Mitchell, Olivia S
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Publication The Effect of Uncertain Labor Income and Social Security on Life-cycle Portfolios(2009-09-01) Maurer, Raimond; Mitchell, Olivia S; Rogalla, RalphThis paper examines how labor income volatility and social security benefits influence life-cycle household portfolios. We examine how much the individual saves, and where, taking into account liquid financial wealth and annuities, and stocks versus bonds. Higher labor income uncertainty and lower old-age benefits boost demand for stable income in retirement, but also when young. In addition, a declining equity glide path with age is appropriate for the worker with low income uncertainty but for the high income risk worker, equity exposure rises until retirement. We also evaluate how changes in social security benefits influence retirement risk management.Publication Defined Contribution Pensions: New Opportunities, New Risks(1996) Mitchell, Olivia S; Schieber, Sylvester J.Publication Social Security Earnings and Projected Benefits(1998) Mitchell, Olivia S; Olson, Jan; Steinmeier, Thomas L.Publication The Victory of Hope over Angst? Funding, Asset Allocation, and Risk-Taking in German Public Sector Pension Reform(2007-04-01) Maurer, Raimond; Mitchell, Olivia S; Rogalla, RalphPublic employee pension systems have traditionally been of the pay-as-you-go defined benefit (DB) variety, where retiree payments are financed by taxes (contributions) levied on the working generation. The same holds for Germany, where civil servants are promised a (mostly) unfunded, noncontributory, tax-sponsored DB pension, representing substantial liabilities currently not recognized as explicit obligations to the public sector. This paper analyzes the risks and rewards of moving to a (partially) prefunded pension system for most civil servants in the German federal state of Hesse. First, we conduct an actuarial valuation of pension promises to retired and active civil servants, which we conservatively put at € 44 billion in present value, or about 150 percent of explicit state debt. Second, we project 50 years into the future and estimate the payroll-related contribution rate sufficient to fund the civil servant pension obligation. Next, using a Monte Carlo framework and a stochastic present value approach, and a Conditional Value at Risk measure, we identify an asset allocation for plan assets that minimizes worst-case pension costs. Prefunding the pension with a tax worth about 20 percent of payroll, and investing the assets 30 percent in equities and 70 percent in bonds, substantially reduces expected and minimizes worst-case pension costs. Finally, we illustrate contribution rates and asset allocation when the plan sponsor is limited to a particular risk budget. In one interesting case, current taxpayers are asked to pay additional regular contributions of only 15 percent while the portfolio is held 43 percent in equities. This mix allows future generations to benefit from possible contribution holidays and withdrawals, while providing an acceptable level of risk of supplementary contributions resulting from underfunding.Publication Fixed and Variable Longevity Annuities in Defined Contribution Plans: Optimal Retirement Portfolios Taking Social Security into Account(2023-01-08) Horneff, Vanya; Maurer, Raimond; Mitchell, Olivia SThis paper investigates retirees’ optimal purchases of fixed and variable longevity income annuities using their defined contribution (DC) plan assets and given their expected Social Security benefits. As an alternative, we also evaluate using plan assets to boost Social Security benefits through delayed claiming. We determine that including deferred income annuities in DC accounts is welfare enhancing for all sex/education groups examined. We also show that providing access to well-designed variable deferred annuities with some equity exposure further enhances retiree wellbeing, compared to having access only to fixed annuities. Nevertheless, for the least educated, delaying claiming Social Security is preferred, whereas the most educated benefit more from using accumulated DC plan assets to purchase deferred annuities.Publication Default, Framing and Spillover Effects: The Case of Lifecycle Funds in 401(k) Plans(2009-06-01) Mitchell, Olivia S; Mottola, Gary R; Utkus, Stephen P; Yamaguchi, TakeshiImportant behavioral factors such as default and framing effects are increasingly being employed to optimize decision-making in a variety of settings, including individually-directed retirement plans. Yet such approaches may have unintended “spillover” effects, as we show with regard to the introduction of lifecycle funds in U.S. 401(k) plans. As anticipated, lifecycle funds do reshape individual portfolio choices through large default and framing effects. But unexpectedly, they also create a new class of investors which holds these funds as part of more