Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment
Dmitry Taubinsky and Alex Rees Jones
BWP2016-01
This paper shows that accounting for variation in mistakes can be crucial for welfare analysis. Focusing on consumer underreaction to not-fully-salient sales taxes, we show theoretically that the efficiency costs of taxation are amplified by 1) individual differences in underreaction and 2) the degree to which attention is increasing with the size of the tax rate. To empirically assess the importance of these issues, we implement an online shopping experiment in which 2,998 consumers–matching the U.S. adult population on key demographics–purchase common household products, facing tax rates that vary in size and salience. We find that: 1) there are significant individual differences in underreaction to taxes. Accounting for this heterogeneity increases the efficiency cost of taxation estimates by at least 200%, as compared to estimates generated from a representative agent model. 2) Tripling existing sales tax rates roughly doubles consumers’ attention to taxes. Our results provide new insights into the mechanisms and determinants of boundedly rational processing of not-fully-salient incentives, and our general approach provides a framework for robust behavioral welfare analysis.
Time Discounting and Economic Decision-making among the Elderly
David Huffman, Raimond Maurer, and Olivia S. Mitchell
BWP2016-02
This research project evaluates the extent of heterogeneity in time discounting among elderly Americans, as well as its role in explaining older peoples’ key behaviors. We first show how older Americans evaluate simple (hypothetical) intertemporal choices in which payments now are compared with payments in the future. This adds to the literature on time horizon experiments by focusing on a nationally representative sample of persons age 70+. Using the indicators derived from this experiment, we show how differences in discounting patterns are associated with characteristics of particular importance in elderly populations, such as serious health and mental conditions. We then relate our discounting measure to key outcome variables including wealth, the timing of retirement, investments in health, and decisions about end of life care.
Does Financial Education Enhance Financial Preparedness? Evidence from a Field Experiment in Singapore
Rashmi Barua, Benedict Koh, and Olivia S. Mitchell
BWP2014-01
We evaluate how financial education provided to college students influenced their financial knowledge and planning in an experimental setting where we control for student motivation to enroll in the course. Using a differences-in-differences strategy, we confirm that financial education improved students’ financial knowledge score by 11%, and financial planning score by 16%. No statistically significant effects are detected for students’ levels of financial prudence or discipline.
Health Expenditure Risk and Annuitization: Evidence from Medigap Coverage
Daniel W. Sacks
BWP2012-01
Theoretical research suggests that health expenditure risk can have an ambiguous influence on the annuitization decisions of the elderly. I provide empirical evidence on this linkage, by estimating the impact of supplemental Medicare insurance (Medigap) coverage on the annuity demand of older Americans. I use local variation in prices as an instrumental variable to address the possible endogeneity of Medigap coverage, an identification strategy motivated by the fact that Medigap policies are not medically underwritten, and Medigap insurance is required by law to be standardized, so prices reflect neither individual characteristics nor product quality. Medigap coverage has a strong impact on annuitization: the extensive margin elasticity is 0.39, the overall elasticity of private annuity income with respect to Medigap coverage is 0.56. These results are robust to controls for health, wealth, and preferences, as well as other robustness tests. They imply that medical expenditure risk has a large impact on underannuitization.
Functional Disabilities and Nursing Home Admittance
Joelle H. Fong, Benedict SK. Koh, and Olivia S. Mitchell
BWP2012-02
This paper examines how inability to perform activities of daily living relates to the risk of nursing home admission over older adults’ life courses. Using longitudinal data on persons over age 50 from the Health and Retirement Study, we show that aging one year boosts the probability of having two or more disabilities by 9 to 12 percent in a multivariate logistic model. Moreover, at least three-fifths of all 65-year-old men and three-quarters of women will experience disability levels during their remaining lifetimes severe enough to trigger nursing home admission. Our analysis also suggests that certain types of disability are more important than others in predicting nursing home admittance and use, which has implications for the design and benefit triggers for long-term care insurance programs.
