Saving

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SOCIAL SCIENCE RESEARCH NETWORK

EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 30: September 6, 2007

Editor: PAMELA J. PERUN
Policy Director, Aspen Institute - Initiative on
Financial Security
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

"The Case for Child Accounts"
LISA MENSAH
Aspen Institute - Initiative on Financial Security
PAMELA J. PERUN
Aspen Institute - Initiative on Financial Security
ELENA CHAVEZ QUEZADA
Initiative on Financial Security

"College Grants on a Postcard: A Proposal for Simple and
Predictable Federal Student Aid"
SUSAN M. DYNARSKI
Harvard University - John F. Kennedy School of
Government, National Bureau of Economic Research (NBER)

"The Failure of Education Tax Incentives"
DEBORAH SCHENK
New York University School of Law
ANDREW L. GROSSMAN
Skadden Arps

"The Theory of Life-Cycle Saving and Investing"
ZVI BODIE
Boston University - Department of Finance & Economics
JONATHAN TREUSSARD
Boston University - Department of Economics
PAUL WILLEN
Federal Reserve Bank of Boston - Research Department,
National Bureau of Economic Research (NBER)

"Individual Account Investment Options and Portfolio Choice:
Behavioral Lessons from 401(K) Plans"
JEFFREY R. BROWN
University of Illinois at Urbana-Champaign - Department
of Finance, National Bureau of Economic Research (NBER)
NELLIE LIANG
Federal Reserve Board
SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign - Department
of Finance, National Bureau of Economic Research (NBER)

"Choice Architecture and Retirement Saving Plans"
SHLOMO BENARTZI
University of California at Los Angeles
EHUD PELEG
University of California, Los Angeles - Anderson School
of Management
RICHARD H. THALER
University of Chicago - Graduate School of Business,
National Bureau of Economic Research (NBER)
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"The Case for Child Accounts"

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

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

Co-Author: ELENA CHAVEZ QUEZADA
Initiative on Financial Security
Email: elena.chavez-quezada@aspeninst.org
Auth-Page: http://ssrn.com/author=858137

Full Text: http://ssrn.com/abstract=1010439

ABSTRACT: Saving, like every other good habit, is best learned at
the beginning of life. The best tool for teaching that essential
skill is a program of Child Accounts, a savings vehicle to put
all children on the path to financial security. Child Accounts
won't solve poverty today. Instead, they are a long-term
investment in children and their financial futures. For families,
it offers children, regardless of income, an opportunity fund to
launch them into adulthood.

From birth, every child would have an investment account
initially funded through a modest government contribution.
Contributions from family and friends and matching contributions
for low-income children, along with investment earnings, would
help the account grow. Child Accounts would also provide a
hands-on opportunity for teaching financial literacy. Delivered
through the private sector, Child Accounts would be simple, with
limited, basic investment choices and no withdrawals for 18
years.

There are around 4 million new births in the United States each
year. If enacted at the federal level, a Child Accounts program
would require a $2.1 billion public investment for the first
year, and $26.6 billion over 10 years ($20.7 billion endowment;
$5.9 billion match). After the first three years, private
contributions and investment income would exceed the government's
initial contribution. Based on modest family contributions and
investment growth, account accumulations are projected to reach
$100 billion over ten years.
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"College Grants on a Postcard: A Proposal for Simple and
Predictable Federal Student Aid"
KSG Working Paper No. RWP07-014
Brookings Institution's Hamilton Project Discussion
Paper No. 2007-01

Contact: SUSAN M. DYNARSKI
Harvard University - John F. Kennedy School of
Government, National Bureau of Economic Research
(NBER)
Email: Susan_Dynarski@harvard.edu
Auth-Page: http://ssrn.com/author=203747

Full Text: http://ssrn.com/abstract=976537

ABSTRACT: The federal system of student financial aid is broken.
Information about aid eligibility is hidden behind a thicket of
complicated paperwork, and is also highly uncertain. Concrete
information arrives just a few months before or even months after
students enroll in college - far too late to affect enrollment
decisions. Economic theory and evidence suggest that the costs of
complexity and uncertainty are high: many high school students
won't even start on the path to college if they aren't certain
they can afford it. Capable students teetering on the margin of
college entry are thus discouraged from going to college by its
price, even though aid is available to them. This is a waste of
human potential. This waste is unnecessary. Dozens of questions
on the federal aid application contribute virtually nothing to
the determination of grant aid, so the aid formula could be
radically simplified while still preserving its distributive
properties. But simplification must achieve more than a shortened
application form: families need certain information about aid
eligibility, and they need it early. Small tweaks and Band-Aid
solutions are likely only to add to the complex, confusing, and
uncertain situation faced by students and their families. We
propose a drastic simplification of the current system of
educational grants and tax incentives. Our proposal combines Pell
Grants and the Hope and Lifetime Learning tax credits for
undergraduates into a single, streamlined grant administered
through the Department of Education, using information already
collected by the Internal Revenue Service (IRS). Eligibility can
be explained on a postcard, allowing students and families to
anticipate their grants many years before the college decision.
This set of reforms will improve the effectiveness of the
billions already committed to higher education, allowing aid to
serve its intended goal: opening college doors to those with the
ability but not the means to pursue higher education.
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"The Failure of Education Tax Incentives"
NYU Law and Economics Research Paper No. 07-28

Contact: DEBORAH SCHENK
New York University School of Law
Email: deborah.schenk@nyu.edu
Auth-Page: http://ssrn.com/author=97836

