SAVING

SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 15: April 26, 2007

Editor: PAMELA J. PERUN
Policy Director, Initiative on Financial Security,
Aspen Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Saving
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T A B L E O F C O N T E N T S

"Mismeasured Personal Saving and the Permanent Income Hypothesis"
LEONARD I. NAKAMURA
Federal Reserve Bank of Philadelphia
TOM STARK
Federal Reserve Bank of Philadelphia

"Simplification and Saving"
JOHN BESHEARS
Harvard University - Department of Economics
JAMES J. CHOI
Yale School of Management, National Bureau of Economic
Research (NBER)
DAVID LAIBSON
Harvard University - Department of Economics, National
Bureau of Economic Research (NBER)
BRIGITTE C. MADRIAN
Harvard University - John F. Kennedy School of
Government, National Bureau of Economic Research (NBER)

"Towards a Sensible System for Saving"
PAMELA J. PERUN
Initiative on Financial Security, Aspen Institute

"Are You Sure You're Saving Enough for Retirement?"
JONATHAN S. SKINNER
Dartmouth College - Department of Economics, National
Bureau of Economic Research (NBER)

"Financial Literacy and Retirement Preparedness: Evidence and
Implications for Financial Education Programs"
ANNAMARIA LUSARDI
Dartmouth College - Department of Economics, National
Bureau of Economic Research (NBER)
OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk Management
Department, National Bureau of Economic Research (NBER)

"Invest Now, Drink Later, Spend Never: The Mental Accounting of
Delayed Consumption"
ELDAR SHAFIR
Princeton University
RICHARD H. THALER
University of Chicago - Graduate School of Business,
National Bureau of Economic Research (NBER)

"Savings in America: Building Opportunities for All"
SUZANNE NORA JOHNSON
Goldman Sachs Group
LISA MENSAH
Initiative on Financial Security, The Aspen Institute
C. EUGENE STEUERLE
Urban Institute
_________________________________________________________________

"Mismeasured Personal Saving and the Permanent Income Hypothesis"
FRB of Philadelphia Working Paper No. 07-8

Contact: LEONARD I. NAKAMURA
Federal Reserve Bank of Philadelphia
Email: LEONARD.NAKAMURA@PHIL.FRB.ORG
Auth-Page: http://ssrn.com/author=118488

Co-Author: TOM STARK
Federal Reserve Bank of Philadelphia
Email: TOM.STARK@PHIL.FRB.ORG
Auth-Page: http://ssrn.com/author=75102

Full Text: http://ssrn.com/abstract=975477

ABSTRACT: Is it possible to forecast using poorly measured data?
According to the permanent income hypothesis, a low personal
saving rate should predict rising future income (Campbell, 1987).
However, the U.S. personal saving rate is initially poorly
measured and has been repeatedly revised upward in benchmark
revisions. The authors use both conventional and real-time
estimates of the personal saving rate in vector autoregressions
to forecast real disposable income; using the level of the
personal saving rate in real time would have almost invariably
made forecasts worse, but first differences of the personal
saving rate are predictive. They also test the lay hypothesis
that a low personal saving rate has implications for consumption
growth and find no evidence of forecasting ability.
______________________________

"Simplification and Saving"
NBER Working Paper No. W12659

Author: JOHN BESHEARS
Harvard University - Department of Economics
Email: beshears@fas.harvard.edu
Auth-Page: http://ssrn.com/author=576924

Contact: JAMES J. CHOI
Yale School of Management, National Bureau of
Economic Research (NBER)
Email: jameschoi@yale.edu
Auth-Page: http://ssrn.com/author=239442

Co-Author: DAVID LAIBSON
Harvard University - Department of Economics,
National Bureau of Economic Research (NBER)
Email: dlaibson@harvard.edu
Auth-Page: http://ssrn.com/author=20341

Co-Author: BRIGITTE C. MADRIAN
Harvard University - John F. Kennedy School of
Government, National Bureau of Economic Research
(NBER)
Email: brigitte_madrian@harvard.edu
Auth-Page: http://ssrn.com/author=85592