Identifying Idiosyncratic Career Taste and Skill with Income Risk
Stephen H. Shore, Daniel Barth, and Shane T. Jensen
BWP2012-04
How important to well-being is choosing a career with the right fit? This question is difficult to answer because we observe individuals only in their chosen careers, not in the other (presumably inferior) options they did not choose. To overcome this problem, we use expected utility to cardinalize a logit model of career choice in a setting where we observe the income risk of chosen careers and the risk-aversion of the people who choose them. The key parameter of interest – the importance of idiosyncratic taste and skill in career choice – is identified from the shift in the distribution of income risk with risk aversion. We estimate the model using individual-specific measures of income volatility to proxy for income risk and survey questions about hypothetical income gambles to proxy for risk preference, both from the PSID. We separate idiosyncratic career taste from skill using the pay gap between high and low-income risk people with high and low risk-aversion.
Keywords: occupational choice, career choice, income risk, idiosyncratic taste and skill
Semiparametric Bayesian Modeling of Income Volatility Heterogeneity
Shane T. Jensen and Stephen H. Shore
BWP2012-05
Research on income risk typically treats its proxy–income volatility, the expected magnitude of income changes–as if it were unchanged for an individual over time, the same for everyone at a point in time, or both. In reality, income risk evolves over time, and some people face more of it than others. To model heterogeneity and dynamics in (unobserved) income volatility, we develop a novel semiparametric Bayesian stochastic volatility model. Our Markovian hierarchical Dirichlet process (MHDP) prior augments the recently developed hierarchical Dirichlet process (HDP) prior to accommodate the serial dependence of panel data. We document dynamics and substantial heterogeneity in income volatility.
Keywords: hierarchical Dirichlet process; income volatility; state-space models.
Low Life Expectancy in the United States: Is the Health Care System at Fault?
Samuel H. Preston and Jessica Y. Ho
BWP2010-01
Life expectancy in the United States fares poorly in international comparisons, primarily because of high mortality rates above age 50. Its low ranking is often blamed on a poor performance by the health care system rather than on behavioral or social factors. This paper presents evidence on the relative performance of the US health care system using death avoidance as the sole criterion. We find that, by standards of OECD countries, the US does well in terms of screening for cancer, survival rates from cancer, survival rates after heart attacks and strokes, and medication of individuals with high levels of blood pressure or cholesterol. We consider in greater depth mortality from prostate cancer and breast cancer, diseases for which effective methods of identification and treatment have been developed and where behavioral factors do not play a dominant role. We show that the US has had significantly faster declines in mortality from these two diseases than comparison countries. We conclude that the low longevity ranking of the United States is not likely to be a result of a poorly functioning health care system.
[Keywords: health care, longevity, life expectancy, United States, cancer, disease, mortality, population]
The Impact of Shrouded Fees: Evidence from a Natural Experiment*
Santosh Anagol and Hugh Kim
BWP2010-02
We study a natural experiment in the Indian mutual funds sector that created a 22 month period in which closed-end funds were allowed to charge an arguably shrouded amortized fee whereas open-end funds were forced to charge standard entry loads. We nd that allowing closed-end funds to charge the shrouded type of fee led to a proliferation of closed-end funds in the market; 45 new closed-end funds were started over this 22 month period collecting 9.1 billion $U.S, whereas only two closed-ended funds were started in the 66 months prior to this period collecting .42 billion $U.S., and no closed-ended funds were started in the 20 months after this period. We argue that other theoretical determinants of the closed versus open ended organizational form did not change discretely around the natural experiment and thus are unlikely to explain the sudden emergence and disappearance of closed-end funds. We find closed-end funds did not perform better in terms of raw or risk-adjusted returns. If all the investors in closed-end funds during this period had invested in the lower fee open fund variety instead they would have paid 4.25 percent less in fees over this 22 month period, equal to approximately 500 million dollars in extra fees.
