically, the effects of Canadian reforms enacted during the 1980s and 1990s are investigated, which reduced vesting and lock-in requirements from employees being at least 45 years old and having ten years of continuous plan membership to two years of membership irrespective of age. To credibly identify these effects, the analysis exploits inter-provincial variation in the timing of the pension reforms using a difference-in-differences approach. The results show that employees aged 25–54 responded positively to the added protection of their pension wealth by increasing plan participation, despite the general trend of declining occupational pension coverage during this time. However, these changes also crowded out contributions to other retirement savings accounts. The implications of these findings for the optimal design of private pension systems are discussed.     

Employees'' understanding of employer-sponsored retirement plans, a knowledge gap perspective

The retirement benefit community is currently undergoing a paradigm shift as many organizations cast aside traditional defined benefit plans in favor of defined contribution plans. In other words, instead of employers providing defined benefit plans that are risk free to employees, many organizations have decided to offer defined contribution plans in which employees are responsible for both contributing to the plan and making the investment decisions required therein.As employees are required to make decisions that will ultimately determine their financial security during retirement, it is crucial that employers develop materials that will equip all employees with knowledge about retirement-related issues. Therefore, this study examined the range of knowledge about retirement-related issues that exists among various employee groups within a particular organization. Results showed that education serves as a strong predictor in determining employees' knowledge about retirement-related concepts. Based on the study's findings, implications for future research regarding the development of materials designed to educate employees about employer-sponsored retirement plans are discussed.     

Retirement Confidence Survey 2000 including results from the RCS Minority Survey and the Small Employer Retirement Survey

The year 2000 represents the 10th anniversary of the Retirement Confidence Survey (RCS), and the third year for the Minority RCS and Small Employer Retirement Survey (SERS). Key RCS findings over the past 10 years include: The fraction of workers saving for retirement has trended upward, and today 80 percent of households report that they have begun to save. The fraction of workers who have attempted to calculate how much they need to save for retirement has risen noticeably over the past several years. Today, 56 percent of households report that they have attempted the calculation. One-half of workers who have attempted such a calculation report that it has changed their behavior, such as saving more and/or changing where they invest their retirement savings. Workers who have done the calculation appear to be in better shape regarding their retirement finances. Worker confidence in the ability of Social Security to maintain benefit levels bottomed out in 1994 and 1995. Workers today are just as confident as they were in 1992, although the majority remain not confident in Social Security. Regarding overall retirement confidence, Hispanic-Americans tend to be the least confident among the surveyed minority groups that they will have enough money to live comfortably throughout their retirement years. Key SERS findings include: While cost and administrative issues do matter to small employers, they are not the primary reasons for low plan sponsorship rates. Employee-related reasons are most often cited as the most important factor for not offering a retirement plan. Business-related reasons, such as profitability, are also a main decision-driver. It is important to note what small employers without plans do not know about plan sponsorship. Small employers that do sponsor a retirement plan report that offering a plan has a positive impact on both their ability to attract and retain quality employees and the attitude and performance of their employees. The survey results indicate that many small company nonsponsors may not be aware of such potential business benefits from plan sponsorship. In addition, many nonsponsors are unaware of the plan options available to them, in particular the ones created specifically for small employers, such as SIMPLE and SEP retirement plans. Therefore, some small employers may be making a premature decision not to sponsor a plan based on incomplete information.     

Return Chasing as a Driver in Individual Retirement Savings Investment Choices: Evidence from Australia

Australia’s retirement savings regime requires employers to make contributions to a superannuation fund for their employees. Workers who may have no experience of investment are asked to make relatively complex decisions, which have significant implications for their retirement lifestyle. Evidence suggests individuals may be unduly influenced by recent historical returns when making investment choices. Such a bias may produce sub-optimal results over the longer-term. This paper uses a large database from four not-for-profit retirement savings funds to investigate members’ investment choices using logistic regression and multi-variate tests. We find evidence that choices are driven by recent historical returns. We also investigate demographics and find a link between age and return chasing behaviour.     

Social security reform ideas in Japan

Japan has a complex social security system. This article discusses the demographic and economic situation in Japan as background for understanding the setting in which the social security system functions. Japan has a three-pillar system for retirement income. The first pillar is the social security pension plan; the second pillar is the voluntary occupational pension plan; and the third pillar is personal savings, including the personal pension plan. The most important part of the retirement income system is the social security pension plan, which paid benefits accounting for 64% of the total income of elderly households in 1998. The five Employees' Pension Plans are established on a compulsory social insurance basis. Most large Japanese employers have a mandatory retirement age. Over 90% of all employees, including public sector ones, must retire from their career jobs at age 60.     

Differences in the Likelihood of Ownership of Retirement Saving Assets by the Foreign and Native-Born

This research compares the determinants of retirement savings asset ownership between the native-born and immigrants. Analysis of Survey of Income and Program Participation data indicate there do not appear to be differences in the likelihood of ownership between European or Asian immigrants and the native-born, but there are differences between Latin American immigrants and the native-born in retirement savings asset utilization. Distributional effects related to ethnic identity, income, and education appear to compound these differences. While factors indicating greater acculturation increase the likelihood of ownership for all immigrant groups, there are substantial differences in the way these variables affect ownership. General savings asset ownership is more affected by immigration, while retirement savings is more sensitive to acculturation and ethnic identity.     

Women’s Household Preparation for Retirement at Young and Mid-Adulthood: Differences by Children and Marital Status

There are increasing concerns about whether Americans are saving enough for retirement. Recent research has called for improved understanding of the relationship between family structure and economic preparation for retirement at earlier stages of the life course. Using multiple years of the Federal Reserve Board’s Survey of Consumer Finances, we examined how number of children and marital status were associated with women’s household retirement savings at young and mid-adulthood. Several household-level indicators of retirement preparation were considered: desire to save for retirement, retirement account ownership, eligibility to participate in a defined-contribution plan, participation in defined-contribution plans, and retirement account wealth. Results from regression analyses revealed variation in women’s household financial preparation for retirement at young and mid-adulthood by family context. Additional children were negatively associated with several measures of retirement preparation among single-female households but not for couple households. Overall, we found that low economic preparation for retirement is an additional economic disadvantage facing single mothers at young and mid-adulthood, with potentially long-term implications for their financial security. The results shed light on linkages between family structure and women’s economic status.