Assessing Knowledge of Retirement Behavior

Eric A. Hanushek and Nancy L. Maritato, Editors

Panel on Retirement Income Modeling

Committee on National Statistics

Commission on Behavioral and Social Sciences and Education

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.
1996



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Assessing Knowledge of Retirement Behavior Assessing Knowledge of Retirement Behavior Eric A. Hanushek and Nancy L. Maritato, Editors Panel on Retirement Income Modeling Committee on National Statistics Commission on Behavioral and Social Sciences and Education National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1996

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Assessing Knowledge of Retirement Behavior NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competencies and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A. Wulf is interim president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce Alberts and Dr. William A. Wulf are chairman and interim vice chairman, respectively, of the National Research Council. The project that is the subject of this report is supported by funds from the Pension and Welfare Benefits Administration of the U.S. Department of Labor, the National Institute on Aging of the U.S. Department of Health and Human Services, the Pension Benefit Guaranty Corporation, the Social Security Administration, and TIAA-CKEF. Library of Congress Catalog Card Number 96-69361 International Standard Book Number 0-309-05547-4 Additional copies of this report are available from National Academy Press, 2101 Constitution Avenue, N.W., Box 285, Washington. D.C. 20055 Call 800-624-6242 or 202-334-3313 (in Washington Metropolitan Area). Order electronically via Internet at http://www.nap.edu. Copyright 1996 by the National Academy of Sciences. All rights reserved. Printed in the United States of America.

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Assessing Knowledge of Retirement Behavior PANEL ON RETIREMENT INCOME MODELING ERIC A. HANUSHEK (Chair), W. Allen Wallis Institute of Political Economy, University of Rochester HENRY AARON, The Brookings Institution, Washington, D.C. ALAN J. AUERBACH, Department of Economics, University of California, Berkeley CHRISTOPHER BONE, Actuarial Sciences Associates, Somerset, New Jersey PETER DIAMOND, Department of Economics, Massachusetts Institute of Technology MICHAEL HURD, Department of Economics, State University of New York, Stony Brook OLIVIA S. MITCHELL, Department of Insurance and Risk Management, The Wharton School, University of Pennsylvania SAMUEL H. PRESTON, Population Studies Center, University of Pennsylvania JOHN P. RUST, Department of Economics, University of Wisconsin, Madison TIMOTHY M. SMEEDING, Center for Policy Research, Syracuse University JAMES P. SMITH, The RAND Corporation, Santa Monica, California CONSTANCE F. CITRO, Study Director NANCY L. MARITATO, Research Associate CANDICE S. EVANS, Project Assistant

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Assessing Knowledge of Retirement Behavior COMMITTEE ON NATIONAL STATISTICS 1995-1996 NORMAN M. BRADBURN (Chair), National Opinion Research Center, University of Chicago JOHN E. ROLPH (Vice Chair), Department of Information and Operations Management, University of Southern California JULIE DaVANZO, The RAND Corporation, Santa Monica, California WILLIAM EDDY, Department of Statistics, Carnegie Mellon University JOHN F. GEWEKE, Department of Economics, University of Minnesota JOEL B. GREENHOUSE, Department of Statistics, Carnegie Mellon University ERIC A. HANUSHEK, W. Allen Wallis Institute of Political Economy, University of Rochester NICHOLAS JEWELL, School of Public Health, University of California, Berkeley CHARLES MANSKI, Department of Economics, University of Wisconsin, Madison WILLIAM NORDHAUS, Department of Economics, Yale University JANET NORWOOD, The Urban Institute, Washington, D.C. EDWARD B. PERRIN, Department of Health Services, University of Washington KEITH F. RUST, Westat, Inc., Rockville, Maryland FRANCISCO J. SAMANIEGO, Division of Statistics, University of California, Davis MIRON L. STRAF, Director MICHELE L. CONRAD, Division Administrator