[Keywords: closed-funds, expenses, investors, mutual funds, India, stock market, load]
What Do People Know About Social Security?
Mathew Greenwald, Arie Kapteyn, Olivia S. Mitchell, and Lisa Schneider
WP2010-03
Innumerable studies over the past decade have shown that many people lack the basic knowledge of the Social Security system necessary for making informed decisions about when to retire and claim benefits, a decision which will impact their savings and their overall financial security. Accordingly, the Social Security Administration (SSA) seeks to educate and provide information to individuals to help them better understand their options for claiming benefits, how much they can receive, and the implications for personal retirement and financial planning. To gain benchmark information about how much people know about Social Security and the public’s attitudes toward the system overall, this project undertook two surveys in the Spring of 2010: a random-digit-dial telephone survey and an internet survey using the American Life Panel (ALP). This report summarizes survey results as well as significant differences between population subgroups. We find that, in both surveys, levels of Social Security literacy are low: half of all respondents receive a grade of D or F on a quiz testing knowledge of some basic elements of Social Security. Nevertheless, expectations for Social Security are high, as many believe benefits should provide more than just enough for basic necessities. Despite lackluster confidence in the solvency of Social Security, especially among younger respondents, we find an extremely high level of trust in the SSA and a strong desire for the SSA to provide information not only about how the system works, but also about how to prepare for retirement in general.
Framing Effects and Expected Social Security Claiming Behavior
Jeffrey R. Brown, Arie Kapteyn, and Olivia S. Mitchell
WP2010-04
Eligible participants in the U.S. Social Security system have the ability to claim benefits anytime between ages 62 and 70, with the level of benefit being actuarially adjusted based on the date of claiming. This project shows that individual intentions with regard to Social Security claiming age are sensitive to the manner in which the early versus late claiming decision is framed. Using an experimental design that alters the manner in which the implications of Social Security benefits are framed, we find evidence that the use of a “break-even analysis” has the very strong effect of encouraging individuals to claim early. We show that individuals are more likely to report that they will delay claiming when later claiming is framed as a gain and when the information provides an anchoring point at older, rather than younger, ages. We also provide evidence that females, individuals with credit card debt, and individuals with lower expected benefits are more strongly influenced by framing. The finding that expected claiming decisions can be significantly altered by the framing of information suggests that individuals may not be making fully rational optimizing choices when it comes to choosing a claiming date.
Financial Literacy among the Young: Evidence and Implications for Consumer Policy
Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto
BWP2009-01
We examined financial literacy among the young using data from the 1997 National Longitudinal Survey of Youth. We showed that financial literacy is low among the young; fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy is strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings is about 50 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy. These findings have implications for consumer policy.
The Dynamics of Lifecycle Investing in 401(k) Plans
Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, Takeshi
BWP2008-01
The introduction of lifecycle funds into 401(k) plans offers a rich environment in which to assess workers’ portfolio allocation decisions. Consistent with behavioral models, employer design decisions strongly influence lifecycle adoption behavior while fundamentally altering portfolio characteristics, both in the cross-section and longitudinally. Yet there are also elements of rational choice by new employees, as well as choice constrained by information costs among workers with low literacy characteristics. We conclude that recent legislation encouraging riskier 401(k) portfolios will modify investment patterns, with the rate of change varying according to whether behavioral or rational elements dominate in a given setting.
The More the Better? Characteristics and Efficiency of 401(k) Investment Menus
Tang, Ning
BWP2008-02
Few previous studies have explored whether defined contribution retirement saving plans offer sufficiently diversified investment menus, though it is likely that these menus significantly shape workers’ accumulations of retirement wealth. This paper assesses the efficiency and performance of 401(k) investment options offered by a large group of US employers. We show that the majority of plans is efficient compared to market benchmark indexes. Three performance measures underscore the fact that these plans tend to offer a sensible investment menu, when measured in terms of the menus’ mean-variance efficiency, diversification, and participant utility. The key factor contributing to plan efficiency and performance is the particular set of funds offered, rather than the total number of investment options provided. We conclude that, in 401(k) arena, “more” is not necessarily “better.”
