Adequacy%20of%20Saving%20for%20Old-Age%20in%20Europe - PowerPoint PPT Presentation

About This Presentation
Title:

Adequacy%20of%20Saving%20for%20Old-Age%20in%20Europe

Description:

Adequacy of Saving for Old-Age in Europe Discussion by Michael Hurd Topic most developed in U.S. Data But more interesting topic in U.S. because of greater dependence ... – PowerPoint PPT presentation

Number of Views:89
Avg rating:3.0/5.0
Slides: 25
Provided by: IST1152
Category:

less

Transcript and Presenter's Notes

Title: Adequacy%20of%20Saving%20for%20Old-Age%20in%20Europe


1
Adequacy of Saving for Old-Age in Europe
  • Discussion by Michael Hurd

2
Topic most developed in U.S.
  • Data
  • But more interesting topic in U.S. because of
    greater dependence on savings and private
    pensions
  • If public pension is sole source of financing,
    debate is whether pensions are large enough.

3
Popular press and some research
  • Baby-boomers headed for poverty in retirement!
  • 60 not adequately prepared!
  • Need 2M in retirement assets!
  • Etc.

4
Yet..
  • Current retired doing fine
  • Cohort studies show improvements (or at least not
    getting worse)
  • Age 51-56 in 1992
  • Age 51-56 in 2004 at least as well off as
    measured by saving plus pension wealth
  • What is going on?

5
How to think about problem?
  • Two persons with different lifetime earnings
  • Should have different levels of economic
    resources in retirement...which one more
    adequate
  • Comparison requires comparing economic resources
    with lifetime earnings for each person

6
Most common comparison
  • Income replacement rate
  • Income at retirement relative to income before
    retirement
  • Simple case
  • r 0
  • annuitization so that consumption income after
    retirement

7
replacement rate A/E (70)
earnings
annuity
E
consumption
A
65
20
85
Age
8
Slightly more complex case
  • Increasing income with age

9
replacement rate A/E (60)
earnings
annuity
E
consumption
A
10
Better comparison
  • Average lifetime earnings rather than final
    earnings
  • Already more difficult...data requirements,
    interest rate assumptions etc
  • But what about changes in household composition?

11
replacement rate A/E (35)
Aunt Tilly visits
Ann born
12
This household will want to allocate fewer
resources to retirement phase
  • Will want lower replacement rate whether measured
    with respect to final income or life-time income
  • Thus in relatively simple situation, no universal
    replacement rate

13
Another situation
  • No pensions
  • Only savings
  • Income in retirement is small...interest on
    wealth
  • Clear income replacement rate makes no sense

14
Actual situation
  • Mix between pension and savings
  • Varies across people and across countries
  • Solution in literature annuitize savings
  • But people dont annuitize
  • Not an accurate description of saving adequacy

15
Other issues
  • the differing role of taxes for households at
    different points in the income distribution
  • work-related expenses
  • the time horizon or survival curve of the
    household
  • returns to scale in consumption reduced
    spending once one of the partners dies
  • the changing consumption profile with age
  • Differential mortality

16
Married. College graduate
Single. Less than high school education
Those with fewer resources need fewer resources
17
One additional problem
  • Different uncertainties after retirement
  • Insurance incomplete and varies from person to
    person and across countries

18
All these problems remain when savings annuitized
and added to pensions
  • And no solution to this problem

19
replacement rate A/E (35)
Aunt Tilly visits
Ann born
20
Inevitably drawn to an economic model to make
comparisons
  • But what model?
  • Life-cycle model says what an informed utility
    maximizer would do.
  • Obvious starting point
  • Does not lead to income replacement rate concept

21
What do we see in U.S. when use life-cycle model?
  • Compare actual wealth with optimal wealth
  • Over-saving! (Schulz et al, 2006)
  • But lifetime utility below optimum
  • Compare consumption at retirement (and associated
    with life-cycle path) with economic resources
  • Almost 80 adequately prepared (Hurd and
    Rohwedder, 2008)

22
How did households achieve this?
  • We dont know
  • All we can do is to assess outcome

23
Relevance for Europe
  • With reduction in state DB pensions larger mix of
    savings and private pensions
  • U.S. experience may be relevant for future

24
This paper
  • Conceptualize situation
  • Input into debate
  • But to implement measures of economic preparation
    need data
  • Is there something between income replacement and
    full-scale life-cycle model?
  • Excellent start
Write a Comment
User Comments (0)
About PowerShow.com