creator: Friedberg, Leora
description- – Using the Lee-Carter mortality model, we quantify aggregate mortality risk, the risk that annuitants might live longer than predicted by the model. We calculate that a markup of 4.3 percent on an annuity premium, or else shareholders' capital equal to 4.3 percent of the expected present value of annuity payments, would reduce the probability of insolvency resulting from uncertain aggregate mortality trends to five percent, and a markup of 6.1 percent would reduce the probability of insolvency to one percent. Using the same model, we find evidence that the projection scale that the insurance industry commonly refers to underestimates aggregate mortality improvements. Consequently, annuities that are priced on that projections scale without any conservative margin will be substantially underpriced. Insurance companies could deal with aggregate mortality risk by transferring it to the financial markets through newly-available mortality-contingent bonds. We calculate the returns that investors would have obtained on such bonds had they been available previously, and the historical covariance between these bond returns and the growth in per-capita consumption. Using the Consumption Capital Asset Pricing Model (CCAPM), we determine the risk premium that investors would have required on such bonds. At plausible coefficients of risk aversion, investors should be able to hedge aggregate mortality risk via such bonds at very low cost.
collectiondatepublishercreatorformat description- – We calculate the risk faced by defined benefit plan providers arising from uncertain aggregate mortality -- the risk that the average participant will live longer than expected. First, comparing the widely cited Lee-Carter model to industry benchmarks, we show that plan providers appear to substantially underestimate the longevity of their employees. The resultant understatement of liabilities is 15.2 percent, when weighted by the characteristics of typical male participants in defined benefit plans, and reaches as much as 25.2 percent for male workers aged 22. Next, we consider the substantial mortality risk that arises even if plan providers were to use the Lee-Carter model or other unbiased forecasts of mortality reductions. We calculate the consequences for plan liabilities if aggregate mortality declines unexpectedly faster than is predicted by an unbiased projection. There is a 5 percent chance that liabilities of a terminated plan would be 2.9 to 5.1percent higher than what is expected, depending on the mix of workers covered. Lastly, we explain how longevity bonds might be used to transfer mortality risk from defined benefit plans to the capital markets, and we calculate a risk premium for a hypothetical frozen plan.
collectiondatepublishercreatorformat description- – A growing literature offers indirect evidence that the distribution of bargaining power within a household influences decisions made by the household. These results undermine the notion that a household can be treated as a"unitary"decision maker. The indirect evidence links household outcomes to variables that are assumed to influence the distribution of bargaining power within the household. In this paper, we have data on whether a husband or wife in the Health and Retirement Study"has the final say"when making major decisions in a household. We use this variable to analyze determinants and some consequences of bargaining power. Our analysis overcomes endogeneity problems arising in many earlier studies and constitutes the missing link confirming the importance of household bargaining models. We find that decision-making power depends on plausible variables within the household and also influences important household outcomes, and moreover that the second set of results is much stronger than the first set. While current and lifetime earnings significantly affect decision-making power, the effects are moderate. On the other hand, decision-making power has important effects on financial decisions like stock market investment and total wealth accumulation and may help explain, for example, the relatively high poverty rate among widows. Thus, our results suggest that more research into the determination of bargaining power is needed, and that household bargaining has major effects on the welfare of household members.
collectiondatepublishercreatorformat description- – This paper investigates the impact on labor supply of changes in the Social Security earnings test in 1996 and 2000. We highlight how the persistence of labor supply choices influences both responses to policy changes and the estimation of such responses. We do this in two ways. First, we use data from the Health and Retirement Study and the Current Population Survey that allows us to compare employment transitions across cohorts that are differentially affected by changes in the earnings test rules. We show that conditioning on last year's employment status is important in identifying responses to current earnings test changes. Second, we test the effect of not only current but also anticipated as well as past earnings test parameters which cohorts faced at earlier ages. We find that past and anticipated future rules influence current employment and earnings. Our results help to identify an effect of earnings test changes affecting ages 65-69 on employment at younger and older ages, which suggests caution about the use of neighboring age groups as control groups in analyzing responses to the earnings test. We also show that earnings test changes that were initiated in 1996 had an important effect, in addition to the changes in 2000 that have been extensively studied.
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