Hidden Regret and Advantageous Selection in Insurance Markets
Huang, Rachel J; Muermann, Alexander; and Tzeng, Larry Y
BWP2008-03
We examine insurance markets in which there are two types of customers: those who regret suboptimal decisions and those who don’t. In this setting, we characterize the equilibria under hidden information about the type of customers and hidden action. We show that both pooling and separating equilibria can exist. Furthermore, there exist separating equilibria that predict a positive correlation between the amount of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the amount of insurance coverage and risk type, i.e. advantageous selection. Since optimal choice of regretful customers depends on foregone alternatives, any equilibrium includes a contract which is not purchased.
For Better, for Worse: Intra-household Risk-sharing over the Business Cycle
Shore, Stephen
BWP2008-04
How do the financial benefits of marriage vary with macroeconomic conditions? One of the major benefits of marriage is the ability to dynamically coordinate labor supply decisions in response to shocks. When one spouse loses a job, the other can work more. This paper argues that dynamic coordination is countercyclical; the innovations to husbands’ and wives’ labor incomes are more positively correlated when the economy is growing rapidly. As a result, while individuals face substantially more idiosyncratic labor income risk in bad times than good, households do not. Improved intra-household coordination in bad times nearly or completely undoes for couples the increased riskiness that comes to individuals. Since panel datasets are typically too short to capture more than a few business cycles, I exploit variation in the cross-sectional covariance of husbands and wives incomes to infer the covariance of past innovations to their incomes. Couples who have been married through periods of greater economic expansion have more positively correlated labor incomes in the cross-section, after controlling for a time trend in assortative mating. This implies that the correlation of couples’ labor incomes falls by roughly 20 percent (e.g., from 10 percent to -10 percent) from booms to busts.
Reforms to an Individual Account Pension System and their Effects on Work and Contribution Decisions: The Case of Chile
Viviana Velez-Grajales
BWP2008-05
This study evaluates the effect of Chile’s pension system rules and regulations on individuals’ contribution and working decisions. In 1980 Chile was the first country to switch from a pay-as-you-go system to a privatized system based on individual investment accounts; then it has since been a model for pension reforms in many other Latin American countries. The Chilean system has also been considered by U.S. policy makers as a possible prototype for reform. This paper develops and estimates a dynamic behavioral model of individual decision-making about formal or informal sector employment and about pension contributions, accounting for regulations that govern the timing and level of pension benefits. Model parameters are obtained by the method of simulated maximum likelihood applied to longitudinal data from a new household survey, the Social Protection Survey (2002 to 2004), and administrative data from the pension regulatory agency. The estimated model is used to simulate the impact on employment and contribution patterns of changing the system rules. Reducing the number of quarters required to obtain the Minimum Pension and increasing the size of that pension increases work in the formal sector and contributions in the informal sector.
How Pension Rules Affect Work and Contribution Patterns: A Behavioral Model of the Chilean Privatized Pension System
Petra Todd and Viviana Vélez-Grajales
BWP2008-06
Chile has been at the forefront of pension reform, having switched in 1980 from a pay-as-you-go system to a fully funded privatized accounts system. The Chilean system served as a model for reform in many other Latin American countries and has also been considered by U.S. policy makers as a possible prototype for social security reform. Some of the criticisms of the Chilean system are low coverage rates and contributions rates among certain segments of the population. In 2006, the Chilean government proposed some reforms aimed at increasing coverage and contribution rates and expanding the safety net provided by the system to poor households. This study evaluates how changes in pension system rules affect working behavior and pension contribution patterns using data from a new Chilean household survey administered in 2002 and 2004 linked with administrative data from the pension regulatory agency. It develops and estimates a dynamic model of decision-making about working in the covered or uncovered sectors of the economy and studies implications for pension accumulations. The estimated model is used to simulate behavior under different pension system rules, such as a change in the number of years of contributions required for the minimum pension or a change in pension plan fees.
