Joshua Rauh is the Ormond Family Professor of Finance at Stanford University, and Senior Fellow at the Hoover Institute and the Stanford Institute for Economic Policy Research. He previously served as principal chief economist on the President’s Council of Economic Advisers, and taught at the University of Chicago’s Booth School of Business and the Kellogg School of Management.
When the Journal of Pension Economics and Finance launched in March 2002, its editors envisioned it as “a forum for developing ideas and solutions to pension challenges.” The inaugural issue showcased four foundational papers: Smetters’ (2002) analysis of controlling minimum benefit guarantees in public pensions; James’ (2002) exploration of old-age security in China; Baxter’s (2002) analysis of how Social Security risks vary by demographics; and Bodie and Merton’s (2002) innovative proposal on international pension swaps. Two decades later, the themes explored in the JPEF’s 20th Anniversary Special Issue demonstrate both the evolution of the field and its enduring challenges.
Addressing Financial Challenges in Social Security Systems
One of the most pressing topics in pension economics then and now continues to be the sustainability of old-age social security systems. Declining birthrates and increasing longevity have placed immense financial strain on these programs. Coile et al. (2024) document how labor force participation rates among older men around the world dropped sharply in the late 20th century, while the participation of older women failed to match the gains seen among younger women. This research, rooted in methodologies such as Stock and Wise’s (1990) option value framework and Coile and Gruber’s (2007) peak value model, underscores the role of incentives in promoting delayed retirement—a critical policy tool for addressing funding gaps.
In the United States, the urgency of reform is heightened by the impending depletion of the Social Security Trust Fund, expected within a decade. Slavov’s (2024) paper explores how incentives to delay claiming Social Security benefits have strengthened over time, driven by factors such as increased delayed retirement credits, rising longevity, and declining real interest rates. Slavov also contextualizes Social Security as a financial asset with embedded options, enriching our understanding of its wealth distribution effects and adequacy as a retirement income program.
Evolving Retirement Income Choices
The low uptake of annuities in defined contribution plans remains a puzzle. Rational models, such as Yaari’s (1965) lifecycle framework, suggest that consumers without a bequest motive should prefer annuitized income. Yet barriers such as behavioral biases, framing effects, and inertia, identified by Benartzi, Previtero, and Thaler (2011), continue to deter annuitization.
Brown et al. (2024) examine trends among TIAA participants and find annuitization has declined even more in recent decades. They document a shift away from life annuities towards maintaining balances and taking required minimum distribution (RMD) payments. This shift raises critical questions about the adequacy of RMDs as a substitute for annuities, particularly given their lack of longevity insurance.
The Impact of Early Pension Withdrawals
The COVID-19 pandemic introduced new dynamics in pension systems, as many governments allowed individuals to access retirement savings to alleviate financial distress. Mitchell et al. (2024) study early withdrawals in Chile, where private savings play a larger role than government programs. While some withdrawals addressed immediate needs, many were used for non-retirement purposes, highlighting the need for reforms to balance liquidity and long-term savings adequacy. Similar debates have emerged in the United States, with proposals like Biggs and Rauh’s (2020) suggestion to allow borrowing against Social Security during crises.
Measuring Retirement Income Adequacy
Accurate measurement is essential for assessing retirement income adequacy. Dushi, Trenkamp, Bee, and Mitchell (2024) incorporate administrative data from the IRS and SSA into their adequacy analyses. Their findings reveal higher pension income shares, lower reliance on Social Security, and reduced poverty rates among older Americans compared to estimates based solely on survey data. This improved accuracy is crucial for evaluating policy options and ensuring retirement systems meet the needs of diverse populations.
Rethinking Defined Benefit Plan Funding
Funding challenges for defined benefit (DB) plans remain a contentious issue, and funding ratios often fail to capture long-term sustainability. In light of this, Costrell and McGee (2024) propose a novel approach to enhance DB funding policy. Like Lenney, Lutz, Schule, and Sheiner (2021) they emphasize sustainability over full funding. Yet their framework addresses critiques from researchers such as Lucas (2021) and Rauh (2021) of these earlier models, by integrating low-risk discount rates for liabilities with optimized contribution adjustments. This methodology provides a potential pathway for ensuring fiscal stability without imposing undue burdens on future generations.
Participation and Investment in DC Plans
Two papers in this issue address critical questions about DC plan participation and investment strategies. Beshears et al. (2024) analyze a UK firm with a high default contribution rate of 12%, finding that while many employees opted out, those who remained were better positioned for retirement. The findings suggest that higher default rates can encourage sufficient savings while allowing flexibility for individual preferences. Parker and Sun (2024) investigate the market impact of target date funds (TDFs), which now account for a quarter of all 401(k) assets. By trading counter-cyclically to maintain asset allocation, TDFs have a stabilizing effect on markets. Nevertheless, questions about their cost-effectiveness, risk management, and one-size-fits-all design remain important avenues for future research.
Future Directions in Pension and Retirement Research
As the pension landscape continues to evolve, numerous unresolved issues demand attention. The rise of Environmental, Social, and Governance (ESG) investments poses questions about their financial tradeoffs, particularly given the underfunding in many systems. Additionally, studies of the global shift towards hybrid pension models, such as the Netherlands’ collective defined contribution model, could offer valuable lessons for balancing sustainability and security.
Governance also remains a critical area of focus. Studies show that pension board composition significantly influences investment performance and funding outcomes (Mitchell and Hsin (1999), Andonov, Hochberg, and Rauh (2018). Ensuring boards have the expertise and independence needed to optimize decision-making is essential for the long-term health of pension systems. Strides in Artificial Intelligence (AI) present both opportunities and challenges for improving pension and retirement outcomes.
With many entitlement programs facing financial distress, developing robust funding frameworks that balance sustainability with equity is as imperative as ever. As the research in the special issue demonstrates, innovative approaches will be key to addressing the complex challenges of pensions and retirement security in the coming decades.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.