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Assessing Knowledge of Retirement Behavior Preface The Panel on Retirement Income Modeling of the Committee on National Statistics was established to review the state of the art and make recommendations to inform policy making on retirement income security. The panel's work considers what data, research, and models exist and what are needed to estimate the short-run and long-run implications of current retirement-income-related policies and proposed changes to them. Support for the project was provided by the Pension and Welfare Benefits Administration in the U.S. Department of Labor, the National Institute on Aging, the Pension Benefit Guaranty Corporation, the Social Security Administration, and TIAA-CREF. In order to inform its work, the panel commissioned the papers in this volume, which review the state of research on such topics as individual labor supply and savings behavior and employer behavior that is relevant to retirement income security. The papers were originally presented at a conference in September 1994; they were subsequently modified to incorporate the comments of discussants at the conference, panel members, and reviewers. The authors provide comprehensive assessments of their subject areas, and we thank them. Our thanks go next to the discussants: Richard Burkhauser, Syracuse University; David Cutler, Harvard University; Marjorie Honig, Hunter College; Michael Hurd, State University of New York, Stony Brook; Marvin Kosters, American Enterprise Institute; Alicia Munnell, Council of Economic Advisors; Patricia Ruggles, Joint Economic Committee, U.S. Congress; John Rust, University of Wisconsin, Madison; Dallas Salisbury, Employee Benefit Research Institute; Eugene Steuerle, The Urban Institute; Lawrence Thompson, The Urban Institute; and Joshua Wiener, The Urban Institute

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Assessing Knowledge of Retirement Behavior The panel also gratefully acknowledges the commitment and support of all those who worked collaboratively to organize the conference and prepare this volume. Constance Citro, the panel's study director, developed plans for the conference in collaboration with panel members. Nancy Maritato worked with the authors to shepherd their papers through revision and review and collaborated with me to draft the introduction. Agnes Gaskin facilitated the conference arrangements, and Candice Evans prepared the final manuscript. Most important, the papers and the workshop discussion contributed significantly to the panel's work and our report, which will be published early next year. Eric A. Hanushek, Chair Panel on Retirement Income Modeling

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Assessing Knowledge of Retirement Behavior Contents 1   INTRODUCTION Eric A. Hanushek and Nancy L. Maritato   1     Income and Wealth of Older American Households,   4     Labor Supply Behavior,   5     Personal Saving Behavior,   6     Employer Behavior,   7     Mortality, Health Status, and Health Care Costs,   8     A Framework for Analyzing Retirement Income Security,   9     Conclusion,   10 2   INCOME AND WEALTH OF OLDER AMERICAN HOUSEHOLDS: MODELING ISSUES FOR PUBLIC POLICY ANALYSIS Alan L. Gustman and F. Thomas Juster   11     Conceptual Overview,   11     Components of Income and Wealth of Older Households,   13     Models of Individual and Firm Behavior Explaining Retirement Income and Wealth,   21     Reconciling Research on Labor Supply, Savings, and Pensions,   35     Models and Data Needed to Understand the Incomes and Wealth of Older Americans,   37     Selected Policies Affecting Retirement Incomes and Wealth,   39     Appendix Tables and Figures,   41     Notes,   50     References,   53

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Assessing Knowledge of Retirement Behavior 3   FACTORS AFFECTING LABOR SUPPLY DECISIONS AND RETIREMENT INCOME Robin L. Lumsdaine   61     Summary of Trends,   62     Social Security,   70     Pensions and Window Plans,   75     Disability,   87     Medicare and Health Insurance,   96     Hours Flexibility and Career Jobs,   102     Conclusions,   109     Notes,   114     References,   115 4   PERSONAL SAVING BEHAVIOR AND RETIREMENT INCOME MODELING: A RESEARCH ASSESSMENT James M. Poterba   123     Forecasting Financial Status: An Organizing Framework,   124     Motives For and Models of Private Saving: What Do We Know?,   130     Social Security and Private Saving,   133     Private Pensions and Saving,   135     Targeted Retirement Saving Accounts and Personal Saving,   137     Housing Wealth and Other Private Saving,   141     Conclusion and Future Research Needs,   143     References,   144 5   RETIREMENT AGE AND RETIREMENT INCOME: THE ROLE OF THE FIRM Donald O. Parsons   149     Notes,   185     References,   187 6   ASSESSING FORECASTS OF MORTALITY, HEALTH STATUS, AND HEALTH COSTS DURING BABY BOOMERS' RETIREMENT Ronald D. Lee and Jonathan Skinner   195     How Rapidly Will Mortality Decline?,   198     Health Status Projections and the Compression of Disability,   212     Predicting Health Care Costs,   219

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Assessing Knowledge of Retirement Behavior     How Will Changing Mortality, Health, and Health Costs Affect Retirement Income Security?,   225     Conclusion,   236     Notes,   237     References,   238 7   A FRAMEWORK FOR ANALYZING FUTURE RETIREMENT INCOME SECURITY Gary Burtless   244     Micro Models of Retirement Income,   248     Dynamic Microsimulation,   256     Macroeconomic Modeling,   260     Cycles,   264     Conclusion,   266     Notes,   269     References,   271     BIOGRAPHICAL SKETCHES   273

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