A New Method for Attributing Changes in Life Expectancy to Various Causes of Death, with Application to the United States
Hiram Beltran-Sanchez & Samuel Preston
BWP2007-01
This article focuses on decomposition of changes in life expectancy by cause of death. We propose an alternative to Arriaga’s (1984) method for performing such decompositions. We apply our method to changes in life expectancy in the United States between 1970 and 2000 and compare results to those produced using Arriaga’s formulation. The major difference between the approaches pertains to diseases prominent at older ages such as cardiovascular disease. For applications where causes of death are the central focus, our technique appears to have a modest advantage because of its conceptual clarity and attractive byproducts in the form of cause-deleted life tables.
The Marital Process and HIV/AIDS in Rural Malawi
Shelley Clark, Michelle Poulin, Hans-Peter Kohler
BWP2007-02
Using both qualitative and quantitative data from young men and women in rural Malawi, this paper takes an in-depth look at how youths in an AIDS-afflicted sub-Saharan country Malawi attempt to achieve the dual goals of avoiding HIV/AIDS and finding a suitable spouse. For youths in Malawi facing AIDS epidemics, we show that the process leading to marriage, with its concurrent rapid changes in sexual partnerships and sexual behaviors, is integrally related to HIV/AIDS risks. In addition, concerns about HIV/AIDS appear to be influencing adolescents marital aspirations with respect to the timing of marriage as well as the selection of spousal partners. Many youths are clearly failing to find safe pathways into marriage, indicating a strong need for far greater research and policy attention on the dynamic relationship between HIV risks and the marital process.
Divorce-Law Changes, Household Bargaining, and Married Women’s Labor Supply Revisited
Betsey Stevenson
BWP2007-03
Divorce law changes made in the 1970s affected marital formation, dissolution, and bargaining within marriage. By altering the terms of the marital contract these legal changes impacted the incentives for women to enter and remain in the labor force. Whereas earlier work had suggested that the impact of unilateral divorce on female employment depended critically on laws governing property division, I show that these results are not robust to alternative specifications and controls. I find instead that unilateral divorce led to an increase in both married and unmarried female labor force participation, regardless of the underlying property laws.
Marriage and Divorce: Changes and their Driving Forces
Betsey Stevenson & Justin Wolfers
BWP2007-04
We document key facts about marriage and divorce, comparing trends through the past 150 years and outcomes across demographic groups and countries. While divorce rates have risen over the past 150 years, they have been falling for the past quarter century. Marriage rates have also been falling, but more strikingly, the importance of marriage at different points in the life cycle has changed, reflecting rising age at first marriage, rising divorce followed by high remarriage rates, and a combination of increased longevity with a declining age gap between husbands and wives. Cohabitation has also become increasingly important, emerging as a widely used step on the path to marriage. Out-of-wedlock fertility has also risen, consistent with declining “shotgun marriages. Compared with other countries, marriage maintains a central role in American life. We present evidence on some of the driving forces causing these changes in the marriage market: the rise of the birth control pill and women’s control over their own fertility; sharp changes in wage structure, including a rise in inequality and partial closing of the gender wage gap; dramatic changes in home production technologies; and the emergence of the internet as a new matching technology. We note that recent changes in family forms demand a reassessment of theories of the family and argue that consumption complementarities may be an increasingly important component of marriage. Finally, we discuss the welfare implications of these changes.
Hidden Regret and Advantageous Selection in Insurance Markets
Rachel J. Huang, Alexander Muermann, Larry Y. Tzeng
BWP2007-05
We examine insurance markets in which there are two types of customers: those who regret suboptimal decisions and those who don’t. In this setting, we characterize the equilibria under hidden information about the type of customers and hidden action. We show that both pooling and separating equilibria can exist. Furthermore, there exist separating equilibria that predict a positive correlation between the amount of insurance coverage and risk type, as in the standard economic models of adverse selection, but there also exist separating equilibria that predict a negative correlation between the amount of insurance coverage and risk type, i.e. advantageous selection. Since optimal choice of regretful customers depends on foregone alternatives, any equilibrium includes a contract which is not purchased.
