ROBERT NOVY-MARX, University of Chicago - Booth School of Business
Email: rnm@ChicagoGSB.edu
JOSHUA D. RAUH, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)
Email: jrauh@gsb.uchicago.edu

We calculate two present value measures of already-promised state pension liabilities using discount rates that reflect their risk. If benefits have the same priority in default as general obligation debt, aggregate underfunding is $1.21 trillion. If states cannot default on these benefits, underfunding is $3.12 trillion. The first measure is a lower bound on the value of the liability to taxpayers, and is more than the $0.94 trillion in state municipal debt. The second measure is a better benchmark for funding adequacy. We also estimate broader concepts of accrued liabilities that account for projected salary growth and future service.

WILLIAM E. EVEN, Miami University, Institute for the Study of Labor (IZA)
Email: evenwe@muohio.edu
DAVID A. MACPHERSON, Florida State University - Department of Economics, Institute for the Study of Labor (IZA)
Email: DMACPHER@MAILER.FSU.EDU

Since 1990, most pension plans have shifted the responsibility for directing pension assets to the employee. This study summarizes some of the possible explanations for this rapid shift toward participant direction and uses IRS Form 5500 data to investigate the effect of worker and plan characteristics on the likelihood of making a switch. The study also estimates the effect of a switch to participant direction on employee contribution and asset allocation behavior. The analysis reveals that collective bargaining and pension investments in employer stock reduce the chance of a switch to participant direction, whereas below average return performance increases the chance. Also, a switch to participant direction increases employee contributions to the pension and reduces the share of assets invested in employer securities.

BARRY BOSWORTH, Brookings Institution - Economic Studies Program
Email: bbosworth@brookings.edu
ROSANNA SMART, affiliation not provided to SSRN

This paper presents an overview of changes in household wealth accumulation and saving using wealth data from three micro-level surveys: Survey of Consumer Finances (SCF), Panel Study of Income Dynamics (PSID), and Health and Retirement Study (HRS). We provide comparisons to the macroeconomic estimates of wealth accumulation and saving, explore problems in constructing household-level valuations of wealth, and assess the value of using household-level data sets to examine wealth accumulation and saving behavior in the United States.

Our first analysis compares the macroeconomic estimates of wealth from the Flow of Funds to comparable measures from the SCF, PSID and HRS. The Flow of Funds and SCF valuations of net worth correspond closely up to 1998. Yet, after1998, the SCF reports a much more rapid acceleration of wealth, concentrated in equity-type assets. The estimates of wealth in the PSID and HRS are very similar to the SCF for the bottom 95 percent of the wealth distribution, diverging only for the top five percent of households.

GORDON L. CLARK, Oxford University Center for the Environment
Email: gordon.clark@ouce.ox.ac.uk
ROGER URWIN, Watson Wyatt Worldwide
Email: roger.urwin@watsonwyatt.com

The global financial crisis has posed profound threats to pension welfare worldwide. This is particularly so in the UK with the closure of private defined benefit plans and the heavy losses experienced by many defined contribution pension plan participants. Meeting these challenges has placed a premium on plan governance, given its link to fund performance. The paper begins by considering the academic literature on institutional change including an analysis of the most common ways of responding to a changing environment. It is noted that the nature and scope of institutional response to a changing environment depends, in part, upon funds' governance budgets including time, expertise, and common commitment. Our research on UK governance suggests that incremental adaptation has been the operative strategy augmented, in some cases, by the adoption of UK corporate governance practices. Three types of innovation in the governance of UK pension plans are identified: the transformation of decision making, the pension buy-out, and fiduciary management along with an emerging 'new' model of pension fund governance. In the penultimate section of the paper, lessons from UK best practice are drawn for institutions that face unprecedented challenges in realising the pension promise. Thereafter, we suggest a possible approach for regulators to strengthen the pension fund sector, based on improved disclosure, independent board chairs, and the skills of board members.

DAVID A. LOVE, Williams College - Department of Economics
Email: dlove@williams.edu
PAUL A. SMITH, Federal Reserve Board of Governors
Email: paul.a.smith@frb.gov

Recent defined benefit (DB) pension freezes in large healthy firms such as Verizon and IBM, as well as terminations of plans in the struggling steel and airline industries, highlight the fact that these traditional pensions cannot be viewed as risk-free promises from the employee's perspective. In this paper we develop an empirical dynamic programming framework to investigate household saving decisions in a model economy with risky DB pensions. The model incorporates important sources of uncertainty facing households, including asset returns, employment, income, and mortality, as well as pension freezes. Applying a compensating variation measure of welfare, we find that pension freezes reduce welfare by a maximum of about $6,000 for individuals with a high school degree and about $2,000 for individuals with a college degree.

WEI-YIN HU, Financial Engines, Inc.
Email: whu@financialengines.com

The advent of the Roth 401(k) significantly expanded opportunities for tax-preferred retirement saving, but at the same time it created much confusion for individual savers regarding whether to save in the form of pre-tax or Roth dollars. The financial community?s conventional wisdom is based on comparing current and future tax rates. We show how relying solely on the conventional wisdom can be wrong. We first show that comparing different saving strategies requires making an apples-to-apples comparison, which can be achieved by keeping take-home pay constant. An individual currently saving pre-tax can maintain the same take-home pay by switching to a lower amount of Roth saving. However, some important rules imposed by either 401(k) plans or the IRS encourage ?tax illusion? by treating pre-tax and Roth dollars as if they were equivalent. First, moderate savers need to take care to understand how switching to Roth saving could lose them free money through employer matching contributions. Second, the IRS limit on annual 401(k) contributions means that aggressive savers who save Roth dollars can save more in a tax-advantaged way than those who save pre-tax dollars. For both of these groups, the conventional wisdom can be completely reversed under fairly normal circumstances.