COLLEEN MEDILL, University of Nebraska at Lincoln - College of Law
Email: cmedill2@unl.edu

From 1964 until 2002, the State of Nebraska sponsored a defined contribution plan for its employees. During this period, the plan was unique among state pension plans because it was an individual account-type plan that offered participants the choice of a lump sum or annuity distribution upon retirement. Such a choice presents the opportunity to learn more about how individuals perceive financial risks and weigh various factors when deciding how to access their retirement benefits. This study reports the results of a new survey of Nebraska state workers who retired or terminated employment in 1997. The results offer a perspective on how individuals perceive their decisions 10 years later. The findings reveal three general themes. First, retirees tended to underestimate the financial risks associated with uninsured health care expenses. Sixty-five percent of retiree respondents said that they had initially underestimated such risk. Second, federal policies may influence the distribution decision. For example, many respondents cited tax penalties on lump sum distributions as a major factor in their decision, which is consistent with a high percentage choosing a nontaxable direct rollover distribution. Finally, the results provide a basis for cautious optimism that retirees will be able to successfully manage a present value sum distribution during retirement. Over 90 percent of retiree respondents reported that they were able to cover their living expenses 10 years after their retirement.

JONATHAN BARRY FORMAN, University of Oklahoma College of Law
Email: JFORMAN@OU.EDU
BING YUNG-PING CHEN, University of Massachusetts at Boston - Gerontology Institute
Email: bing.chen@umb.edu

What is the optimal retirement age? This paper looks at the optimal retirement age from various perspectives. Most of the current pension laws relating to retirement age were codified decades ago, and they have become badly out of date given what we now know about longevity, about health and work in old age, and about how pension policies influence retirement decisions. This paper provides some background about demography, health, and retirement; summarizes how current pension laws influence the design of pension plans and the timing of retirement; and looks at the optimal retirement age from the perspective of employers, government, and workers. This paper then offers some new perspectives on the relationship between demography and retirement age; discusses the implications for public policy; and offers recommendations about how to reform our pension laws so that pension plans comport with our ideas about optimal retirement age.

ALAN L. GUSTMAN, Dartmouth College - Department of Economics, National Bureau of Economic Research (NBER)
Email: Alan.L.Gustman@dartmouth.edu
THOMAS L. STEINMEIER, Texas Tech University - Department of Economics and Geography
Email: thomas.steinmeier@ttu.edu

According to CPS data, men 65 to 69 were about six percentage points less likely to be retired in 2004 than in 1992. CPS and Health and Retirement Study (HRS) data indicate a corresponding difference of 3 percentage points between 1998 and 2004. Simulations with a structural retirement model suggest changes in Social Security rules between 1992 and 2004 increased full time work of 65 to 67 year old married men by a little under 2 percentage points, about a 9 percent increase, and increased their labor force participation by between 1.4 and 2.2 percentage points, or 2 to 4 percent, depending on age. Social Security changes account for about one sixth of the increase in labor force participation between 1998 and 2004, for married men ages 65 to 67. These rule changes encourage deferring retirement from long term jobs, returning to full time work after retiring, and increasing partial retirement. Although married men in their fifties decrease their participation in the labor force over this period, this is not due to changes in Social Security, but may reflect other factors, including changes in disability.

PIERRE-CARL MICHAUD, RAND Corporation, Institute for the Study of Labor (IZA)
Email: Pierre-Carl_Michaud@rand.org
SUSANN ROHWEDDER, The RAND Corporation
Email: Susannr@rand.org

This paper forecasts the retirement patterns and resources of the Early Baby Boomers by estimating forward-looking dynamic models of labor force participation, wealth accumulation and pension and Social Security benefit claiming for older workers using seven waves of HRS-data. The two most important innovations of our proposed approach are the use of alternative measures of pension entitlements and the associated incentives, and accounting for subjective expectations about future work. Our main findings are that the Early Baby Boomers will work longer and claim Social Security later.

JASON S. SCOTT, Financial Engines, Inc.
Email: jscott@financialengines.com
WILLIAM F. SHARPE, Stanford University - Graduate School of Business, National Bureau of Economic Research (NBER)
Email: wfsharpe@stanford.edu
JOHN G. WATSON, Financial Engines, Inc.
Email: jwatson@financialengines.com

The 4% rule is the advice most often given to retirees for managing spending and investing. This rule and its variants finance a constant, non-volatile spending plan using a risky, volatile investment strategy. As a result, retirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform. The previous work on this subject has focused on the probability of short falls and optimal portfolio mixes. We will focus on the rule's inefficiencies - the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10%-20% of a retiree's initial wealth to surpluses and an additional 2%-4% to overpayments. Further, we argue that even if retirees were to recoup these costs, the 4% rule's spending plan often remains wasteful, since many retirees may actually prefer a different, cheaper spending plan.

JAE SONG, U.S. Social Security Administration
Email: jae.song@ssa.gov
JOYCE MANCHESTER, Government of the United States of America - Congressional Budget Office (CBO)
Email: joyce.manchester@ssa.gov
SOCIAL SECURITY ADMINISTRATION, affiliation not provided to SSRN

Using a 1 percent sample of Social Security Administration data, this article documents and analyzes responses in the entitlement age for old-age benefits following the recent changes in Social Security rules. Both rules, the removal of the retirement earnings test (RET) for persons who are at the full retirement age (FRA) through age 69 in 2000 or later and a gradual increase in the FRA for those who reach age 62 in 2000 or later, are expected to affect the age at which people claim Social Security retirement benefits (or entitlement age) and the work behavior of older Americans.

MARK AGUIAR, University of Rochester - Department of Economics
Email: maguiar@troi.cc.rochester.edu
ERIK HURST, University of Chicago - Graduate School of Business, National Bureau of Economic Research (NBER)
Email: erik.hurst@gsb.uchicago.edu

In this paper we revisit two well-known facts regarding lifecycle expenditures. The first is the familiar "hump" shaped lifecycle profile of nondurable expenditures. We document that the behavior of total nondurables masks surprising heterogeneity in the lifecycle profile of individual sub-components. We find, for example, that while food expenditures decline after middle age, expenditures on entertainment continue to increase throughout the lifecycle. These patterns pose a challenge to familiar lifecycle models that emphasize inter-temporal substitution or movements in income, including standard models of precautionary savings, myopia, and limited commitment. Secondly, we document that the increase in the cross-sectional dispersion of expenditure over the lifecycle is not greater for luxuries. In particular, the dispersion in entertainment expenditure declines relative to food expenditures as households become older, casting further doubt on theories that emphasize (exclusively) shocks to permanent income. We propose and test a Beckerian model that emphasizes intra-temporal substitution between time and expenditures as the opportunity cost of time varies over the lifecycle. We find this alternative model successfully explains the joint behavior of food and entertainment expenditures in the latter half of the lifecycle. The model, however, is less successful in explaining expenditure patterns during the early half of the lifecycle.