What Determines Adult Cognitive Skills? Impacts of Pre-Schooling, Schooling and Post-Schooling Experiences in Guatemala
Jere R. Behrman, John F. Hoddinott, John A. Maluccio, Erica Soler-Hampejsek, Emily L. Behrman, Reynaldo Martorell, Manuel Ramirez-Zea & Aryeh D. Stein
BWP2006-01
Most investigations of the importance of and the determinants of adult cognitive skills assume that (a) they are produced primarily by schooling and (b) schooling is statistically predetermined. But these assumptions may lead to misleading inferences about impacts of schooling and of pre-schooling and post-schooling experiences on adult cognitive skills. This study uses an unusually rich longitudinal data set collected over 35 years in Guatemala to investigate production functions for adult (i) reading-comprehension and (ii) nonverbal cognitive skills as dependent on behaviorally-determined pre-schooling, schooling and postschooling experiences. Major results are: (1) Schooling has significant and substantial impact on adult reading comprehension (but not on adult nonverbal cognitive skills)”but estimates of this impact are biased upwards substantially if there are no controls for behavioral determinants of schooling in the presence of persistent unobserved factors such as genetic endowments and/or if family background factors that appear to be correlated with genetic endowments are included among the first-stage instruments. (2) Both preschooling and post-schooling experiences have substantial significant impacts on one or both of the adult cognitive skill measures that tend to be underestimated if these pre- and post-schooling experiences are treated as statistically predetermined”in contrast to the upward bias for schooling, which suggests that the underlying physical and job-related components of genetic endowments are negatively correlated with those for cognitive skills. (3) The failure in most studies to incorporate pre- and post-schooling experiences in the analysis of adult cognitive skills or outcomes affected by adult cognitive skills is likely to lead to misleading over-emphasis on schooling relative to these pre-and post-schooling experiences. (4) Gender differences in the coefficients of the adult cognitive skills production functions are not significant, suggesting that most of the fairly substantial differences in adult cognitive skills favoring males on average originate from gender differences in schooling attainment and in experience in skilled jobs favoring males. These four sets of findings are of substantial interest in themselves. But they also have important implications for broader literatures, reinforcing the importance of early life investments in disadvantaged children in determining adult skills and options, pointing to limitations in the cross-country growth literature of using schooling of adults to represent human capital, supporting hypotheses about the importance of childhood nutrition and work complexity in explaining the “Flynn effect of substantial increases in measured cognitive skills over time, and questioning the interpretation of studies that report productivity impacts of cognitive skills without controlling for the endogeneity of such skills.
Black-White Differentials in Cause-Specific Mortality in the United States during the 1980s: The Role of Medical Care and Health Behaviors
Irma T. Elo & Greg L. Drevenstedt
BWP2006-02
In this paper, we examine black-white differences in cause-specific mortality during the 1980s when black-white disparities in mortality widened in the United States. We group causes of death to those amenable to medical intervention, those closely linked to health behaviors or residential location, and all other causes combined. At older ages, we treat cardiovascular disease, stroke, and forms of cancer not amenable to medical or behavioral intervention as distinct causes. We conduct separate analyses by gender and age group. Causes of death amenable to medical intervention and those linked to health behaviors and residential location accounted for over 60% of the absolute black-white difference in male and female mortality at ages 25-44, male mortality at ages 45-74, but somewhat less than 50% of the black-white difference in female mortality at these older ages. The relative black excess risk was most pronounced for causes amenable to medical intervention with and without adjustment for sociodemographic characteristics.