Full Text: http://ssrn.com/abstract=940608

ABSTRACT: Many financial decisions that individuals face are
complicated and daunting for those who are not financial experts.
One important consequence of this complexity is that individuals
procrastinate in making these decisions. In this paper, we
evaluate a low-cost intervention designed to simplify the
retirement saving decision. Individuals received the opportunity
to enroll in their workplace savings plan at a pre-selected
contribution rate and asset allocation. By collapsing a
multidimensional set of options into a binary choice between the
status quo and the pre-selected alternative, this intervention
increases participation rates by 10 to 20 percentage points among
affected employees. We find that similar mechanisms can be used
to increase contribution rates among employees who are already
participating.
______________________________

"Towards a Sensible System for Saving"

Contact: PAMELA J. PERUN
Initiative on Financial Security, Aspen Institute
Email: pamela@planetnow.com
Auth-Page: http://ssrn.com/author=237591

Full Text: http://ssrn.com/abstract=981212

ABSTRACT: The American system for saving is propelled by one
incentive highly favored by Congress: the special "plans" for
saving now found throughout the tax code. The history of savings
plans is short but Congress has created more plans in the last
ten years than in any prior period. There are now eight plans for
retirement saving: 401(k)s, SIMPLE 401(k)s, 403(b)s, 457(b)s, the
Thrift Savings Plan, SIMPLE IRAs, traditional IRAs, and Roth
IRAs. Congress recently added savings plans for education, 529
plans and Coverdell IRAs, and its latest initiative is a savings
plan for healthcare, health savings accounts or HSAs.

This brief describes the history of current plans and the savers
who use them. By some measures, savings plans are a success. They
now dominate the private pension system, are highly valued by
employees, and have introduced millions to equity investing. Yet,
savings plans also exhibit notable flaws and weaknesses:

?Work-based intermediary plans induce saving but many Americans
have no savings plan at work.
?Low-income workers are often excluded from work-based plans.
?Most saving occurs in work-based intermediary plans. Few workers
use open access plans as a substitute.
?The best predictor of participation in a savings plan is income.
?Savings rates vary widely but average savings rates are low
among both lower and higher income savers.
?Increasing contribution limits does not induce more saving.
?Account accumulations are low. Whether current plan designs can
induce adequate saving is debatable.
?Matching contributions are a puzzle. Thought to induce more
saving, they often don't.
?Complex investment menus deter participation and result in
investment paralysis.
?The economics of plan investment and administration are poorly
understood by both savers and employers.

To make these plans a universal success requires building a more
sensible system for saving. The brief discusses proposals to
improve the current system and concludes that a new agenda will
be required for the next generation of savings plans. Step one
in that process means striving for simplification. Step two
means building better plans. Step three means recognizing that
what really matters the most for saving in the long run are
outcomes. Traditionally, savings plan design has focused almost
entirely on the first stage of saving - contributions and their
tax incentives. But contributions alone do not make savings
plans effective. A more sensible system for saving would set
specific savings objectives and design plans capable of
achieving them.
______________________________

"Are You Sure You're Saving Enough for Retirement?"
NBER Working Paper No. W12981

Contact: JONATHAN S. SKINNER
Dartmouth College - Department of Economics,
National Bureau of Economic Research (NBER)
Email: jonathan.skinner@dartmouth.edu
Auth-Page: http://ssrn.com/author=46140

Full Text: http://ssrn.com/abstract=975922

ABSTRACT: Many observers believe current aging baby boomers are
woefully unprepared for retirement. Others raise the prospect
that Americans are saving too much for retirement. This paper
attempts to reconcile these contrasting views using a simple life
cycle model and a more sophisticated retirement program,
ESPlanner, with special reference to retirement prospects for
economists. I find most households with post-graduate degrees
fall short of the wealth needed to smooth spending through
retirement. Of course, there are ways to economize during
retirement: stepping up household production (cooking at home
rather than eating out), selling one's house, or maintaining the
modest individual consumption levels from when children still
roamed the house. But ultimately, I argue these laudable
strategies to reduce retirement expenses will be dwarfed by
rapidly growing out-of-pocket medical expenses. The combination
of eroding retiree health benefits and the risk of catastrophic
future out-of-pocket health spending suggests that even
conventional retirement planning recommendations could be too
low.
______________________________

"Financial Literacy and Retirement Preparedness: Evidence and
Implications for Financial Education Programs"

