LEORA FRIEDBERG, University of Virginia - Department of Economics, National Bureau of Economic Research (NBER)
Email: LFRIEDBERG@VIRGINIA.EDU
SUN WEI, affiliation not provided to SSRN
ANTHONY WEBB, Boston College - Center for Retirement Research
Email: webbaa@bc.edu

Work affects both the time available for non-market activities and the times at which those activities are performed - and therefore work-induced constraints on time use may influence retirement decisions. We analyze these effects by combining new data from the American Time Use Survey with information on retirement in the Health and Retirement Study.

We find that the propensity to engage in three types of non-work activities - household production, leisure, and tertiary activities (eating, sleeping, grooming) - are substantially altered by work. Moreover, the ways in which the timing of these activities are distorted differ across ten different job types (industry-occupation combinations) that we examine in the ATUS. We use the resulting measures of time distortions as control variables in multinomial logit retirement models that we estimate in the HRS. Older workers in jobs with greater distortions to the quantity and timing of leisure activities have an increased propensity to leave those jobs, either for new jobs or for retirement. On the other hand, workers in jobs with greater distortions to household production have a reduced propensity to leave their jobs, and distortions to tertiary activities raise the propensity to take new jobs but reduce the propensity to retire.

MICHAEL S. BARR, University of Michigan Law School
Email: msbarr@umich.edu
JANE DOKKO, Board of Governors of the Federal Reserve System
Email: jane.k.dokko@frb.gov

We analyze the phenomenon that low- and moderate-income (LMI) tax filers exhibit a "preference for over-withholding" their taxes, a measure we derive from a unique set of questions administered in a dataset of 1,003 households, which we collected through the Survey Research Center at the University of Michigan. We argue that the relationship between their withholding preference and portfolio allocation across liquid and illiquid assets is consistent with models with present-biased preferences, and that individuals exhibit self-control problems when making their consumption and saving decisions. Our results support a model in which individuals use commitment devices to constrain their consumption. Using data on other tax-filing behaviors, we also show that mental accounting and loss aversion explanations for tax filers' "preference for over-withholding" are unlikely to explain the patterns in the data. Present-biasedness and dynamic inconsistency among LMI tax filers have important implications for saving policies and tax administration.

LAUREN COHEN, Harvard Business School, National Bureau of Economic Research (NBER)
Email: lcohen@hbs.edu

I evaluate the effect of loyalty on individuals' portfolio choice using a unique dataset of retirement contributions. I exploit the statutory difference that, in 401(k) plans, stand-alone employees can invest directly in their division, while conglomerate employees must invest in the entire firm, including all unrelated divisions. Consistent with loyalty, employees of stand-alone firms invest 10 percentage points (75%) more in company stock than conglomerate employees. Support is also found using variation in loyalty between different groups of employees, across and within firms. The cost to employees of loyalty is large, amounting to nearly a 20% loss in retirement income.

JONATHAN BARRY FORMAN, University of Oklahoma College of Law
Email: JFORMAN@OU.EDU

Most state and local government employees are covered by traditional final-average-pay pension plans. State and local government employers typically fund those pension plans through a combination of employer and employee contributions, with help from investment returns on already-accumulated assets. Unlike private sector pension plans, however, public pension plans are not subject to strict minimum funding standards like those in the Employee Retirement Income Security Act of 1974 (ERISA). Public pensions also face more relaxed accounting standards than private sector pensions. To be sure, many public pensions are nevertheless fairly well funded. Unfortunately, however, the recent meltdown of financial markets, the decline in the stock market, and the recession are putting inordinate pressure on both public pensions and the state and local governments that fund them; and public employers will need to respond.

At the outset, this paper reviews the operation and funding status of state and local government pension plans. Next, this paper discusses the major financial, accounting, and legal issues that relate to the funding of state and local government pension plans. Finally, this paper considers how to ensure that public employees will have adequate retirement benefits now and in the future.

ZVI BODIE, Boston University - Department of Finance & Economics
Email: zbodie@bu.edu
JEROME DETEMPLE, Boston University - Department of Finance & Economics, Center for Interuniversity Research and Analysis on Organization (CIRANO)
Email: detemple@bu.edu
MARCEL RINDISBACHER, Boston University School of Management, Finance and Economics Department, Center for Interuniversity Research and Analysis on Organization (CIRANO)
Email: rindisbm@bu.edu

This article reviews recent scientific literature on consumer financial decisions over the life cycle outlining its implications for the design of pension plans. It begins with a review of advances in the theory of rational financial planning and wealth management. It then summarizes the recent empirical literature on the actual behavior of households regarding saving, investing, and insuring their consumption in old age. Finally, it briefly comments on the practical implications of the theory for the design of pension systems and outlines areas of future research.

DAVID P. BLAKE, City University London - Cass Business School - The Pensions Institute
Email: d.blake@city.ac.uk
ANDREW J. G. CAIRNS, Heriot-Watt University - Department of Actuarial Science & Statistics
Email: a.cairns@ma.hw.ac.uk
KEVIN DOWD, Nottingham University Business School (NUBS)
Email: kevin.dowd@nottingham.ac.uk

Many, if not most, individuals cannot be regarded as 'intelligent consumers' when it comes to understanding and assessing different investment strategies for their defined contribution pension plans. This gives very little incentive to plan providers to improve the design of their pension plans. As a consequence, pension plans and their investment strategies are still currently in a very primitive stage of their development. In particular, there is very little integration between the accumulation and decumulation stages. It is possible to produce well-designed DC plans but these need to be designed from back to front (that is, from desired outputs to required inputs) with the goal of delivering an adequate targeted pension with a high degree of probability. We use the analogy of designing a commercial aircraft to explain how this might be done. We also investigate the possible role of regulators in acting as surrogate 'intelligent consumers' on behalf of plan members.

PETER A. DIAMOND, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER)
Email: pdiamond@mit.edu

Pension benefit rules depend on individual history far more than taxes do, and age plays a much larger role in pension determination than in tax determination. Apart from some simulation studies, theoretical studies of optimal tax design typically contain neither a mandatory pension system nor the behavioral dimensions that lie behind justifications commonly offered for mandatory pensions. Conversely, optimizing models of pension design typically do not include annual taxation of labor and capital incomes. After spelling out this contrast and reviewing (and rejecting) zero taxation of capital income based on the Atkinson-Stiglitz and Chamley-Judd results, this article raises the issue of tax-favored retirement savings, a topic where the two subjects come together.