|Title||Essays on private pensions and workers’ savings behavior|
In the last thirty years there has been a considerable change in the way people save for retirement. The once traditional defined benefit plans are steadily being replaced by now dominant defined contribution plans. The new type of plans have effectively shifted the responsibility for retirement saving from the employer to the worker and have thus contributed to the ongoing debate on the adequacy of retirement income and ways to encourage workers to save more. This dissertation studies the role of private pensions on workers savings decision in the US and the potential impact of policy interventions. The first essay co-authored with Geoffrey Sanzenbacher) documents recent trends in growing pension inequality between high and low-income workers, which has coincided with the shift towards defined contribution type of plans and workers voluntary non-participation in such plans. It examines the question whether extending tax-deferred pensions to uncovered low-income workers would result in high rates of pension participation and whether it would succeed in closing the pension inequality gap. To determine how likely uncovered workers are to participate if given the option, it is important to control for possible self-selection into jobs. Even though the majority of low-income workers currently eligible for a voluntary tax-deferred pension plan choose to participate, it is unclear whether those individuals are representative of low-income workers in general. Our estimation reveals that workers currently offered a tax-deferred pension are more likely than otherwise similar individuals to participate. Thus, current estimates over-predict the fraction of workers who would participate if voluntary retirement plans were extended to them. Ignoring selection would overestimate the percent of all low-income workers that would participate in a tax-deferred savings plan by 25 percent and the remaining pension inequality gap by 8.1 percentage points. The second essay further explores how not yet implemented policies that change the distribution or incentives of different pension plans would affect saving outcomes. For this purpose, it builds-in the endogeneity of pension coverage into a behavioral model of workers employment, consumption and saving decisions in which both wages and pensions are simultaneously determined by workers job choice decisions. The model is estimated on the Panel Study of Income Dynamics PSID) data using the method of indirect inference. Policy simulations indicate that switching from voluntary to mandatory contributions in defined contribution plans would result in lower overall pension coverage and a crowd-out effect with other forms of saving, but an overall 10 percent increase in average wealth accumulations. A complete phaseout of defined benefit plans, on the other hand, would lead to a 3 percent lower overall savings for retirement.
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