Author: ANNAMARIA LUSARDI
Dartmouth College - Department of Economics,
National Bureau of Economic Research (NBER)
Email: annamaria.lusardi@dartmouth.edu
Auth-Page: http://ssrn.com/author=53048

Contact: OLIVIA S. MITCHELL
University of Pennsylvania - Insurance & Risk
Management Department, National Bureau of Economic
Research (NBER)
Email: mitchelo@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=41556

Full Text: http://ssrn.com/abstract=957796

ABSTRACT: Economists are beginning to investigate the causes and
consequences of financial illiteracy to better understand why
retirement planning is lacking and why so many households arrive
close to retirement with little or no wealth. Our review reveals
that many households are unfamiliar with even the most basic
economic concepts needed to make saving and investment decisions.
Such financial illiteracy is widespread: the young and older
people in the United States and other countries appear woefully
under-informed about basic financial computations, with serious
implications for saving, retirement planning, mortgages, and
other decisions. In response, governments and several nonprofit
organizations have undertaken initiatives to enhance financial
literacy. The experience of other countries, including a saving
campaign in Japan as well as the Swedish pension privatization
program, offers insights into possible roles for financial
literacy and saving programs.
______________________________

"Invest Now, Drink Later, Spend Never: The Mental Accounting of
Delayed Consumption"

Contact: ELDAR SHAFIR
Princeton University
Email: shafir@princeton.edu
Auth-Page: http://ssrn.com/author=338327

Co-Author: RICHARD H. THALER
University of Chicago - Graduate School of
Business, National Bureau of Economic Research
(NBER)
Email: richard.thaler@gsb.uchicago.edu
Auth-Page: http://ssrn.com/author=74929

Full Text: http://ssrn.com/abstract=901830

ABSTRACT: Monetary transactions in which consumption is
temporally separated from purchase naturally lend themselves to
multiple frames and to alternative accounting schemes, which
nonetheless maintain a modicum of discipline and authenticity. We
investigate some of the relevant accounting rules, and find that
advanced purchases (e.g., a case of wine) are typically treated
as "investments" rather than spending. At the same time,
consumption of a good purchased earlier and used as planned (a
wine bottle opened for dinner) is often coded as "free", or even
as savings. However, when it is not consumed as planned (a bottle
is dropped and broken), then the relevant account, long dormant,
is resuscitated and costs associated with the event are perceived
as the cost of replacing the good, especially if replacement is
actually likely. Related phenomena and assorted implications are
discussed.
______________________________

"Savings in America: Building Opportunities for All"

Author: SUZANNE NORA JOHNSON
Goldman Sachs Group
Email: suzanne.norajohnson@gs.com
Auth-Page: http://ssrn.com/author=798450

Contact: LISA MENSAH
Initiative on Financial Security, The Aspen
Institute
Email: lisa.mensah@aspeninstitute.org
Auth-Page: http://ssrn.com/author=526247

Co-Author: C. EUGENE STEUERLE
Urban Institute
Email: esteuerl@ui.urban.org
Auth-Page: http://ssrn.com/author=241081

Abstract: http://ssrn.com/abstract=981644

ABSTRACT: Savings policy in the United States is at a critical
juncture. The U.S. personal saving rate has declined from 10.8
percent in 1984 to zero in 2005.1 The national saving rate, which
includes government and business savings, is the lowest among the
G-20 countries and has decreased significantly in recent decades.
These low levels of saving generally suggest lower growth rates
of income and standards of living in the future.

This paper considers barriers in current policies that confront
households trying to save more. These include the complexity of
laws affecting retirement and saving plans, and the exclusion of
many households from using incentives that are worth the most to
those facing the highest tax rates. It also discusses the effect
of asset tests in welfare and education policies and other
institutional barriers that discourage saving, especially for
low- and moderate-income families.

Without advocating any particular savings policy or reform, this
paper discusses several proposed policies to build assets for all
Americans. These include new initiatives such as universal
children's accounts and enhanced Individual Development Accounts
(IDAs). The paper also explores improvements to existing programs
such as matched subsidies for retirement savings, and an
enhanced, refundable tax credit for low-income savers. Although
many of these ideas have not been fully developed and are open to
debate on their merits, we believe they form an important part of
the discussion about how to boost savings in the United States.