Co-Author: ANDREW L. GROSSMAN
Skadden Arps
Email: algrossman@gmail.com
Auth-Page: http://ssrn.com/author=851073

Abstract: http://ssrn.com/abstract=1006593

ABSTRACT: Federal aid to higher education has shifted over the
last decade from direct subsidies to tax incentives. There are
three types of Pigouvian subsidies designed to subsidize price:
Nonrefundable tax credits and a deduction for tuition reduce the
price of tuition; a deduction for interest on education loans
lowers the cost of borrowing; and the tax-exemption of the
earnings on education savings plans increases the return to
saving. These tax incentives can be justified on either
efficiency or equity grounds. If they increased investment in
higher education, they would enhance efficiency by correcting for
positive externalities. If they helped to eliminate disparities
in the distribution of education consumption, they would increase
equity. The paper develops models to test predicted taxpayer
response to the most important education tax incentives. It
concludes that the structure of the incentives is such that there
will be no change in behavior in response to the subsidies. Those
for who demand for education is most elastic (low income
taxpayers) cannot use the incentives, those for whom demand is
somewhat elastic (middle income taxpayers) will not use the
incentives, and those for whom demand is inelastic (wealthy
taxpayers) will reap the benefits in the form of increased
consumption. The design of the credits also precludes a
distributional change in education investment.
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"The Theory of Life-Cycle Saving and Investing"
FRB of Boston Public Policy Discussion Paper No. 07-3

Author: ZVI BODIE
Boston University - Department of Finance &
Economics
Email: zbodie@bu.edu
Auth-Page: http://ssrn.com/author=16745

Co-Author: JONATHAN TREUSSARD
Boston University - Department of Economics
Email: jtreussa@bu.edu
Auth-Page: http://ssrn.com/author=504640

Contact: PAUL WILLEN
Federal Reserve Bank of Boston - Research
Department, National Bureau of Economic Research
(NBER)
Email: paul.willen@bos.frb.org
Auth-Page: http://ssrn.com/author=236691

Full Text: http://ssrn.com/abstract=1002388

ABSTRACT: How much should a family save for retirement and for
the kids' college education? How much insurance should they buy?
How should they allocate their portfolio across different assets?
What should a company choose as the default asset allocation for
a mandatory retirement saving plan? We believe that the
life-cycle model developed by economists over the last fifty
years provides guidance for making such decisions. The theory
teaches us to view financial assets as vehicles for transferring
resources across different times and outcomes over the life
cycle, and that perspective allows households and planners to
think about their decisions in a logical and rigorous way. This
paper lays out and illustrates the basic analytical framework
from the theory in nonmathematical terms, with the aim of
providing guidance to financial service providers, consumers, and
policymakers.
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"Individual Account Investment Options and Portfolio Choice:
Behavioral Lessons from 401(K) Plans"
NBER Working Paper No. W13169

Contact: JEFFREY R. BROWN
University of Illinois at Urbana-Champaign -
Department of Finance, National Bureau of Economic
Research (NBER)
Email: brownjr@uiuc.edu
Auth-Page: http://ssrn.com/author=155077

Co-Author: NELLIE LIANG
Federal Reserve Board
Email: nliang@frb.gov
Auth-Page: http://ssrn.com/author=62781

Co-Author: SCOTT J. WEISBENNER
University of Illinois at Urbana-Champaign -
Department of Finance, National Bureau of Economic
Research (NBER)
Email: weisbenn@uiuc.edu
Auth-Page: http://ssrn.com/author=160511

Full Text: http://ssrn.com/abstract=993071

ABSTRACT: This paper examines how the menu of investment options
made available to workers in defined contribution plans
influences portfolio choice. Using unique panel data of 401(k)
plans in the U.S., we present three principle findings. First, we
show that the share of investment options in a particular asset
class (i.e., company stock, equities, fixed income, and balanced
funds) has a significant effect on aggregate participant
portfolio allocations across these asset classes. Second, we
document that the vast majority of the new funds added to 401(k)
plans are high-cost actively managed equity funds, as opposed to
lower-cost equity index funds. Third, because the average share
of assets invested in low-cost equity index funds declines with
an increase in the number of options, average portfolio expenses
increase and average portfolio performance is thus depressed. All
of these findings are obtained from a panel data set, enabling us
to control for heterogeneity in the investment preferences of
workers across firms and across time.
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"Choice Architecture and Retirement Saving Plans"

Contact: SHLOMO BENARTZI
University of California at Los Angeles
Email: sbenartz@ucla.edu
Auth-Page: http://ssrn.com/author=75169

Co-Author: EHUD PELEG
University of California, Los Angeles - Anderson
School of Management
Email: epeleg@anderson.ucla.edu
Auth-Page: http://ssrn.com/author=439323

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=999420

ABSTRACT: In this paper, we apply basic principles from the
domain of design and architecture to choices made by employees
saving for retirement. Three of the basic principles of design we
apply are: (1) there is no neutral design, (2) design does
matter, and (3) many of the seemingly minor design elements could
matter as well. Applying these principles to the domain of
retirement savings, we show that the design of retirement saving
vehicles has a large effect on saving rates and investment
elections, and that some of the minor details involved in the
architecture of retirement plans could have dramatic effects on
savings behavior. We conclude our paper by discussing how lessons
learned from the design of objects could be applied to help
people make better decisions, which we refer to as ?choice
architecture.?