The Impact of Nutrition during Early Childhood on Education among Guatemalan Adults
John A. Maluccio, John F. Hoddinott, Jere R. Behrman, Reynaldo Martorell, Agnes R. Quisumbing & Aryeh D. Stein
BWP2006-03
Early childhood nutrition is thought to have important effects on education, broadly defined to include various forms of learning. We advance beyond previous literature on the effect of early childhood nutrition on education in developing countries by using unique longitudinal data begun during a nutritional experiment during early childhood with educational outcomes measured in adulthood. Estimating an intent-to-treat model capturing the effect of exposure to the intervention from birth to 36 months, our results indicate significantly positive, and fairly substantial, effects of the randomized nutrition intervention a quarter century after it ended: increased grade attainment by women (1.2 grades) via increased likelihood of completing primary school and some secondary school; speedier grade progression by women; a one-quarter SD increase in a test of reading comprehension with positive effects found for both women and men; and a one-quarter SD increase on nonverbal cognitive tests scores. There is little evidence of heterogeneous impacts with the exception being that exposure to the intervention had a larger effect on grade attainment and reading comprehension scores for females in wealthier households. The findings are robust to an array of alternative estimators of the standard errors and controls for sample attrition.
Mortality of American Troops in Iraq
Samuel H. Preston & Emily Buzzell
BWP2006-04
Counts of military deaths in Iraq are well publicized, but deaths alone do not indicate the risk for an individual. In order to assess the extent of individual risk, the number of deaths must be compared to the number of individuals exposed to the risk of death. These risks may vary from person to person depending on such factors as one’s branch of service, rank, age, sex, race and ethnicity. In this paper, we construct death rates for members of the military who have been deployed to Iraq. Two excellent and highly consistent websites, one of them maintained by the Department of Defense, provide data on deaths that have been incurred in Operation Iraqi Freedom. Data on the number and characteristics of troops deployed in Iraq (the denominators of death rates) were provided by the Department of Defense on their website, with supplementary tabulations supplied by the Defense Manpower Data Center (2006). [1]. The data permit an examination of how death risks among members of the military deployed to Iraq vary according to certain personal characteristics and aspects of armed service. Some of these differences mimic those in society at large, while others reflect the unique conditions of military service.
- Sex Mortality Differentials in the United States: The Role of Cohort Smoking Patterns
Samuel H. Preston and Haidong Wang
BWP2005-01
This paper demonstrates that, over the period 1948-2003, sex differentials in mortality in the age range 50-54 to 85+ widened and then narrowed on a cohort rather than on a period basis. The cohort with the maximum excess of male mortality was born shortly after the turn of the century. Three independent sources suggest that the turnaround in sex mortality differentials is consistent with sex differences in cigarette smoking by cohort. An age/period/cohort model reveals a highly significant effect of smoking histories on men’s and women’s mortality. This model suggests that improvements in mortality at older ages are likely to accelerate in the future. - Regret, Portfolio Choice, and Guarantees in Defined Contribution Schemes
Alexander Muermann, Olivia S. Mitchell, and Jacqueline M. Volkman
BWP2005-02
We model how asset allocation decisions in a defined contribution (DC) pension plan might vary with participants’ attitudes about risk and regret. We show that anticipated disutility from regret can have a potent effect on investment choices. Compared to a risk-averse investor, the investor who takes regret into account will hold more stock when the equity premium is low but less stock when the equity premium is high. We also assess how regret can influence a DC plan participant’s view of rate-of-return guarantees, as measured by his willingness-to-pay. We find that regret increases the regret-averse investor’s willingness to pay for a guarantee when the portfolio is relatively risky but decreases it when the portfolio is relatively safe.