complex portfolios. Our results are directly relevant to those interested in retirement plan design and retirement security; they also highlight the importance of assessing such spillover effects in other consequential settings where techniques drawn from behavioral economics may be employed.Publication Redesigning Public Sector Pensions in Developing Countries(2002-03-01) Mitchell, Olivia SPensions in the public sector cover state, municipal, and federal government employees in addition to workers in publicly-managed enterprises. Until recently, the most prominent model for public employee pension plans in both developed and developing economies was the defined benefit (DB) plan. Nevertheless, the status quo is now changing as public plans are being asked to catch up with global changes in labor and capital markets. As a consequence, defined contribution (DC) pensions are now making headway in many cases as an alternative or sometimes an additional pillar of public employees’ retirement systems. This paper examines public pension plan design and management decisions in developing countries, beginning by identifying the key functions of a pension plan and the range of structures implemented as well as their economic effects. We then discuss the rationales for and means of moving to a funded public pension system, including the problems associated with underfunding and the ways in which accrued rights can be financed and managed, with attention to the range of stakeholders in a public pension system. Finally we explore governance and investment issues in the context of public pension plans. A number of public pension changes exist that could contribute materially to the strengthening of the pension promise in developing nations, while making the plans more equitable, more economically efficient, and more financially solvent. These reforms could benefit not only the employer and employee groups most directly associated with public pension systems, but they can also enhance the wellbeing of broader groups including taxpayers and consumers on whom the burden of high taxes and reduced public services ultimately fall.Publication Estimating International Adverse Selection in Annuities(2001-05-01) Mitchell, Olivia S; McCarthy, DavidIt is well known that purchasers of annuities have lower mortality than the general population. Less widely known is the quantitative extent of this adverse selection and how it varies across countries. This paper proposes and applies several methods for comparing alternative mortality tables and illustrates their impact on annuity valuation for men and women in the US and the UK. Our results indicate that the relatively lower mortality among older Americans who purchase annuities is equivalent to using a discount rate that is 50-100 basis points below the UK rate for compulsory annuitants, or 10-20 basis points lower than the UK rate for voluntary annuitants. We then draw on the mortality experience of over half a billion lives to estimate mortality differentials due to varying degrees of adverse selection controlling for country, gender, and an allowance for mortality improvements. Results show that adverse selection associated with the purchase of individual annuities reduces mortality rates by at least 25% in the international context. We also find that the system of mortality tables used to value Japanese annuities is quite distinct from international norms.Publication Debt Close to Retirement and its Implications for Retirement Well-being(2020-05-06) Lusardi, Annamaria; Mitchell, Olivia S.; Oggero, NoemiWe analyze debt and debt management of Americans nearing retirement age, to document that older people have numerous financial obligations that can lead to financial distress. Using data from the 2015 National Financial Capability Study and drawing on an extensive literature review, we show that lack of financial literacy, lack of information, and behavioral biases help explain the prevalence of debt later in life. Our evidence indicates that debt at older ages can negatively influence retirement well-being.Publication Longevity Perceptions and Saving Decisions During the COVID-19 Outbreak: An Experimental Investigation(2021-01-12) Hurwitz, Abigail; Mitchell, Olivia S; Sade, OrlyWe experimentally study individuals’ perceptions about and advice to others regarding retirement savings and annuitization during the pandemic. Many people recommend that others save more for retirement, but those most affected by the pandemic tell others to save and annuitize less. We investigate two possible channels for this result and show that the pandemic does not substantially alter optimism regarding survival probabilities. Hence, we conclude that economic factors are driving our results. Consequently, some financial ramifications of the COVID-19 outbreak are yet to be revealed, as the pandemic is having longer-term effects on peoples’ willingness to save and annuitize.