Crime and Early Retirement Among Older Americans
Dan Silverman and Olivia S. Mitchell
BWP2004-01
This paper investigates the relationship between local crime rates and the retirement decisions of older Americans. We do so by linking data from the Health and Retirement Study with measures of local crime patterns taken from the Federal Bureau of Investigation’s Unified Crime Reports. If we condition on crime rates alone, there is either a weakly positive or no relationship between local crime patterns and older men’s propensity to retire early. But unobservable factors associated with early retirement may be correlated with residence in higher-crime rate cities, so next we condition on both the expectation for the crime rate and deviations from average crime levels. We find a positive and statistically significant association between early retirement and expectations for murder rates, and a positive but, on average, imprecisely estimated positive association between early retirement and unexpected increases in crime. The effect of unanticipated increases in crime is greatest, and significant for those in poor health. In this latter group, men are 14 percent more likely to retire early given a standard deviation increase in unexpected murder rates. These findings are consistent with a pattern of more early retirement among those who live in higher crime areas, and earlier retirement among those in poor health when crime levels rise above anticipated levels.
Death Spiral or Euthanasia? The Demise of Generous Group Health Insurance Coverage
Mark Pauly, Olivia Mitchell, and Peter Zeng
BWP2004-02
Employers must determine which sorts of healthcare insurance plans to offer employees and also set employee premiums for each plan provided. Depending on how they structure the premiums that employees pay across different healthcare insurance plans, plan sponsors alter the incentives to choose one plan over another. If employees know they differ by risk level but premiums do not fully reflect these risk differences, this can give rise to a so-called “death spiral” due to adverse selection. In this paper, we use longitudinal information from a natural experiment in the management of health benefits for a large employer to explore the impact of moving from a fixed dollar contribution policy to a risk-adjusted employer contribution policy. Our results suggest that implementing a significant risk adjustment had no discernable effect on adverse selection against the most generous indemnity insurance policy. This stands in stark contrast to previous studies, which have tended to find large impacts. Further analysis suggests that previous studies which appeared to detect plans in the throes of a death spiral, may instead have been experiencing an inexorable movement away from a non-preferred product, one that would have been inefficient for almost all workers even in the absence of adverse selection.
Modeling Lifetime Earnings Paths: Hypothetical versus Actual Workers
Andrew Au, Olivia S. Mitchell, and John W. R. Phillips
BWP2004-03
To assess the distributional effects of social security reform proposals, it is essential to have good information on real-world workers’ lifetime earnings trajectories. Until recently, however, policymakers have relied on hypothetical earnings profiles for policy analysis. We use actual lifetime earnings data from the Health and Retirement Study (HRS) to compare actual workers’ covered earnings profiles to these hypothetical profiles. We show that the hypothetical profiles do not track earnings patterns of current retirees; thus lifetime pay levels are much higher than for most HRS workers. Therefore, using hypothetical profiles could misrepresent benefits paid and taxes collected under such reforms.
Plan Design and 401(k) Savings Outcomes
James J. Choi, David Laibson, Brigitte C. Madrian
BWP2004-04
We assess the impact of 401(k) plan design on four different 401(k) savings outcomes: participation in the 401(k) plan, the distribution of employee contribution rates, asset allocation, and cash distributions. We show that plan design can have an important effect on all of these savings outcomes. This suggests an important role for both employers in determining how to structure their 401(k) plans and government regulators in creating institutions that encourage or discourage particular aspects of 401(k) plan design.
Employee Stock Purchase Plans
Gary V. Engelhardt and Brigitte C. Madrian
BWP2004-05
Employee stock purchase plans (ESPPs) are designed to promote employee stock ownership broadly within the firm and provide another tax-deferred vehicle for individual capital accumulation in addition to traditional pensions, 401(k)s, and stock options. We outline the individual and corporate tax treatment of ESPPs and the circumstances under which ESPPs will be preferred to cash compensation from a purely tax perspective. We then examine empirically ESPP participation using administrative data from 1997-2001 for a large health services company that employs approximately 30,000 people. The picture that emerges from the analysis of these data suggests that there is substantial non-participation in these plans even though all employees could increase gross compensation through participation. We discuss a number of potential explanations for non-participation.